Retirement Taxation Quiz

Questions and Answers

What is the maximum percentage charge applied to an Additional Accrual (AA) that exceeds the Annual Allowance for a higher rate taxpayer?

45%

40% (correct)

25%

20%

Which of the following correctly describes the penalty for an unauthorised payment made in respect of a sponsoring employer?

It incurs a fixed amount surcharge.

It is exempt from any surcharges.

It results in a lower-tier unauthorised payments charge.

It may attract an unauthorised payments surcharge. (correct)

When can the charge from an Additional Accrual (AAC) exceeding £2,000 be paid from a pension fund?

At the discretion of the pension provider.

Under a system called 'scheme pays'. (correct)

Only if the member is retired.

It cannot be paid from the pension fund.

What is the surcharge rate for a lump sum taken that exceeds the Lifetime Allowance (LTA)?

55% Signup and view all the answers

Tax charges on pensions and annuities apply primarily to which party?

The recipients of the pensions and annuities. Signup and view all the answers

What must the scheme administrator declare regarding unauthorised payments?

No person is entitled to receive unauthorised payments. Signup and view all the answers

Which tax relief is NOT available to registered pension schemes under the EET principle?

Exemption from capital gains tax on all investments. Signup and view all the answers

What is a potential consequence for a scheme that does not follow HMRC's tax rules?

De-registration of the scheme. Signup and view all the answers

Which statement accurately describes the tax implications on investment returns within registered pension schemes?

Investment returns are exempt from income tax except for certain types. Signup and view all the answers

Under what condition can employers recover VAT on management services for a funded pension scheme?

There are specific rules for recoverability of VAT on management services. Signup and view all the answers

Study Notes

Tax Charges on Pension Schemes

Pensions and annuities incur income tax for recipients.
Lump sums received at the start of a pension or due to serious ill health are exempt from income tax.
For trivial lump sums under £10,000, 25% is tax-free; the remainder is taxed as income.
Death-related lump sums face different tax treatment than those received prior to death.

Lifetime Allowance (LTA) Charge

The LTA charge applies when the value of benefits exceeds the set threshold.
Excess over the LTA taxed at 25% when taken as a pension, 55% as a lump sum.

Annual Allowance (AA) Charge

Contributions exceeding the Annual Allowance incur an AA charge.
Basic rate taxpayers face a 20% charge, 40% for higher rate taxpayers, and 45% over the additional rate threshold.
If the AA exceeds £2,000 in a year, members can pay the charge from their pension fund through "scheme pays".

Unauthorised Payments Surcharge

Unauthorised payments exceeding a defined proportion of benefits incur additional surcharges.
Unauthorised payments related to sponsoring employers also attract a surcharge.
Scheme administrators must declare that governing instruments do not allow unauthorised payments.

Registered Pension Schemes and Tax Benefits

Governed by the "EET principle": Contributions and investment returns are tax-exempt at entry and exit, but retirement income is taxable.
Tax advantages include:
- Income tax relief on contributions for both employers and employees.
- Employer contributions to registered schemes are exempt from income tax and NICs.
- Investment returns exempt from income tax, barring specific types (e.g., trading income).
- Capital gains from realising investments are tax-exempt.
- VAT on management services linked to funded pension schemes can be reclaimed by employers.

Death Benefits and Inheritance Tax

If a member dies before age 75, death benefits within the LTA are tax-free to dependants or beneficiaries.
After age 75, benefits are taxed at the recipient's marginal tax rate.
Inheritance Tax (IHT) doesn't typically apply to pensions; however, it can apply if contributions are made when a member is aware of ill health within two years prior to death.
IHT may apply if benefits transferred to another scheme alters the tax treatment of death benefits.
The nil-rate band for IHT is £325,000 for the 2021/22 tax year.

Auto-Enrolment

Since 2012, UK employers are mandated to automatically enroll eligible employees into a pension scheme, ensuring broader retirement savings.

Description

Test your knowledge on the taxation of pensions, annuities, and lump sums. This quiz covers important details about tax charges and exemptions related to retirement benefits. Prepare to understand the nuances of retirement provision taxation effectively.