Chapter 2&3 Quick Rerun

Question 1

Salary Sacrifice - Advantages (6) - take home, new pension scheme, NI, entitlement, used to reinstate (2)

disadvantages (3 + counter for 2) - benefits, borrowing + affordability, social security

Answer 1

Advantages;

• if employee was already paying a pension contribution, take home pay is usually the same or can be higher.
• if sal sac is being used because of a new pension scheme, reduction in take home pay will be less than the amount of the gross pension contribution.
• NI savings made can be paid into pension arrangement.
• As salary is reduced, employees entitlement to Working Tax Credits may be increased.
• For those earning above £100k, sal sac can be used to reinstate some or all of personal allowance.
• those with earnings in excess of £50k can use sal sac to reduce earnings back to £50k to avoid High Income Child Benefit tax charge.
• Salary is reduced for all purposes which may reduce some benefits such as death in service. Notional salary may be used to ensure benefits are not reduced.
• Reduction in salary may reduce borrowing capacity for mortgage and other loans - however, changes in mortgage rules means borrowers assess affordability rather than salary multiplier therefore likely to have little impact on amount that can be borrowed.
• May cause reduction or loss of other social security benefits such as maternity.

Question 2

Recycling the PCLS - overview, HMRC will treat as… and what needs to be met (4)

Answer 2

Government see recycling of abuse of tax simplification rules due to receiving tax relief on contributions that have already been given tax relief previously. HMRC will treat PCLS as unauthorised payment when all of the following are met;

• individual receives a PCLS which, when added to any other PCLS taken into previous 12 months, exceeds £7.5k.
• PCLS means that pension contribution paid on behalf of the individual is significantly greater than it normally would be. (More than 30% of normal contributions.
• Additional contributions are made by individual or by someone else.
• Recycling was pre-planned

Question 3

Other exclusions from total pension input (2)

Answer 3

• Contributions and DB accrual in tax year which member dies.
• contributions and DB accrual in tax year which bens are taken early due to ill health.

Question 4

Annual allowance - Gross taxable income sources (7), threshold income calc (4 parts), adjusted income calc (3 parts)

Answer 4

When calculating threshold and adjusted income start at the persons gross taxable income from all sources which includes the following

• earnings from employment
• earnings from self-employment or partnership
• most pension income
• interest on most savings
• dividend income
• rental
• income received from trust

Once this is calc’d, then calc threshold income (only need to calc adjusted income if this exceeds £200k). Threshold income is calculated like so;
Gross taxable income - gross pension contributions (not by employer) + income given up from sal sac - taxed lump sum bens received.

Adjusted income calculated;
Gross taxable income + employers contributions less death benefits

Question 5

Money Purchase Annual Allowance (MPAA) -once triggered it… (2), events that will trigger it (7), when automatically entered into MPAA rules and who can take payments without triggering (3)

Answer 5

Once triggered, it applies from following day and will continue to apply in all subsequent tax years. Events that can trigger MPAA rules are when member;

• first draws funds from flexi access drawdown fund
• takes a UFPLS
• notifies scheme admin to convert capped fund to flexi-access drawdown and then take withdrawal.
• takes more than permitted amount for capped fund.
• receives stand alone lump sum when entitled to primary protection where lump sum exceeds £375k
• payment received from flexible annuity contract.
• payment of one of they types of benefit from above from an overseas scheme has benefitted from tax relief.

Members who entered flexi-access drawdown before 04/15 automatically subject to MPAA rules. MPAA only triggered when the member takes one of the payments above, not dependant, nominee or successor.

Question 6

Money Purchase Annual Allowance - events that don’t trigger MPAA (9)

• takes what, receives (2), SP, SP from where, SP secured how, lifetime annuity, capped, dependants FAD

Answer 6

When the member;

• takes PCLS (only when first payment is taken from fund i.e income)
• receives trivial commutation lump sum
• receives small pots lump sum
• receives a payment from scheme pension from a DB arrangement
• received a payment from scheme pension paid directly from funds of DC where at least 11 other people are doing the same.
• receives a scheme pension secured by annuity from DC scheme of any size.
• in receipt of lifetime annuity where payments cannot go down except in prescribed circumstances.
• takes no more than permitted max amount from capped drawdown fund
• receives payment from a dependants flexi-access fund

Question 7

LTA tax charge when;

• income, lump sum, overseas, 75 and FAD

Answer 7

If LTA breached, subject to tax charge (LTA charge) and charge depends on benefits taken as lump sum or as income.

