Learning Material Sample
Pensions and retirement planning2. Tax regimeLearning Outcome 2 Understand how the HM Revenue & Customs (HMRC) tax regime applies to pensions planning
Pension simplification came into force on 6 April 2006, known as ‘A-Day’. This put in place one set of rules applying to all types of pension.
On the 6 April 2015, The Taxation of Pensions Act 2014 and the Finance Act 2015 brought in radical changes to the ways in which pension benefits can be... Shortened demo course. See details at foot of page. ...ion that is subject to the HMRC tax regime is known as a ‘registered pension scheme’.The Pensions Tax Manual covers the taxation of pensions and is available via the HMRC website. What is the name of the HMRC guide to the taxation of pension schemes? Answer : Purchase course for answer One set of contribution limits apply to all registered pension schemes. However, there are differences in the way that tax relief is granted, depending upon the type of scheme.
Contributions to a registered pension scheme are unlimited though there is a limit on how much of the contribution will receive tax relief. Member contributions The maximum personal contribution that can reecive tax relief for a member who is a relevant UK individual is 100% of relevant UK earnings or £3,600 gross (£2,880 net); whichever is higher. However, if total contributions for a single member exceed the annual allowance, a tax charge could apply. This will be looked at in more detail later. It is important to note here that the contribution will get tax relief on the higher of £3,600 or relevant UK earnings - even if that amount is over the annual allowance (or the Money Purchase Annual Allowance (MPAA), which we will cover shortly). The tax relief is given when the contribution is made and the annual allowance (or MPAA) is only considered when the member completes their self-assessment form; at this point it will be clear whether the individual can keep all their tax relief or whether some of it should be ‘given back’ to HMRC in the form of an annual allowance charge. Tax relief is given in two ways: Employer sponsored occupational schemes (usually trust-based final salary and money purchase schemes) generally use the ‘net pay’ method. This means that employee contributions are taken from the employee’s gross pay before income tax is deducted via PAYE. The contribution reduces the amount of earnings that are taxable so the employee normally receives full tax relief via PAYE whether the member is a basic rate or higher/additional rate taxpayer.
Group personal pensions generally use the ‘... Shortened demo course. See details at foot of page. ... more now rather than a multiple of earnings.The decision to reduce salary cannot normally be revoked, though it may be possible to change the terms of an arrangement where a ‘lifestyle change’ affects an employee’s financial circumstances. This includes marriage, divorce or an employee’s spouse becoming redundant or pregnant. Recycling the pension commencement lump sum (PCLS) Legislation was brought into effect to prevent a PCLS being reinvested back into a registered pension scheme and automatically generating further tax relief on the contribution as a result. These rules impose tax charges where much larger pension payments are made for an individual as a direct and pre-planned result of drawing a PCLS from a registered pension scheme after 5 April 2006. The rules apply when: The PCLS (together with any other PCLS taken in the previous twelve-month period) is more than £7,500 AND The pension payments made are significantly (generally 30%) larger than might have been expected AND The cumulative total of extra pension payment in the tax year is more than 30% of the PCLS However, these rules only apply to pre-planned recycling exercises. HMRC guidance makes it clear that unplanned recycling will not be caught by the rules. Any lump sum that is caught by the recycling rules will be treated as an unauthorised payment. This will mean a tax charge of up to 55% of the lump sum (made up of the unauthorised payments charge of 40% plus a 15% unauthorised payments surcharge if that applies) for the individual and up to 40% for the pension scheme (though the scheme can escape tax charges where it was not aware of the recycling plan). If a pension scheme member does not meet any of the relevant UK individual criteria then what is their position regarding contributions to the scheme? Answer : Purchase course for answer This section covers the money purchase annual allowance and the annual allowance charge.
