Pension Recycling
*applies ONLY to PCLS monies, allowed to recycle pension income as paid the tax
*Exploitable loophole - withdraw PCLS lump sum whilst working, put it back into pension and get a tax relief on the contribution made
*So unauthorised payments subject to tax are those that satisfy all of:
- Any PCLS received more than £7.5k
- 30% more than expected contribution in
- Action was pre-planned
- Contribution was made by the individual or by a third party e.g. employer
Primary protection (2006)
What it is
*Available at A-day (April 2006) for those whose pension rights exceeded £1.5m lifetime allowance
*Used a personal LTA factor to protect tax free lump sums bigger than £375k (£1.5m) allowance, 25% of your bigger value
Features
*Able to continue contributing to your pot
*Only lose it if value dropped below £1.5M (usually from divorce)
*Even tho amount later fell, anyone with primary protection uses the 2006-2012 high point as their underpin i.e = your pension value x (1.8/ 1.5)
Enhanced Protection (2006)
*for those who expected big pension growth and wanted to avoid LTA completely (DB usually)
*Allows unlimited future growth tax free for 25% tax free cash of a bigger fund
*Lost if you contribute whether that be you or your employer after 6 April 2006, unless after 6 April 2023 (rule removed)
*From 6 April 2023, max PCLS calc’d as: (PCLS % entitlement on A-day) * fund value on 5 April 2023 as this is when tax free cash limits were frozen
*minimum underpin is £1.5M as it was on A-day
Fixed protection 2012/ 2014/ 2016
*a mini-Enhanced Protection, fixes LTA at a higher level but you must stop contributing
*every time gov reduced standard LTA members needed a way to ‘lock in’ the old higher limit
*2012: £1.8m, 2014: £1.5m, 2016: £1.25m
*Lost when pension contribution or accrual happens after cut off date
Individual protection 2014/ 2016
*a mini-Primary protection, protects a personal LTA based on fund size but lets you keep contributing
*to protect people who already had large pots but wanted to continue contributions (unlike fixed protection)
*Gives a personal LTA of £1.5m max (2014); £1.25m max (2016)
*Only lost if pension rights fall below respective £1.5m/ £1.25m
Employer contribution spreading
*To stop employers artificially dumping a huge pension contribution into one tax year in order to reduce corporation tax bill employer must spread their payments if:
Employer contribution more than 210% of last years (less than can do all this year)
Then calc excess above 110%
If excess is more than £500k must spread tax relief over up to 4 years (less than can do all this year)
Tapered annual allowance
*Threshold income more than £200k
Threshold income = ALL taxable income - PERSONAL pension contributions + salary sacrifice deductions - lump sum death benefits
i.e. T, take away personal pension contributions
*Adjusted income £260k
Adjusted income = ALL taxable income + EMPLOYER pension contributions - lump sum death benefits
i.e. A, add employer pension contributions
*If these limits are both breached then AA tapered £1 for every £2 over adjusted income down to a minimum of £10k
What are safeguarded rights?
And guaranteed rights?
*promised income
*contracted out rights
Pension protections decision tree
Where was the client on A day?
- If already got enormous pot £1.5m+ could take primary protection (could carry on contributing but ‘just’ a personalised LTA factor) Most deceased now
- If expecting big future growth could take enhanced protection (could no longer contribute but total LTA freedom) Many still alive
- If didn’t meet 1 or 2 had to jump on the band wagon at a later date with individual/ fixed protections
PPF
Eligibility
*Applies to DB schemes that began windup after 6 April 2005
*scheme must be insolvent & employer unable to save it
Compensation limits (no longer capped)
*100% if member over NRA at assessment date or already receiving survivors/ ill health pension
*90 if below NRA at assessment date
*survivor pension is 50% of the members PPF compensation (i.e. after PPF has stepped in)
Revaluation BEFORE RETIREMENT
*Deferred benefits revalued to NRA on all service
*90% or 100% compensation applied after revaluation
Escalation AFTER RETIREMENT
*Pre 1997 - no statutory requirement to increase
*Post 1997 - CPI capped at 2.5% p.a.
