Topic 10 Flashcards
Pension products
Why does the government provide tax reliefs on pensions?
To encourage individuals to save for their retirement. With state pensions offering only a modest income, and people living longer in retirement, tax reliefs aim to incentivise personal saving for a more secure financial future.
What are the main types of pension schemes?
The two main types of pension schemes are defined-benefit schemes, which are only offered by employers, and defined-contribution schemes, which can be offered by employers or set up individually.
Why might people choose other sources of savings and investments over pensions?
People might choose other sources of savings and investments because pension schemes come with contribution limits and rules regarding access to funds. These restrictions are in place to ensure fairness and manage the country’s finances, making alternative savings options potentially more appealing for some.
Who can receive tax relief on pension contributions?
Any UK resident (or non-resident with UK earnings) under the age of 75 can receive income tax relief at their highest marginal rate on annual contributions to occupational and private pension schemes, up to a maximum threshold.
What is the annual allowance for pension contributions, and how is it applied?
The annual allowance is the maximum amount that can be contributed to a pension each tax year without incurring tax charges. If the combined total of contributions exceeds this amount, tax is charged on the excess. The allowance is tapered for higher earners based on their threshold and adjusted income.
What are the two new lump sum allowances introduced after the abolition of the lifetime allowance?
The two new lump sum allowances are:
Lump Sum Allowance (LSA): £268,275, the maximum that can be taken as a tax-free lump sum.
Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100, the maximum that can be taken tax-free from a pension fund during lifetime and on death.
How is tax relief on pension contributions provided for personal pensions?
For personal pensions, tax relief is given at source at the basic rate, with any higher- or additional-rate relief claimed via the individual’s self-assessment tax return. For occupational pensions, relief is given at the highest marginal rate, as contributions are deducted from gross income.
What does “marginal rate” of tax mean?
The “marginal rate” of tax refers to the highest rate of tax an individual pays on their income. For example, if a person falls into the higher-rate band, they would receive tax relief at the higher rate on that portion of their pension contributions that falls within the higher-rate income bracket.
When can pension benefits generally be taken?
Pension benefits can generally be taken from the normal minimum pension age, which is currently 55, rising to 57 in 2028.
How much of the pension fund can be taken tax-free upon retirement?
Up to 25 per cent of the pension fund can be taken tax-free as a Pension Commencement Lump Sum (PCLS), subject to the Lump Sum Allowance (LSA).
What happens to the remaining pension fund after the tax-free PCLS is taken?
The remaining balance must be used to provide an income. In a defined-benefit scheme, this is typically as a scheme pension directly from the fund. In a defined-contribution scheme, it can be used to provide income through an annuity or flexible access drawdown (FAD), or a UFPLS.
What is a Defined-Benefit Scheme?
A Defined-Benefit Scheme is a pension plan where the benefits the individual will receive are specified in advance, also known as a final salary scheme.
What is a Defined-Contribution Scheme?
A Defined-Contribution Scheme is a pension plan where an agreed level of contributions is paid, but the benefits the individual receives depend on the performance of the investments into which the contributions are paid, also known as a money-purchase scheme.
What are the two main types of occupational pension schemes?
Defined Benefit (DB) schemes, where pension benefits are calculated as a percentage of final salary or based on a career average.
Defined Contribution (DC) schemes, where an agreed contribution is invested, and the benefits depend on the accumulated fund and investment performance.
What are collective defined-contribution pension schemes?
Collective defined-contribution (CDC) pension schemes are a new type of scheme where both the employer and employee contribute to a joint fund, and pensions are paid out from this shared pot. These schemes offer predictable costs for employers and are more resilient to economic shocks.
How can individuals top up their defined-benefit pensions?
Individuals can top up their defined-benefit pensions by contributing more to their occupational schemes or making contributions to private arrangements, such as:
Additional Voluntary Contributions (AVCs)
Free-standing Additional Voluntary Contributions (FSAVCs)
Personal/stakeholder pension plans.
What are Additional Voluntary Contributions (AVCs)?
AVCs are additional contributions to an occupational scheme. They are often used to purchase additional years’ service in a final salary scheme, or more commonly, as defined-contribution arrangements. Contributions to AVCs are deducted from gross salary, allowing for tax relief at the same time.
What are Free-standing Additional Voluntary Contributions (FSAVCs)?
FSAVCs are contributions made to a defined-contribution fund provided by a separate pension provider, such as insurance companies or banks. Contributions are made from taxed income, and tax relief at the basic rate is claimed by the pension provider. Higher- and additional-rate taxpayers can claim further relief through self-assessment.
What is auto-enrolment in the context of workplace pensions?
Auto-enrolment is a system where employers must automatically enrol eligible workers into a qualifying workplace pension scheme and make a specified minimum contribution. Employees can opt out after being automatically enrolled, but the employer must contribute at least 3% of the employee’s earnings, with the employee contributing 4%, and tax relief of 1%.
What is the National Employment Savings Trust (NEST)?
NEST is a trust-based occupational pension scheme designed to support workplace pension provisions. It can be used alongside or instead of an employer’s existing occupational pension scheme. It offers a range of investment funds, with charges capped, and members can take benefits from age 55.
What is a personal pension?
A non-occupational, defined-contribution arrangement provided by financial services companies such as life assurance companies, banks, and building societies. Contributions receive basic-rate tax relief at source, even for non-taxpayers. Higher- and additional-rate taxpayers can claim additional relief through self-assessment.
What is a group personal pension?
An alternative to an occupational pension for small or medium-sized employers who cannot afford to set up a pension scheme. It involves a collection of individual personal pension plans administered by an insurance company on behalf of a single employer. Employees receive better value through discounts on set-up and management charges, and the employer may also handle contributions through a ‘direct pay’ arrangement.
What is a self-invested personal pension (SIPP)?
A type of personal pension that offers access to a wider range of investment options than a conventional personal pension. It allows members to hold direct shareholdings or commercial property, as well as conventional pension funds. A SIPP may appeal to individuals who are confident in making their own investment decisions.
What is a stakeholder pension?
A stakeholder pension is a type of personal pension introduced in 2001 to encourage individuals, particularly those with lower earnings, to save for retirement. It is designed to be simple and low-cost, with key features including charges that cannot exceed 1.5% of the fund value per annum for the first ten years, no entry or exit charges, and a minimum contribution of £20. However, due to low take-up, auto-enrolment into workplace pensions was introduced in 2012.