The annual allowance is a limit on the value of ‘pension input amount’ that qualifies for tax relief during each ‘pension input period’. If the amount of pension input is more than the available annual allowance, an annual allowance charge is paid, charged at the individual’s marginal rate(s) of income tax. The annual allowance for 2024/25 is £60,000. Prior to the 2023/24 tax year, it had been £40,000 for several years. The increase was announced during the spring budget 2023. However this is tapered (reduced by £1 for every £2) for those people with ‘threshold income’ over £200,000 and ‘adjusted income’ over £260,000. Threshold income is gross taxable income (investment as well as earned): Less the grossed-up amount of any pension contribution (made by anyone other than their employer), subject to relief at source or net pay Plus any employment income given up via salary sacrifice via an arrangement set-up on or after 9 July 2015 Less any lump sum death benefits taxed as income If this is greater than £200,000 then adjusted income must be calculated. (If someone has threshold income of £200,000 or less will not be subject to the taper and there is no need to calculate adjusted income). Adjusted income is gross taxable income: Plus any employer contributions Less any lump sum death benefits taxed as income If this is greater than £260,000 the annual allowance is tapered, if less or equal to £260,000 no tapering is needed. As a result of the new pension flexibilities, the money purchase annual allowance (MPAA) was introduced. The MPAA rules work with the annual allowance rules to make sure that the new flexibilities cannot be abused. The MPAA has been £10,000 since April 2023. Previously, it was £10,000 from April 2015... Shortened demo course. See details at foot of page. ...lowance of £60,000.This leaves £40,000 to be carried forward from the previous 3 years, starting with the earliest year. £15,000 is carried forward from 2021/22. £10,000 is carried forward from 2022/23. He then carries forward £15,000 from 2023/24 which means there is £25,000 to be used in 2025/26 or 2026/27. The annual allowance charge The annual allowance charge is a tax charge that applies when an individual’s pension input amount for a tax year exceeds that year’s annual allowance/MPAA. The tax charge is usually levied on the member at their marginal rate of tax. This means that the excess over the annual allowance would be charged at more than one income tax rate if it falls into more than one income tax band. The excess over the annual allowance/MPAA is added to the person’s taxable income (the amount after the personal allowance has been deducted). The annual allowance charge is collected from the individual via their self-assessment tax return. Individuals with an annual allowance charge of over £2,000 and whose pension savings exceeded the annual allowance (not just the MPAA) can elect for the scheme administrator to pay all or part of the annual allowance charge on their behalf. This is known as ‘scheme pays’ and will result in the member's pension benefits being reduced. In defined contribution schemes, the charge will be deducted from the fund and in defined benefit schemes, an adjustment will be made to the accrued benefits. All contributions paid to UK registered pension scheme count towards the annual allowance, whether they receive tax relief or not. Only contributions paid to non-registered pension schemes (e.g. employer-financed retirement benefits schemes), do not count. It is possible to carry forward any unused annual allowance to the current tax year from how many of the previous tax years? Answer : Purchase course for answer The lifetime allowance (LTA) was a limit on the overall value of pension savings that could be taken without incurring an additional tax charge, including benefits that built up prior to 6 April 2006 (A-Day).
