Commonly asked questions about Pensions.
No. Scottish Widows’ personal pensions can only accept personal contributions that attract tax relief – in other words net contributions. The overall limit on personal tax relievable contributions that can be made in a tax year is the higher of 100% of relevant UK earnings and £3,600. This limit includes personal and third party contributions to all pension schemes that the individual is a member of.
Our Spotlight On: Pension Tax Relief has more details.
Employer contributions are not limited by salary. Contributions are paid gross and will not receive tax relief, but they will be assessed against the annual allowance for the tax year during which they are paid. The director will need to check with their accountant that the company will receive a deduction for corporation tax purposes in respect of the contribution. To do so the contribution should be made ‘wholly and exclusively’ for the purposes of trade, which requires that the director’s overall remuneration package (including the pension contribution) is justified by their value to the company. Please note, however, that a corporation tax deduction is not a condition of being able to pay the contribution to the provider - this is a separate matter for the company to consider.
A member of a UK pension scheme can continue to pay personal contributions and get tax relief on gross amounts up to £3,600 in each of the five tax years after the year in which they ceased to be UK resident. The contributions must be paid to a scheme that they were a member of when they left.
As Scottish Widows only accept personal contributions that attract tax relief, amounts paid must be supported by the member’s relevant UK earnings. If their earnings in the tax year are sufficient to get tax relief on the full gross contribution, then they can pay their redundancy cash payment into their pension. This will be subject to the annual allowance limit. Note that the first £30,000 of redundancy is tax-free and so does not count as earnings; the taxable part of redundancy payments, however, does count towards earnings. Another option would be to ask the employer to pay the taxable part of the redundancy payment as an employer pension contribution instead.
Total income above £100,000 results in a reduction to (or complete loss of) the income tax personal allowance. Every £2 of excess income reduces the personal allowance by £1. It is lost completely at income levels at or above £123,000 (2017/2018). Personal contributions to registered pension schemes reduce income for this purpose, so can help reclaim the personal allowance. An effective rate of tax of 60% is available against pension contributions that reduce income within the band from £100,000 to £123,000: 40% tax relief is available because they are higher rate taxpayers; the additional 20% relief is obtained because a segment of income that was previously taxable is now tax-free because it is falls within the personal allowance.
Where a personal contribution is made to a scheme that operates ‘net pay’ (most occupational schemes use this mechanism) tax relief at the member’s marginal rate is applied automatically. If the contribution is made to a scheme that operates on a ‘relief at source’ basis (personal pensions, group personal pensions and stakeholder schemes use this method), only the basic rate (20%) is added automatically. The remaining tax relief available to higher and additional rate tax taxpayers must be claimed through the self-assessment process by the member detailing their personal contributions for the tax year.
These are permitted under the legislation; however tax relief will not be available. In practice this means many providers will not accept them.
The carry forward rules are not relevant as your client will still have £36,400 of their annual allowance left for the current tax year. As a non-earner, their tax relievable contributions are still limited to £3,600 per tax year.
The annual allowance from 6 April 2017 until 5 April 2018 is £40,000. All personal, employer and third party contributions made to defined contribution schemes and benefits accrued within defined benefit schemes during the tax year are tested against this allowance. Unused allowances of the three previous tax years can be added to the current year’s allowance. For restrictions to the annual allowance see the ‘Tapered annual allowance’ and ‘Money purchase annual allowance’ sections that follow.
Where total pension contributions and/or accrual exceeds the annual allowance (including carry forward) for a tax year, the excess will be added to the client’s other income and taxed at their marginal rate of income tax. There is no facility to the return the excess contributions to the client. Any contributions, however, that were genuinely made in error may be refunded following the guidelines for that particular scheme.
Yes: personal, employer and third party contributions to defined contribution schemes are tested against the annual allowance, as is benefit accrual within a defined benefits arrangement.
It is not necessary to use a special form or tell HMRC in advance if you want to use carry forward. If contributions fall within the annual allowance plus carry forward allowances, it won't be necessary to report anything via a self-assessment tax return either.
Provided that the individual was a member of a registered pension scheme in each tax year that they want to carry forward from, they can add the unused annual allowances of each of the previous three years to the current year’s annual allowance. The current year’s allowance will be utilised first, followed by the allowance of the earliest available year, then the next earliest year and so on. No application is required for carry forward – it applies automatically. An annual allowance excess, and thus a charge, only occurs if the annual allowance plus carry forward is exceeded. Relevant UK earnings in the current tax year are still required to support any tax relievable personal contributions paid using carry forward. Carry forward from the 2015/2016 tax year is slightly more complicated and is explained in a later question in this section.