• if any excess taken as pension income, LTA charge of 25% before fund is used to provide income.Then income is subject to normal income tax.
• if any excess taken as lump sum, LTA charge of 55% taken before lump sum paid.
• If charge arises through transfer to overseas scheme, 25% charge.
• Under BCE’s that take place at 75, LTA charge of 25%.
• If decide to designate balance to flexi-access drawdown, LTA charge of 75%

Question 8

How to work out previous LTA used at previous BCE - 48k in 07/08

What factor pre a-day and how is this applied to lifetime annuities and scheme pensions

Answer 8

E.g. Scheme pension of £48k in 07/08 then draws income in 20/21 trig BCE.
SP= 20*48k = 960k. LTA 07/08 = 1.6m. LTA used in 07/08 = 960k/1.26m = 60%. 40% left of current LTA.

25:1 valuation factor is used for pre A-day income benefits. For lifetime annuity or scheme pension this factor is applied to the yearly income amount.

Question 9

Higher lifetime allowance - entitled if (8)

• residents, overseas, order, as above + in payment, protection (4)

Answer 9

• not UK residents
• transferred benefits into recognised oversea pension scheme
• have entitlement to benefits arising from pension credit after sharing order following divorce.
• if they have the above, that was acquired post 04/06 and from a pension that was in payment to member already.
• have benefits in a pre a-day scheme and have registered for primary protection.
• registered for fixed protection 2012 due to reduction of LTA from £1.8m to £1.5m in 04/12
• registered for fixed protection 2014 or individual protection 2014 due to LTA reduction from £1.5m to £1.25m 04/14.
• registered for fixed or individual protection 2016 due to reduction of LTA from £1.25m to £1m 04/16

Question 10

Ill-health death bens- if take what not tested against LTA but what is

Uncrystal bens - tested when and can take PCLS if, same for UFPLS but if no remaining then

TCLS - LTA test but what, if made from SP taxed how otherwise normal places taxed how

Answer 10

Ill health bens - If TCLS or SPP then not tested against LTA otherwise they are such as lifetime annuity, SP, drawdown and UFPLS.

Uncrystallised bens tested against LTA at 75 and can still take PCLS if have some LTA remaining. Same for UFPLS - if they dont have any remaining full amount taxed at marginal rate.

TCLS - not tested against LTA but must have some remaining to take. If being made from SP (and not DB or IPMPIH) then taxed at marginal rate otherwise 25% TF.

Question 11

Death bens

Who can/cant receive SP as death ben?

Annuity protection and pension protection - how do they get each? Max LSDB (annuity and SP) for each and how different to usual death before 75 and why?

Answer 11

Nominee or successor cannot receive SP from death but dependant can.

If secured bens and die then LSDB can be included in scheme;

• if scheme pension from DB scheme known as pension protection LSDB
• if scheme pension or lifetime annuity from DC known as annuity protection LSDB.

Under annuity protection, max LSDB is equal to amount crystallised to provide income which;

• for DC, amount of fund used to purchase annuity
• for SP, 20xinitial pension - value of gross payments up to date of death. (same for pension prot)

if before 75, annuity protection and pension protection not tested against LTA as previously paid from crystallised funds.

Question 12

TCLSDB - two occasions this can be paid (survivor and guarantee) and how taxed

Answer 12

Two occasions where this may be paid and max of £30k can be paid;

• survivor commutes a survivor’s lifetime annuity or SP
• member dies within guaranteed period of lifetime annuity or SP and recipient wishes to commute the remaining payments.

In all cases, lump sum payment is taxed at recipients marginal rate via PAYE.

Question 13

Death bens from guaranteed income - SP guarantee (2)

Lifetime Annuity guarantee - tax and LTA - pre 75 death and post 75 and survivors annuity

What is a dependants SP - how taxed

Answer 13

Scheme Pension guarantee

• Income taxed as recipients pension income via PAYE (marginal rate.
• No test against LTA

Lifetime annuity guarantee and pre 75

• Income free of tax
• No test against LTA

Lifetime annuity guarantee post 75

• Income taxed at marginal rate
• No test against LTA

Dependants SP - SP set up so that on death, income passes to dependant and taxed at marginal rate.

Survivors annuity same as lifetime annuity