The LTA was set by the Treasury and, since it was introduced in 2006, the figures were as follows: 2006/07 - £1.5 million 2007/08 - £1.6 million 2008/09 - £1.65 million 2009/10 - £1.75 million 2010/11 - £1.8 million 2011/12 - £1.8 million 2012/13 - £1.5 million 2013/14 - £1.5 million 2014/15 - £1.25 million 2015/16 - £1.25 million 2016/17 - £1.0 million 2017/18 - £1.0 million 2018/19 - £1.03 million 2019/20 - £1.055m 2020/21 - £1,0731m 2021/22 - £1,0731m 2022/23 - £1,0731m 2023/24 - £1,0731m With effect from the start of the 2024/25 tax year, the lifetime allowance was formally abolished. However, it will still be relevant for the purposes of determining the member’s entitlement to tax-free lump sums during their lifetime, or that of their beneficiaries in the event of their death before the age of 75. Fixed protection When reducing the LTA to £1.5 million in 2012, the Government recognised that there should be a ‘protection regime’ for those who had already made pension saving decisions based on an LTA £1.8 million. This protection was designed to cover those with savings above £1.5 million or who believed the value of their pension pot would rise to above that level through investment growth without any further contributions or pension savings and who did not already have primary or enhanced protection. They were able to apply for ‘fixed protection’, i.e. a personalised LTA of £1.8 million, providing there was no benefit accrual in any registered pension scheme after 5 April 2012. Any excess value above £1.8 million would be subject to a LTA tax charge. This did mean, though, they could take a tax-free PCLS of up to 25% of £1.8 million. Under defined contribution schemes, benefit accrual occurred if any further relevant contributions were made after 5 April 2012. The only contributions allowed were contributions to provide life cover, which was in place before 6 April 2006. Under defined benefit schemes it meant that the benefit value (i.e. 20 times the accrued pension plus any separate PCLS) could not increase by more than the relevant percentage in any tax year after 5 April 2012. The relevant percentage was any annual rate of benefit increase specified in the scheme rules on 9 December 2010 or, if no increases are specified, the increase in the Consumer Prices Index (CPI) for the year to the September before the start of the tax year. Benefit accrual under fixed protection was tested every year, unlike under enhanced protection where it was tested only on transfer or on crystallising benefits. Scheme members who had fixed protection and are automatically enrolled into a qualifying pension scheme under auto-enrolment originally had to opt out within one month of their auto-enrolment date or they would have lost their fixed protection. Since 1 April 2015 employers were allowed to exempt workers from the auto-enrolment requiremen... Shortened demo course. See details at foot of page. ...declaration to be in a flexible drawdown pensionFlexi-access drawdown Previously a flexible drawdown plan where the nomination was accepted in a drawdown year starting on or after 27 March 2014 25 × 80% the maximum permitted income that could be paid if the contract was a capped drawdown at the date of the BCE Flexi-access drawdown Capped drawdown – converted to flexi-access drawdown on or after 6 April 2015 25 × 80% of the maximum permitted income from a capped drawdown pension that could have been paid when the member’s drawdown pension fund became a flexi-access drawdown fund Testing against the lifetime allowance Whenever a BCE took place after A-Day the value of the new benefits being crystallised was tested against the member’s available LTA and used up a percentage of that allowance. The remaining percentage was then carried forward for use at the member’s next BCE. Example Rashid crystallised excess benefits valued at £200,000. If he took this chargeable amount as a lump sum, it would suffer tax of £110,000 (i.e. 55% x £200,000), leaving a lump sum payment of £90,000. If he decided to use the chargeable amount to provide pension income, it would suffer tax of £50,000 (i.e. 25% x £200,000). The pension income provided by the remaining £150,000 would also suffer income tax at his marginal rate of income tax. From 6 April 2024, the lifetime allowance excess charge ceased to exist, to be replaced by the lump sum allowance and the lump sum and death benefits allowance. Lifetime allowance charge The LTA charge was a tax charge that applied at any BCE where the crystallised value of the new benefits exceeded the member’s available LTA. The tax charge applied to the excess over the available allowance, known as the chargeable amount. The charge was designed to recoup the tax breaks the member had received on the excess funds over the years they had been sheltered inside the pension tax regime. Prior to 6 April 2023, the amount of tax charged depended on the form in which the excess benefits were paid: If the excess was paid as a lump sum, it was taxed at 55% If the excess was used to provide pension income, it was taxed at 25%. Remember, the pension provided by the remaining 75% was also subject to income tax at the member’s marginal rate of income tax Example Rashid crystallises excess benefits valued at £200,000. If he takes this chargeable amount as a lump sum, it will suffer tax of £110,000 (i.e. 55% x £200,000), leaving a lump sum payment of £90,000. If he decides to use the chargeable amount to provide pension income, it will suffer tax of £50,000 (i.e. 25% x £200,000). The pension income provided by the remaining £150,000 will also suffer income tax at his marginal rate of income tax. Since 6 April 2023, the rate of the charge has been 0%. Technically, it still exists, however, in effect, no tax is paid. Instead, lifetime allowance excess benefits will simply be subject to income tax under PAYE on the recipient. From 6 April 2024, the lifetime allowance excess charge will formally cease to exist. What tax rates were used to calculate the LTA charge? Answer : Purchase course for answer Following the abolition of the lifetime allowance, it was decided to retain the limit on the amount of tax-free lump sums which can be taken by a member from a registered pension scheme. This is known as the lump sum allowance (LSA). It is designed to ensure that tax-free lump sum entitlements continue to work in broadly the same manner as under the lifetime allowance system, despite the abolition of the LTA excess tax charge itself.