Yes. From 6 April 2016, pension contributions are tested against the annual allowance of the tax year in which they are paid. This is because pension input periods for all schemes are aligned with the tax year from 2016/2017 year onwards. Prior to this, pension input periods were not always aligned with the tax year. See next question.
From April 2016 onwards, pension input periods are aligned with the tax year and cannot be changed. Prior to this the position was more complicated, which still matters where carry forward is being used. 2015/2016 was a transitional year: following the announcement in the 2015 Summer Budget, any open pension input period was automatically closed on 8 July 2015; a new pension input period then covered the rest of the tax year from 9 July 2015 to 5 April 2016. Prior to this, pension input periods could have started and ended on any day during the tax year.
The pension input period was usually determined by when the first post A-day contribution was paid. If that contribution was paid before 6 April 2011, the pension input periods ran for 12 months from this date, with the exception that the very first period lasted for one year and one day. (This was due to an error in the legislation.) If the first contribution was paid on or after 6 April 2011, the pension input periods ended on the last day of each tax year i.e. they were tax-year aligned. This was the statutory default and members / schemes had some scope to vary their pension input periods. These rules were overturned in the 2015 Summer Budget when all open pension input periods were closed on 8 July 2015 and the ability to alter the pension input period removed.
The 2015/16 tax year was split into two ‘mini’ tax-years for annual allowance purposes. The first period was the ‘pre-alignment period’, which ran from 6 April 2015 to 8 July 2015. The second was called the ‘post-alignment period’, which ran from 9 July 2015 to 5 April 2016. The annual allowance in the pre-alignment period was £80,000. There was no annual allowance in the post-alignment period, however the unused annual allowance from the pre-alignment period, subject to a maximum of £40,000, was available to be carried forward to the post-alignment period. This took place before the usual carry forward from earlier tax years. Carry forward from 2015/2016 to later tax years is from the pre-alignment period and is limited to the maximum carry forward that was able to be utilised in the post-alignment period less total pension input in that period.
(There is an exception to the rules for those that were not members of a registered pension scheme in the pre-alignment period, but were in the post-alignment period. This is explained in the Pension Tax Manual.)
The tapered annual allowance is a reduced annual allowance that affects those with high incomes. The annual allowance is tapered by £1 for every £2 of ‘adjusted income’ over £150,000 if ‘threshold income’ is also over £110,000 (both explained below). The minimum tapered annual allowance is £10,000, which applies to those with adjusted income of £210,000 or more.
Adjusted income is total taxable income for the tax year plus personal 'net pay' contributions and contributions that required a claim for tax relief (which were deducted when taxable income was calculated) plus employer pension contributions for the tax year.
Threshold income is taxable income, again already reduced by net pay and other gross contributions, less personal contributions made to personal and stakeholder pension schemes. Another aspect of threshold income is that employer contributions paid under salary sacrifice agreements that were set up after 8 July 2015 are also added.
Both must be exceeded for the tapered annual allowance to apply. If either adjusted income is below £150,000 or threshold income is below £110,000 your client will be entitled to the full annual allowance in this tax year.
Yes, carry forward can be added to the tapered annual allowance. The carry forward amounts for tax years prior to 2016/2017 will be based on the full allowance of £40,000. Carry forward from tax years 2016/2017 onwards to later years will be based on the tapered annual allowance for that year, if it applied.
This won’t work because employer pension contributions are added to taxable income to determine ‘adjusted income’. Instead the client should keep their taxable income at or below £110,000 (the ‘threshold income’ level) and pay the remaining £140,000 as an employer pension contribution, assuming they have carry forward to cover the full contribution. If they do this they will have the full £40,000 standard annual allowance in the current tax year plus carry forward.
A company car usually generates a taxable benefit for the employee based on the car’s list price and carbon dioxide emissions. This taxable benefit will be included when calculating adjusted income and threshold income.
If the amount of salary being sacrificed does not change (either the percentage or the monetary amount depending on the type of agreement) there should be nothing new to add to threshold income. If there is an increase in the amount of salary being sacrificed only the increase will be added to threshold income. The employer contribution paid under the agreement is always added to adjusted income.