Set up
*2 years to assess schemes (during which time no further benefits accrued but pensioners get paid)
*funded by levy on all DB schemes
Worker categories
*Usually have to be 18 in order to join a pensions scheme
*Eligible jobholder - 22 to SPA; AND earns above £10k: must be auto enrolled and receive employer contributions
*Non-eligible jobholder - 16-21 or SPA-74; OR earning between £6,240 and £10,000: can opt in and will receive employer contributions if they do
*Entitled worker - 16-74; AND earns below £6,240: has a right to join but employer contributions not required
Which regulators handle what?
*TPO - All workplace pension administration complaints
*FOS - All Personal, bot not workplace, pension complaints (I.e. FCA regulated, Advice problems)
*TPR = regulation of occupational schemes + auto enrolment compliance/ stakeholder scheme compliance
PPF revaluation vs escalation
*PPF REVALUATION = before retirement
- Whilst deferred, all service gets revalued up to PPF retirement age THEN get 100% if over NRA at retirement, 90% if under NRA at retirement
PPF ESCALATION = once a pensioner
- Pre 1997 no increase, post 97 increases at 2.5% each year
e.g. David’s entire pension is revalued while he’s waiting to retire - bringing ALL benefits to todays value - once retired the escalation rules kick in only growing the post 97 part
IN PAYMENT DB contracted in escalation rules (GMP and Requisite benefits)
*Benefits before April 1997 = none
*Benefits from April 1997 to April 2005 = CPI capped at 5%
*Benefits after 6 April 2005 = CPI capped at 2.5%
*GMP accrual ends (5 April 1997), and requisite benefits accrue from (6 April 1997)
DEFERRED MEMBER DB contracted in revaluation rules (GMP and Requisite benefits)
*Pre 2009 CPI/ RPI capped at 5%
*Post 2009 CPI capped at 2.5%
DB scheme liabilities and AA bond prices
*If AA bond prices rise their yields fall, a lower yield = a lower discount rate which gives a higher present value of liabilities
*If AA bond prices fall their yields rise, a higher yield = a higher discount rate which gives a lower present value of liabilities
Contract based schemes
- Regulated by FCA
- Ran by 3rd party (no trustees)
- Must have IGC
*SMPI required
*Operates under relief at source contributions
*Class trap group personal pension schemes provided by employer
SIPPs
*Contract based DIY individual pension with wide investment choice
- Can invest in commercial property, paying stamp duties (not buy to let)
- Can group SIPPs to buy property together
- Cannot lend to connected parties
- Up to 50% net scheme value can be borrowed - not from connected parties
- Can buy shares in an employer
SSAS’
*Trust based (11 trustees max), built for business, regulated by TPR
- Assets are pooled, no indv earmarking
- Wide investment powers, commercial property paying stamp duties (not buy to let)
- Can invest up to 5% assets in a sponsoring employer (up to 20% if multiple companies)
- Rental income within a SSAS roll up tax free
- costs and admin higher than a SIPP
Can loan back to an employer if:
- Secured on a non-depreciated asset
- Max term 5 years (can rollover once)
- Level repayments, at least annually
Minimum interest 1% above BoE base rate
Annuity guarantees vs annuity protection
Guarantee period
- Pays remaining guaranteed income to the beneficiary
- Can be commuted to a lump sum ONLY IF <£30k (trivial)
- If > £30k must stay as income
- Not an RBCE
Annuity (value) protection
- Pays out unused purchase price as lump sum
- Always creates an annuity protection lump sum
- Is an RBCE
The purchasing of annuities
Two different types
*Pension annuity can only be bought from pension income (i.e. any PCLS taken outside the pension cannot be used)
*Purchased lifetime annuity, with any cash outside of your pension!!
(Hence in phased retirement qs why pcls has to be crystallised but cannot be put towards the annuity purchase)
Serious ill health lump sums
*Tax free ONLY if paid within 2 years before age 75 and sum is within LSDBA
*Otherwise taxable, even if you are going to die!
Consequences of being contracted in/ out on New State Pension
- Contracted IN > you kept SERPS/ S2P > may get a protected payment
- Contracted OUT > you did not build SERPS/ S2P (instead paying less NICs so building your private pot) > may get a reduction
Deferring the state pension
Post 2016
*can only be deferred once
*must defer at least 9 weeks to earn increased pension
*no lump sum
Pre 2016
*could take a lump sum
*only needed to defer for 5 weeks