The standard lump sum allowance for 2024/25 is £268,275, which is 25% of the previous standard lifetime allowance of £1,073,100. There is currently no provision in legislation to increase this in future years. Scheme members who benefitted from transitional lifetime allowance protection can keep a lump sum allowance. The treatment of this is as follows:
Form of protection Lump sum allowance Enhanced protection (no lump sum protection) £375,000 Enhanced protection (with lump sum protection) Dependent on value of protected entitlement Primary protection (no lump sum protection) £375,000 Primary protection (with lump sum protection) Dependent on primary protection factor. Fixed protection 2012 £450,000 Fixed protection 2014 £375,000 Fixed protection 2016 £312,500 Individual protection 2014 25% of individually protected amount between £1.25m and £1.5m Individual protection 2016 25% of individually protected amount between £1m and £1.25m An event tested against the lump sum allowance is known as a relevant benefit crystallisation event (RBCE). These are not to be confused with the BCEs tested against the old lifetime allowance. This occurs when the member becomes entitled to a relevant lump sum. The following benefits are relevant lump sums and are tested against the LSA: Pension commencement lump sum (PCLS) Stand-alone lump sum (SALS) Uncrystallised funds pension lump sum (UFPLS) non-taxable part The following are not RBCEs Small pots payments Trivial commutation lump sums Winding up lump sums The lump sum allowance will normally be calculated under the standard transitional calculation. This includes a deduction for any benefits taken prior to its introduction. The calculation deducts 25% of any lifetime allowance which was used prior to 6 April 2024. Peter holds individual protection 2014 with a protected amount of £1,375,000. What is his lump sum allowance?
Answer : Purchase course for answer The lump sum and death benefits allowance operates along a similar line to the lump sum allowance. It is a limited on the total amount of tax-free lump sum payments which can be taken from registered pension schemes during the member’s lifetime and in the event of their death before the age of 75. It therefore differs from the lump sum allowance, which is lower and relates to lump sums taken solely during the member’s lifetime.