If income is not known until the end of the year, then you will not know what the annual allowance will be, but there is no simple solution to this problem. You could estimate income and leave an adequate margin of error if you want to ensure that an annual allowance charge does not arise. Another solution is to ensure that there is adequate carry forward to cover any excess that might arise. However, if the client is happy to pay the annual allowance excess tax charge that might arise, then this may not be much of an issue.
No, salary sacrifice contributions are not separately added to adjusted income, as they are already included in the form of employer pension contributions. It is calculation of threshold income that may include employer contributions paid by salary sacrifice. These must be added to income if they are paid under a post 8 July 2015 agreement.
Not necessarily. HMRC practice is that the provider is only obliged to offer Scheme Pays where the total charge is at least £2,000 and the member has paid at least £40,000 to the scheme in respect of the relevant tax year. As the tapered annual allowance can give rise to a tax charge where contributions of much less than £40,000 were paid scheme pays will not always be an option.
This is unlikely to be the best approach for a number of reasons: not all affected employees will have the minimum £10,000 annual allowance; some may prefer to receive the contributions and pay the resulting annual allowance charge; and employers may not always be able to identify who is affected because all taxable income, not just employment income, is taken into account. Further, entitlement to a certain level of employer pension contributions will usually be written into employment contracts, so it will not be possible to simply reduce those contributions. The best approach will be to open a dialogue with affected employees – with input from a financial adviser - to determine the best way of minimising the impact of tax charges on affected employees.
The lifetime allowance is £1 million for 2017/2018. From April 2018, it will be revalued in line with the annual increase in the consumer prices index (CPI) to the previous September. Only those entitled to the standard lifetime allowance will benefit from the uplift. The lifetime allowance of previous tax years can be found here.
There are four broad types of event that lead to the benefits in a registered pension scheme being subject to a lifetime allowance test: receiving a lump sum, receiving an income, the payment of death benefits and the transfer of benefits overseas. In addition, any benefits that have not been tested against the lifetime allowance are tested when the member reaches age 75.
For lifetime allowance purposes, benefits are either defined benefit or defined contribution. Cash balance benefits fall into the defined contribution category. Hybrid schemes eventually generate either defined contribution or defined benefits. To calculate the lifetime allowance value of a defined contribution scheme is straightforward - it is the cash value at the time of the event. To calculate the lifetime allowance value of defined benefits is more complex. The annual pension must be converted into an equivalent lump sum, which is normally done using a factor of 20. Any tax-free cash that is received is added to this amount. Pre A-day benefits are explained in the next question.
You need to look at the percentage of the lifetime allowance used. In your example 75% will be used (£750,000 / £1,000,000). Their remaining lifetime allowance will be 25% x £1,000,000 = £250,000. When the lifetime allowance rises with inflation in the future, their remaining lifetime allowance will become 25% of the new lifetime allowance.
Benefits crystallised before A-day cannot be subject to a lifetime allowance charge. However, their value is taken into account when working out the amount of lifetime allowance available for benefits that are crystallised on or after A-day. This ‘notional’ lifetime allowance test takes place when the first post A-day benefit crystallisation event (BCE) occurs. The value of the pre A-day pension (referred to as a ‘pre-commencement pension’ in the legislation) is found by multiplying the annual pension in payment on the date of the first post A-day BCE by 25. Any tax-free cash that was taken does not need to be added to this as it is accounted for within the 25x multiple. Once the value has been established it is fixed as a percentage of the lifetime allowance and revalued with subsequent changes to the allowance. If there has not yet been a post A-day BCE, the lifetime allowance value of the pre A-day pension will not yet be known. This can be disadvantageous if the pre A-day pension is escalating as the longer it is left the larger the amount of lifetime allowance that will use up. The reductions to the lifetime allowance since 2012 can exacerbate this effect, so clients with pre A-day benefits that have not been tested against the lifetime allowance should consider taking action.
No. There is a 2nd lifetime allowance test against drawdown funds at age 75 or earlier annuity purchase that tests the growth in the fund since designation against the lifetime allowance. This prevents funds being moved into drawdown simply to take investment fund growth outside the scope of the lifetime allowance. The subsequent test applies to the monetary increase in the drawdown fund only. This ensures that funds are not tested against the lifetime allowance twice. It also means that the growth in the drawdown fund can be minimised by making withdrawals. However, these will be subject to income tax at the member’s marginal rate of tax. The 2nd lifetime allowance test does not apply on death or to pre A-day drawdown arrangements.