The lump sum and death benefits allowance will be broadly equal to the member’s previous lifetime allowance. Therefore, for anyone without previous LTA protection, the allowance will be £1,073,100. Those with a protected lifetime allowance will benefit from a protected lump sum and death benefits allowance which is in line with their previous protected allowance. For those with enhanced protection, the allowance will be the value of their uncrystallised funds as of 5 April 2024. The following relevant lump-sum death benefits are tested against the LSDBA: Defined benefits lump sum death benefit Uncrystallised funds lump sum death benefit Annuity protection lump sum death benefit Pension protection lump sum death benefit Drawdown/flexi-access drawdown lump sum death benefit Dependents/nominees/successors flexi-access drawdown lump sum death benefit The following relevant lump-sum death benefits are NOT tested against LSDBA: Charity lump sum death benefit Trivial commutation lump sum death benefit Type of lump sum Tested against LSA Tested against LSDBA Pension commencement lump sum (PCLS) Yes No Stand-alone lump sum (SALS) Yes No Uncrystallised Funds Pension Lump Sum (UFPLS) Yes No Serious ill-health lump sum (SIHLS) Yes No Small pots lump sum No No Trivial commutation lump sum No No Winding-up lump sum No No Defined benefits lump sum death benefit No Yes Uncrystallised funds lump sum death benefit No Yes Annuity protection lump sum death benefit No Yes Pension protection lump sum death benefit No Yes Drawdown/flexi-access drawdown lump sum death benefit No Yes Dependents/nominees/successors flexi-access drawdown lump sum death benefit. No Yes Charity lump sum death benefit No No Trivial commutation lump sum death benefit No No Scheme members also have an Overseas Transfer Allowance (OTA). This limits the amount which can be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS). The limit is equivalent to the member’s previous lifetime allowance, with any excess subject to a flat 25% tax charge. Name two lump sum death benefits which will not be tested against the LSDBA.
Answer : Purchase course for answer The standard transitional calculation for both the LSA and the LSDBA deducts 25% of the lifetime allowance previously used.
Example Omar crystallised £500,000, taking £125,000 PCLS and placing the balance into drawdown in 2017 when the lifetime allowance was £1.25m. He did not apply for lifetime allowance protection. His LTA use was £500,000/£1.25m = 40% His lump sum allowance would be £268,275 – (£1,073,100 x 40% x 25%) = £268,275 - £107,310 = £160,965 His lump sum and death benefits allowance would be £1,073,100 less the same, i.e. £965,790. This may cause an issue in certain circumstances. The standard calculation assumes that the member took 25% tax-free cash at each BCE. In practice, this may not turn out to have been the case. Some of the circumstances in which they may not have done include the following: No PCLS was taken due to a poor commutation rate PCLS restricted by GMP element DB scheme with defined PCLS rates e.g. 3/80ths D... Shortened demo course. See details at foot of page. ...– (£1,073,100 x 37.27% x 25%= £268,275 - £99,986 = £168,289 Note: the figure of £99,986 rather than £100,000 is due to rounding error as LTA use is rounded down to two decimal places. The same figure would be used as the basis for her lump sum and death benefits allowance, i.e. £1,073,100 - £99,986. Example Prith took a scheme pension of £30,000 per annum and £200,000 lump sum in 2013 when the lifetime allowance was £1.5m. He has not applied for any lifetime allowance protection. He therefore used 53.33% of the LTA His standard transitional lump sum amount would be: £268,275 – (£1,073,100 x 53.33% x 25%) = £268,275 - £143,071 = £125,204 However, if he applied for a TTFAC then his amount would be £268,275 - £200,000, or £68,275. He would therefore be disadvantaged as a result. State five categories of scheme member who may benefit from applying for a TTFAC. Answer : Purchase course for answer There is no longer a statutory concept of a normal retirement age. Retirement can now take place at any time after the normal minimum pension age (NMPA) which is currently age 55. Of course, employers may still choose to set a standard retirement age under their pension scheme but cannot force an employee to retire at that age.
There are two exceptions to the NMPA: Where deferred or current members of occupational or statutory schemes already had a contractual right to retire at age 50. This right must have existed on 10 December 2003 and must have been genuinely contractual, i.e. ... Shortened demo course. See details at foot of page. ... where the scheme rules included, prior to 11 February 2021, an unqualified right to take benefits before the age of 57 and the member joined the scheme before 4 November 2021, the right to the lower pension age will remain.The new normal minimum pension age will not apply to public service schemes – the police, armed forces, firefighters, etc – they will not have an NMPA that is linked to State pension age. By how much will the LSA and LSDBA be reduced where a scheme member takes benefits early on the grounds of ill-health?
Answer : Purchase course for answer All registered pension schemes can pay up to 25% of the value of the benefits (subject to the LSA) as a pension commencement lump sum (PCLS) when the payment of benefit commences.
Since 6 April 2015 these are the ways of providing a pension income: Lifetime annuities – these are pensions secured by annuity purchase from an insurance company – they can either be conventional or flexible Scheme pensions – these are paid directly from a registered pension scheme and this is the only option available from a defined benefit scheme Drawdown pensions – these can be either capped (if already in existence before 6 April 2015) or flexi-access drawdown Uncrystall... Shortened demo course. See details at foot of page. ... funds is taxed as the member’s pension income under PAYE.The first 25% of a payment made in respect of uncrystallised funds is tax free, with the remaining 75% taxed as the member’s pension income under PAYE. To help simplify retirement rules, the Government reduced the age at which an individual could take a small pot from 60 to 55, with effect from 6 April 2015. It is also possible to take a small pot payment from an earlier age where the member either has a protected pension age or is suffering ill health and takes early retirement. Explain the conditions that must be met for a member to receive a trivial commutation lump sum. Answer : Purchase course for answer Prior to 6 April 2015 there were two main types of death benefit – dependent's pensions and lump sums.
Dependant 's pensions Under HMRC rules for registered pension schemes a dependant is defined as: A person who was married/in a civil partnership with the member at the time of the member’s death A person who was married/in a civil partnership with the member when the member first started to receive a pension but who was divorced from the member before the date of the member’s death A child of the member who is aged under 23 at the date of the member’s death A child of the member who is aged 23 or over but who in the scheme administrator’s opinion was dependent on the member because of their physical or mental impairment at the date of the member’s death A person who, at the date of the member’s death, was in the opinion of the scheme administrator: - Financially dependent on the membe... Shortened demo course. See details at foot of page. ... case it will be taxed at 45%) with no test against the LSDBA.Since 6 April 2015, scheme pensions still have to be paid to a dependant, but death benefits from defined contribution schemes (excluding scheme pensions) can now be paid to an individual nominated by the member (or by the scheme administrator where the member has not done so), who is not a dependant, and who is known as a nominee. It is also now possible for a nominee or dependant (or by the scheme administrator where they have not done so) to nominate a successor to pass a flexi-access drawdown fund to on the death of the nominee or dependant. Since 6 April 2015, a nominee’s continuing pension can be any of the following: A lifetime annuity – either conventional or flexible A scheme pension (provided the option of a lifetime annuity has already been declined) A flexi-access drawdown pension What are the three main types of death benefit? Answer : Purchase course for answer Once a lifetime annuity or scheme pension is in payment there are three types of death benefit available, depending on the options selected at outset:
Guarantee periods: Scheme pension payments may be guaranteed for a period of up to ten years, regardless of the member’s age. For a lifetime annuity, the time limit on a guarantee period was removed from 6 April 2015 and will be at the annuity provider’s discretion. Prior to 6 April 2015, such payments from both scheme pensions and lifetime annuities were taxable for the recipient(s) and could not be commuted. Since 6 April 2015, any income received by a beneficiary under a lifetime annuity guarantee period will now be tax-free if the member died prior to age 75. Income received by a beneficiary from a scheme pension under a guarantee period, and income received by a beneficiary from a lifetime annuity under a guarantee period whe... Shortened demo course. See details at foot of page. ... no surviving dependants of the member. The pension scheme administrators are not allowed to do so.Such a lump sum is paid without any tax charge. There is also no tax charge on the charity receiving the payment if it is used for charitable