No, it can only be deferred. A lifetime allowance test usually takes place when a member becomes entitled to pension benefits. However, when they reach age 75 any pension benefits that have not been crystallised will be tested against the lifetime allowance along with any appreciation in value of a drawdown fund since benefits were designated. A transfer to a QROPS scheme or the member’s death before reaching age 75 will also trigger a lifetime allowance test.
The lifetime allowance tax charges are: 25% if the excess above the allowance is taken as pension income; 55% if received as a lump sum. The disparity is explained by the taxation position when those benefits are received by the member. A lifetime allowance excess lump sum does not suffer any further tax, which means 45% of the lump sum is paid out after deduction of the tax charge. The amount of a lifetime allowance excess that is designated to drawdown or used to purchase an annuity is net of the 25% tax charge. The income paid from these products (and scheme pensions) is subject to income tax at the member’s marginal rate. What is important is the overall effective rate of tax, which is looked at in the next question.
The 55% tax charge against lifetime allowance excess lump sums and the 25% charge against an excess used to purchase (or designate to) an income product should be broadly equivalent for a higher rate taxpayer: 25% tax plus 40% tax against the remaining 75% of the fund gives an overall tax liability of 55%.The differing tax rates charged to taxpayers other than higher rate tax payers result in correspondingly different effective rates of tax. The table below shows the effective rates of tax for different taxpayers, assuming that all income received is taxed at the rate shown.
Only Fixed Protection 2016 and Individual Protection 2016 are still available. There are no stated deadline for these protections, but in practice they should be applied for as soon as possible, particularly Individual Protection 2016, as values as of 5 April 2016 must be obtained, which will not be available indefinitely.
Fixed Protection 2016 can only be applied for by members who have paid no contributions to money purchase schemes and no benefit accrual in defined benefit schemes since 6 April 2016. Individual protection 2016 is only available to those who had total benefits (in lifetime allowance terms) of at least £1 million on 5 April 2016. FP2016 provides a protected lifetime allowance of £1.25 million, but no more contributions or accrual are allowed and no new arrangements can be established. Individual Protection 2016 provides a protected lifetime allowance equal to the total value of benefits on 5 April 2016 (capped at £1.25 million) but continued contributions and accrual are allowed. Further details and restrictions can be found in the Pensions Tax Manual.
If a worker who is automatically enrolled into a workplace pension opts out of the scheme they will be treated as though they had never been a member of the scheme. This will not cause revocation of fixed or enhanced protection. The same treatment applies to those who cancel their rights within the ‘cooling-off’ period for the contract. Those who leave other than by opting out (e.g. those who leave outside the opt-out period or who leave after being contractually enrolled and so do not have an opt-out right) or outside of their cooling-off period have joined a new scheme and paid contributions. Membership of the scheme, therefore, causes loss of fixed or enhanced protection.
From the 6th April 2015, in addition to receiving tax-free cash, a money purchase pension can be accessed by receiving a partial pension encashment (uncrystallised funds pension lump sum), designating to flexi-access drawdown and taking an income, purchasing an annuity or, in some case, receiving a small lump sum payment such as a “small pot.” The full range of options are explained in the Pension Tax Manual.
Clients that have reached age 55 (or lower if a protected pension age applies) must make a request to their pension provider to designate uncrystallised funds to drawdown. Alternatively, a new drawdown account can be set up to accept a transfer from another provider. If the client wants to receive tax-free cash from uncrystallised funds this must be paid out when the drawdown account is set up. If the client decides not to take tax-free cash from their fund at this time it is lost and cannot be made up at a later date. Where the standard rules apply the maximum tax-free cash is 25%, which means the amount designated to drawdown will usually be three times the value of the lump sum. Once the flexi-access drawdown policy has been set up it can be accessed immediately.
There is no annual withdrawal limit. Any amount can be withdrawn at any time. However, the tax implications should be considered first, as taking large amounts in one tax year can result in a disproportionate income tax liability. The money purchase annual allowance will also apply as soon as flexi-access drawdown income is received, which will restrict future contributions.
A new capped drawdown policy can no longer be set up from 6 April 2015 unless it is being set up to accept a transfer of an existing capped drawdown from another scheme. In all other circumstances a flexi-access drawdown contract will be set up.