purposes. Members are encouraged to complete an expression of wish form to advise the trustees who they wish benefits to be payable to on death but this is not binding on the trustees, who have full discretion as to who to pay the lump sum to. In most cases, however, the trustees will follow the member’s wishes. If the member does not complete an expression of wish form the trustees must investigate their domestic situation following death to search for dependent persons as defined by the scheme’s rules What are the death benefits available when a scheme member dies whilst in flexi-access drawdown? Answer : Purchase course for answer Transitional protection
Although one aim of pensions simplification was to replace the eight previous pensions regimes with a single simplified regime, some elements of the old regimes were carried forward into the new regime under the transitional protection rules. These rules recognised that it was only fair that people’s reasonable expectations for pension rights built up under the old rules should be honoured. There were two kinds of transitional protection – enhanced protection and primary protection – aimed at protecting, at least to some extent, rights built up before A-Day. Enhanced protection Enhanced protection was available to everyone with pre A-Day benefits irrespective of the value of their pension rights. An election for enhanced protection fully pro... Shortened demo course. See details at foot of page. ...mbers who had enhanced protection and were automatically enrolled into a pension scheme from October 2012 onwards (as a result of Workplace Pension Reform) had to opt out within one month of their auto-enrolment date or they would lose their enhanced protection. However, where the employer had reasonable grounds to believe the worker had enhanced protection, the requirement to auto-enrol the employee did not applyAs with Fixed Protection, members holding Enhanced Protection can, from 6 April 2023, recommence benefit accrual without experiencing the loss of that protection. From 6 April 2023, Enhanced Protection cannot generally be revoked. However, they cannot accrue additional lump sum entitlement. How could enhanced protection previously be revoked? Answer : Purchase course for answer Only individuals with pension rights valued at more than £1.5m on 5 April 2006 could apply for primary protection. An election for primary protection gave an individual a personal LTA that was larger than the standard LTA and allowed contributions to continue or benefits to continue to build-up after A-Day. This gave increased protection against the LTA charge but the charge still arose if the crystallised value of benefits when they were taken exceeded the personal LTA. For example, money purchase funds that grew at a higher percentage rate between A-Day and taking benefits than the percentage increase in the LTA (taking into account the underpinned lifetime allowance) would be subject to an LTA charge at crystallisation. An LTA charge could also occur for members of defined benefit schemes if ... Shortened demo course. See details at foot of page. ...he only way that primary protection can be lost is if a pension share on divorce has the effect of reducing the individual’s personal LTA below 100%.This arises where a pension debit on divorce is awarded against an individual who has primary protection and the amount of the debit is deducted from the value of their benefits at 5 April 2006. If the value then goes below £1.5m (the standard LTA in 2006/07), primary protection is lost. If it does not fall below £1.5m, the factor is recalculated with effect from that date though it does not affect BCEs or RBCEs that may have already taken place between 5 April 2006 and the date of the debit. Where an individual applied for both enhanced and primary protection, which of them took priority? Answer : Purchase course for answer The maximum pension commencement lump sum (tax-free cash) since A-Day is 25% of the value of benefits. At A-Day this equated to a maximum pension commencement lump sum (PCLS) of 25% x £1.5m = £375,000. It then reduced to a minimum of £250,000 (25% of £1m) in 2016/17, before increasing again to £2678,275 by 2023/24. Since 6 April 2024, PCLS payments have been subject to the lump sum allowance.