Pension schemes must calculate the maximum income limit for each capped drawdown arrangement they administer. This will apply for the drawdown year, which is determined by the policy start date. From 6th April 2015, the limit can be exceeded without triggering an unauthorised payment, however the contract will convert to flexi-access drawdown and the money purchase annual allowance will be triggered from the following day. This is irrevocable, so clients who want to retain their policy’s ‘capped’ status and/or wish to avoid being subject to the money purchase annual allowance should stay within the maximum income limit.
The process for calculating the maximum annual capped drawdown income is explained in the Pensions Tax Manual.
A partial pension encashment enables a money purchase pension fund to be accessed from age 55. The key reason for its introduction was to provide access to the Pension Freedoms where a pension scheme might otherwise impose a restriction – e.g. a minimum fund value for drawdown or lack of drawdown functionality. It is a much simpler route for accessing a money purchase pension fund, but there are some key differences compared to access via flexi-access drawdown that mean some needs are better served by drawdown:
25% of the payment is tax-free, which is essentially tax-fee cash. The remaining 75% of the payment is added to the client’s other income and taxed at their marginal rate, however the provider is likely to make the payment net of emergency tax. Any overpaid tax can be claimed back from HM Revenue & Customs using forms P50Z, P53Z or P55.
From normal minimum pension age (currently 55) up to three arrangements of no more than £10,000 can be withdrawn. They are not tested against the lifetime allowance, nor do they trigger the money purchase annual allowance. The £10,000 limit applies at arrangement level, which means some benefits may have to be ‘restructured’ to take advantage of these rules. E.g. one arrangement worth £27,000 could be split into three arrangements worth £9,000 each; or 24 arrangements worth £1,000 each could be merged into three arrangements worth £8,000 each.
No. Any partial pension encashment or uncrystallised funds pension lump sum (UFPLS) will be made up of a 25% tax-free payment and a 75% taxable payment and the full payment must be within the lifetime allowance where the member is under 75. The taxable part will be subject to income tax at the member's marginal rate. A member that wants to take tax-free cash of greater than 25% of the total cash received must go down the flexi-access drawdown route.
The legislation allows section 32 contracts to offer flexi-access drawdown or uncrystallised funds pension lump sums, but whether it is available depends on the provider. If an annuity is the only option then clearly this will prevent them from moving into drawdown and using the new pension freedoms. In this case they should consider transferring their benefits to another section 32 provider that will enable them to take their pension fund as a lump sum.
Yes, protected tax-free cash can be received and the remaining fund designated to flexi-access drawdown, allowing the fund to be accessed in full. The income tax consequences of doing so must be considered beforehand. The lifetime allowance rules also apply.
No, only 25% of an UFPLS will be free of tax, provided that the member has available lifetime allowance to cover the total payment.
For a one member scheme you could consider winding up the EPP first, transferring the benefits to a Section 32 which offers drawdown and then taking benefits.
If there is more than one member in the EPP a ‘buddy’ transfer may be possible if there is another member willing to transfer to the same receiving scheme and your client had not been a member of the receiving scheme for more than 12 months before the transfer.
Protection as a percentage of the fund only applies if: the member registered their benefits for enhanced protection, they had a tax free entitlement at A-day which exceeded £375,000 and the tax-free cash was also separately registered for enhanced protection. Relatively few members will have been eligible for such protection and most will be relying on scheme specific tax free cash protection, which does not protect the percentage of tax-free cash available at A-day.
Further information on protected tax-free cash
No, as long as they are transferring to the same receiving ‘scheme’ it will qualify. For example Scottish Widows Retirement Account is part of the Scottish Widows Appropriate Personal Pension Scheme, so if you transferred them both to our Retirement Account at the same time this would count as a block transfer. Bear in mind that a further condition for a transfer to qualify under the standard block transfer rules is that the member must not have been a member of the receiving scheme for more than 12 months.
The maximum tax-free cash which can be commuted depends on the commutation factor and your formula will only work if it is 20:1. The maximum permitted amount can be calculated using the formula 20fg / (20 + 3f) where f is the commutation factor and g is the gross scheme pension before commutation There is nothing to stop a scheme using a different definition for the maximum tax free cash (e.g. 3N/80 x pensionable salary) as long as it does not exceed the maximum permitted amount. As with all pension schemes it’s important to check what’s allowed under the scheme rules.
The tax treatment of death benefits no longer depends on whether the fund was crystallised or uncrystallised. If the member dies before reaching age 75 then all payments to their nominated beneficiary would be free of tax. The beneficiary can receive either a lump sum or an income and there is no requirement to be a dependant to receive an income, but a nomination will usually be required. If death is after age 75, the beneficiary can still receive income or a lump sum payment. Income payments will be subject to income tax at the beneficiary's marginal rate, as will lump sums from 2016/2017 onwards. This does not apply to dependant's/survivor's scheme pensions, which remain taxable at the recipient's marginal rate even if the member dies before age 75.
See answer above.
It is the age of the most recently deceased individual (member or beneficiary) that matters. So, if the member dies before age 75, the payment of death benefits to a nominated beneficiary will avoid income tax charges. If the nominated beneficiary nominates a further beneficiary (a "successor") and dies before age 75, then payments to the next beneficiary can also be tax-free. It can continue in this way indefinitely, but of course at some stage someone is likely to survive beyond age 75 or the fund will be exhausted.
A bypass trust can normally be used in conjunction with an occupational pension scheme. However, it does depend on the trust provisions and whether or not the scheme trustees are willing to accept a nomination in favour of another settlement. This is something you should check with the scheme administrator as it may not be allowed under the scheme rules.
Where death benefits are held under a discretionary trust, scheme trustees have full discretion over who receives death benefits. When trustees exercise that discretion they must consider the circumstances of the deceased member. Any nomination will be taken into account, as will other relevant information about the member’s circumstances, such as any dependants they have and other possible beneficiaries with consideration of who, if anyone, was financially dependent on the member. In most situations the nomination will be followed, but if a more appropriate beneficiary was identified payment could be made to them. If there was no nomination, payment will usually be made to the spouse and/or children or other financial dependant.
A scheme can set up beneficiary drawdown for a dependant or a nominated beneficiary. In addition, if there are no dependants or nominated beneficiaries the scheme can set up beneficiary drawdown for anyone.
If they were not nominated as beneficiaries, then because there was another dependent beneficiary, the non-dependant cannot receive beneficiary drawdown. The dependant beneficiary can make their own nomination so that the non-dependant receives beneficiary drawdown when the current beneficiary dies or they could let the scheme administrators know that the dependant does not want to receive the death benefits which would allow the scheme trustees to pay a lump sum to the non-dependant. The beneficiaries, however, cannot exercise any direct control in the matter so it does depend on the scheme trustees agreeing. If, alternatively, there were no other dependants, nominees or other possible beneficiaries then this should not be an issue.
Another route would be for the dependant to receive a lump sum and pass on the funds themselves. This would require a consideration of the inheritance tax effects as the lump sum will form part of their estate and be subject to the 7 year potentially exempt transfer rules.
Scottish Widows aim to offer dependant's drawdown and nominee's drawdown for most of our products, and this will be provided through Retirement Account. For the drawdown option to be available it mustinitially be set up under the member's existing pension scheme, and then transferred if necessary. The original arrangement can largely be notional, but the scheme rules must allow drawdown.
You, as the pension scheme member, cannot insist on this, but assuming this option is available under the product, the individual has been nominated / is a dependant and the scheme administrator and beneficiary agree, a beneficiary drawdown policy can be established instead of a lump sum payment being made. With some providers the nomination form will allow the member to state their preference of the form of benefits. On Scottish Widows standard nomination form we simply ask the member who they want to nominate. The administrators can then have a discussion with the beneficiaries at the relevant time to determine the most appropriate benefit type.
It is also possible for the member to be more specific without losing the inheritance tax exemption. For example, they could make a binding nomination for a beneficiary to receive flexi-access drawdown, but with us retaining the ability to pay a lump sum instead and to exercise discretion over the beneficiary of that. We expect this to be rare and customers wishing to make more complex nominations will need to obtain their own legal advice.
There is little point in insisting on the drawdown option for this reason alone. There is no restriction on the level of beneficiary’s drawdown income, so they could simply withdraw the entire fund in one go.
This option is possible but doesn't provide the scheme administrators with any clear guidance as to who benefits should be paid to. In most cases it will be obvious who the member actually wants to receive the benefits in which case they should be named along with the appropriate percentages. This gives the administrator clear guidance. If the member is keen to include a wide range of beneficiaries they can do so with appropriate wording on the nomination form.