There were, however, some circumstances in which a lump sum could be protected as more than 25% of the pension value. Primary protection example Dennis had a registered PCLS of £500,000 under primary protection. He decided to crystallise his benefits in 2023/24 when the LTA was £1,073,100. The maximum PCLS Dennis could take was £600,000, i.e. £500,000 x (£1.8m/£1.5m). Even though the LTA had reduced to £1,073,100, the &p... Shortened demo course. See details at foot of page. ...ferred to another pension scheme unless the transfer was a block transfer. This could be when either:Two or more members transferred from the scheme with the protected PCLS to another pension scheme at the same time. The member must not have been a member of the receiving scheme for more than a year at the date of transfer; or There was a transfer to an individual pension contract (e.g. a Section 32 buyout contract) or assignment of a member's policy on the wind-up of the scheme Whilst the lifetime allowance has been abolished, scheme specific tax-free cash entitlements also continue to be of relevance for the purposes of the lump sum allowance. Which type of pre A-Day pensions could have built up a pension commencement lump sum entitlement of greater than 25% of the value of pension benefits and therefore benefit from scheme specific protection? Answer : Purchase course for answer There are four tax sanctions that can apply where a payment that is not authorised by the legislation is made to a sponsoring employer or scheme member (or associate of either). The definition of 'payment' is wide and includes investment in ‘taxable property’. The charges are listed below:
The unauthorised payments charge This is an income tax charge applied at a rate of 40% of the unauthorised payment made (or de... Shortened demo course. See details at foot of page. ... any surcharge)De-registration charge This charge is mainly aimed at 'trust busting' but is most likely to become payable when a scheme invests in ‘taxable property’. The charge is levied on the scheme at the rate of 40% of the total value of the funds held by a scheme immediately before its registration is withdrawn by HMRC. On whom is an unauthorised payments charge levied? Answer : Purchase course for answer Schemes granted registration by HMRC enjoy significant tax advantages on growth and income within the scheme. In summary, the advantages are:
No capital gains tax on any gains within the scheme; <... Shortened demo course. See details at foot of page. ...tax charges that would remove any tax advantages of doing so.What is the tax position with regards to interest received within a registered pension scheme? Answer : Purchase course for answer Qualifying recognised overseas pension schemes (QROPS) became available as part of the pensions simplification regime. A QROPS is essentially an overseas pension arrangement that can accept a transfer from a UK pension scheme, other than the State pension, provided the UK pension fund has not been used to provide an annuity. A transfer to any other type of overseas pension will be an unauthorised payment.
A QROPS can be arranged by any UK taxpayer who intends to move (or has already moved) outside the UK or by international workers who are members of a UK pension scheme and are returning home or moving to another country. To accept a transfer, the QROPS must meet HMRC requirements. The QROPS can be based in any country, not necessarily the one where the individual intends to move to (or is living), which means that the plan can be set up in a low tax regime such as the Channel Islands or the Isle of Man and paid to another country in any currency. To gain HMRC approval, a QROPS must be regulated as a pension scheme in the country where it is established and must be recognised as a pension in its host country for tax purposes. However, HMRC has no control over the level of regulation or the rules that apply to the scheme in the host country. Within 10 years of the transfer, HMRC will be entitled to receive information about any benefits or withdrawals that are taken from funds that originated in the UK. If the individual returns to live in the UK within a five-year period there may be a UK tax... Shortened demo course. See details at foot of page. ...00 limit for payments received during periods of temporary non-residence is a total limit for payments from registered pension schemes and overseas schemesAlign the tax treatment in relation to pension flexibility for registered pension schemes with those for overseas schemes The scheme administrator of a QROPS must notify HMRC that the scheme meets the conditions to be a recognised overseas pension scheme every five years. Overseas transfer charge A 25% overseas transfer charge applies on transfers after 9 March 2017 unless at least one of the following applies: Both the individual and the QROPS are in the same country after the transfer The QROPS is established in Gibraltar or a country within the EEA and the member is UK resident or resident in a country within the EEA or Gibraltar The QROPS is an occupational pension scheme sponsored by the individual’s employer The QROPS is an overseas public service pension scheme and the individual is employed by one of the employer’s participating in the scheme The QROPS is a pension scheme established by an international organisation and the individual is employed by that international organisation If the transfer is not liable to the overseas transfer charge at the point of transfer, UK tax charges will apply if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer. Who can put in place a QROPS? Answer : Purchase course for answer Estimated study... Shortened demo course. See details at foot of page. ...this learning outcome. |
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This is a shortened version of our online course, built so that you can get a good idea of what is provided. The full version shows all the current text and is fully formatted. Use the top right drop down menu to view the chapters. If you have already purchased this course, please log in to access the full version Our online courses page lists details of all our courses. For more details on the above course see; |