This would enable the scheme administrators to pay beneficiary drawdown or lump sums to any of these 3 beneficiaries. They would firstly need to determine who is the most appropriate beneficiary following the usual process. If it was determined that the children are the most appropriate beneficiaries, say because the spouse does not wish to receive any benefits, they would then decide whether to pay a lump sum or drawdown. Neither the spouse nor the children could compel the trustees to do this.
No, this is not possible because it would cause the employer to breach the national minimum wage legislation. Further, salary sacrifice is advantageous because of the national insurance saving: reducing salary in a particular month below the national insurance threshold would offer no further tax benefits. Any salary sacrifice agreement should, therefore, ensure that the employee is at least paid the national minimum wage and that salary is not reduced below the national insurance primary threshold and/or secondary threshold.
Not necessarily. Whilst salary exchange usually enhances the overall contribution or take home pay as well as saving employer costs, it can result in a worse outcome for the very low paid for the following three reasons:
Those that earn just above the zero tax/NI allowances may lose out to a lesser extent and for a given level of contribution there will be a critical threshold of pay above which salary exchange becomes more tax-efficient than paying personal contributions. A tax comparison should be carried out to determine the best course of action for a particular employee.
Yes. Whilst it is technically possible to have a non-written contract of employment and, by extension, a non-written amendment to a contract of employment, a lack of documentation makes such agreements extremely difficult to enforce. Employers and employees should, therefore, ensure that salary exchange is agreed to in writing; either in the main contract of employment that is signed when the employee commences work, or in a separate amendment.
Yes, an amendment to the contract for salary exchange can be permanent, for a limited period of time, such as 12 months, or contain a review at which time a decision can be taken to review the agreement. Many salary exchange agreements also refer to ‘lifestyle events’ upon which the agreement can be reviewed or automatically terminated. However, following recent changes that allow salary exchange to be opted in to and out of at any time without compromising their tax effects, such clauses are not strictly necessary.
It depends what conditions the agreement contains. If there is a lifestyle event clause covering maternity leave, then it may cease automatically or allow the employee to opt out. If there is no clause covering maternity leave, the employee and employer can separately agree to revert to a non-salary sacrifice contribution. There are two separate points that employers need to be aware of, here:
1) The employer contribution must continue at the same monetary level when maternity leave starts and run for the duration of paid maternity leave. This applies irrespective of whether the employer contribution is a salary sacrifice contribution or not and cannot be overridden by anything in a salary sacrifice agreement. However, the ongoing employer contribution can be dependent on the employee continuing to pay their contributions, which is likely to be based on the employee’s reduced pay.
2) Statutory maternity pay cannot be reduced by salary sacrifice.
As always, the salary sacrifice agreement should be consulted in the first instance to determine the employer’s obligation and the employee’s options.
No, this is not possible because it would cause the employer to breach the national minimum / living wage legislation. Furthermore, salary exchange is advantageous because of the national insurance saving: reducing salary in a particular month below the national insurance threshold would offer no further tax benefits. Any salary exchange agreement should, therefore, ensure that the employee is at least paid the national minimum wage and that salary is not reduced below the national insurance thresholds.
No. The employer can keep all of the saving if they wish. Or they can pass all or a proportion of the saving onto the employee. If their intention is to encourage as many employees as possible to pay contributions by salary exchange, the incentive of boosting contributions by at least some of the employer NIC saving should help encourage uptake.
Paying contributions via salary exchange cannot be a condition of being automatically enrolled. This means that the automatic enrolment process and salary exchange agreement need to be dealt with separately, preferably at different times. This can be achieved by amending contracts before the auto-enrolment duty arises or by using a postponement period to make the necessary changes.
HMRC will only check salary exchange agreements after they have been set up. Furthermore, they will only comment on their efficacy from a tax perspective. The gov.uk website provides further details.
Assuming we are talking about a client's potential insolvency/bankruptcy, unvested pensions should be safe from a 'raid' by creditors. The most recent case that dealt with undrawn pension benefits reinforced this position. Annuity purchase would have no beneficial effect and may even have the reverse effect if 'excess' income is generated, which can be recovered by creditors subject to obtaining the necessary court order.
It is a reduced annual allowance that restricts the amount of tax-efficient pension contributions that can be made to defined contributions schemes by those who have accessed their pension flexibly. From 6 April 2017, the MPAA is £4,000 for those that it applies to. The reduced limit – it was previously £10,000 – is effective from the start of the 2017/2018 tax year despite the previous uncertainty over its implementation caused by the general election in 2017.
Broadly, any ‘flexible access’ of a registered pension scheme triggers the MPAA. This means payment of flexi-access drawdown income including an excess above the GAD limit of a capped drawdown contract, uncrystallised funds pension lump sums (partial pension encashments), flexible annuities and pre-April 2015 flexible drawdown are all trigger events. Other payments such as stand-alone lump sums and income from certain small scheme pensions are also triggers. Please see the Pensions Tax Manual for the full list.
It applies from the start of the day following the day in which the trigger event occurred. This means that when the trigger event occurs the MPAA is likely to apply for only part of that tax year. Money purchase contributions paid up until the day of the trigger event are not affected. Once triggered, the MPAA applies indefinitely and to all defined contribution schemes that the member pays to.
If the MPAA is triggered, the scheme that provided flexible benefits must issue the member with a ‘flexible access statement’. The member must pass this on to the other schemes that they are a member of. However, only schemes that the individual is an ‘accruing member’ of must be notified. An accruing member is one that has paid money purchase contributions (or had contributions paid on their behalf) between the trigger event and receipt of the statement, in which case they have 91 days to inform the scheme. If they do not pay a contribution until after receipt of the flexible access statement they have 91 days from the contribution date to notify that scheme.
No. The MPAA is currently £4,000 and cannot be enhanced by carry forward. However, the alternative annual allowance for defined benefit accrual – the remainder of the standard annual allowance after deduction of the MPAA - can be. Defined benefit accrual, therefore, can be made in the tax year of up to £36,000 plus any available carry forward alongside full use of the MPAA.
A pension scheme must offer Scheme Pays to members who are liable to an annual allowance charge of at least £2,000, had pension input in the tax year at least equal to the standard annual allowance and elect to use Scheme Pays before the deadline. However, if it is the MPAA that is exceeded the annual allowance charge must also be at least £2,000 if it was calculated against the standard annual allowance. Because of this rule, we expect few members who breach the MPAA to be able to opt for Scheme Pays, in which case they must settle the tax liability directly with HMRC.
The MPAA does not apply to schemes that operate on a defined benefit basis. The remaining annual allowance after deduction of the MPAA – the alternative annual allowance – along with carry forward can be used to accrue benefits in a defined benefits scheme.
The MPAA is not reduced by the tapered annual allowance. High income individuals who are subject to the tapered annual allowance have their overall annual allowance reduced, but this is made up of the £4,000 MPAA (if the member has triggered it) and the alternative annual allowance, which is subject to the tapered reduction. For example, someone with income of £250,000 is entitled to the minimum tapered annual allowance of £10,000. If they have also triggered the MPAA they will be able to fund money purchase schemes up to a total of £4,000 each tax year, leaving the remaining £6,000 plus carry forward to cover accrual of defined benefits.
Speak to us and discuss how we can help
This site is intended for UK authorised & regulated financial advisers only. It is not intended for onward transmission to retail customers & should not be relied upon by any other person. If you are not an adviser please return to our consumer site.
Copyright ©2018 Scottish Widows | Copyright, companies,
legal and privacy information |
Accessibility | Site map
Information within this site is intended for UK authorised and regulated financial
advisers only. It is not intended for onward transmission to retail customers and
should not be relied upon by any other person. If you are not an adviser please
return to our consumer site.
Scottish Widows is not responsible for the content of third party websites. Separate
terms apply to the use of third party websites and Scottish Widows does not warrant
the accuracy, reliability, availability or otherwise of these sites.
By using this site you agree to our terms & conditions
of use. Please read our copyright, companies, legal and privacy information.
We may record and monitor calls to help us improve our service.
Scottish Widows Limited. Registered in England and Wales No. 3196171. Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 181655.
Scottish Widows Unit Trust Managers Limited. Registered in England and Wales No. 1629925. Registered Office in the United Kingdom at Charlton Place, Andover, Hampshire SP10 1RE. Tel: 0345 300 2244. Authorised and regulated by the Financial Conduct Authority. Financial Services Register number 122129.
HBOS Investment Fund Managers Limited, registered in England number 941082. Registered office in the United Kingdom at Trinity Road, Halifax, West Yorkshire HX1 2RG. Authorised and regulated by the Financial Conduct Authority. Financial Services Register number 119223.
Scottish Widows Bank is a trading name of Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales, no. 2065. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 119278.