Chapter 5 Part 2

Created by

Ellie Williams

Cards (41)

Occupational pension scheme – usually established by an employer to provide benefits to employees
Public service pension scheme established by government for public sector employees
State pension – provided by government, based on National Insurance payments
Private/personal pension scheme
A pension which is registered with HMRC qualifies for various tax reliefs and exemptions.
A registered pension scheme must comply with many regulations with regards to its investment, the payments it makes to its members and number of other matters.
Annual allowance: for the tax year 2023/24 is £60,000
Carry forward: If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years.
Tapering: The annual allowance is reduced by £1 for every £2 by which a person’s ‘adjusted income’ exceeds £260,000, down to a minimum tapered annual allowance of £10,000. Therefore, a person with adjusted income of £360,000 or more, will only be entitled to an annual allowance of £10,000 (60,000 – ((360,000 – 260,000)/2) = £10,000).
As from 6 April 2023, the lifetime allowance charge is abolished. However, the lifetime allowance itself remains in existence and is unchanged at £1,073,100.
Despite the fact that no lifetime allowance charge can arise in 2023-24, the lifetime allowance is still relevant when calculating the amount of tax-free cash which can be taken from a pension scheme and when determining the tax treatment of certain lump sums (see below). However, the lifetime allowance will finally be abolished as from 6 April 2024, when it is expected that revised pensions legislation will be introduced.
State pension
The earliest you can get your State Pension is when you reach your State Pension age. You’ll have to wait to claim your State Pension if you retire before you reach that age.
Personal and workplace pensions
When you can take money from your pension pot will depend on your pension scheme’s rules, but it’s usually after you’re 55
You may be able to take money out before this age if either:
you’re retiring early because of ill health
you had the right under the scheme you joined before 6 April 2006 to take your pension before you’re 55
Some companies offer to help you get money out of your pension before you’re 55. This could be an unauthorised payment. If it’s unauthorised, you pay up to 55% tax on it.
EMPLOYER / WORKPLACE

Can be money purchase or salary related
Contributions usually made by employee and employer
Method of tax relief: Net pay arrangements
Money Purchase/defined contribution -
Build up a “pot” of money to buy a pension on retirement.
Money paid in by you or your employer is put into investments (such as shares) by the pension provider. The value of your pension pot can go up or down depending on how the investments perform.
Salary Related/defined benefit –
Pension linked to your final salary and length of service.
Workplace schemes are usually based on a number of things, for example your salary and how long you’ve worked for your employer.
The pension provider will promise to give you a certain amount each year when you retire.
Contributions usually made by employee and employer
The current minimum total contribution is 8%
5% by employee
And at least 3% from the employer.
In most automatic enrolment schemes, you’ll make contributions based on your total earnings between £6,240 and £50,000 a year before tax. Your total earnings include:
salary or wages
bonuses and commission
overtime
statutory sick pay
statutory maternity, paternity or adoption pay
Your employer must contribute the minimum amount if you earn more than:
£10,000 per year
They do not have to contribute anything if you earn below £10,000
If you earn less than £10,000, but above £6,240 (for the tax year 2023/24), your employer doesn’t have to automatically enrol you into a scheme
The minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 (in the tax year 2023/24). This slice of your earnings is known as ‘qualifying earnings’.
So, if you were earning £18,000 a year, your minimum contribution would be a percentage of £11,760 (the difference between £6,240 and £18,000).
Some employers apply the pension contribution to the whole of your earnings, not just to qualifying earnings
If you’re under the age of 22, you won’t be automatically enrolled into your employer’s workplace pension scheme along with your older colleagues.
Net pay arrangements

Employer deducts an employee’s contribution to the occupational pension scheme from the employee’s pay before operating the PAYE system.
The six largest public service pension schemes in the UK :
the Armed Forces
the Civil Service
NHS
Teachers
Police
Firefighters
The full new State Pension is £185.15 per week.
The actual amount you get depends on your National Insurance record. (pension)
You’ll usually need at least 10 qualifying years on your National Insurance record to get any State Pension.
You’ll need 35 qualifying years to get the full new State Pension
You’ll get a proportion of the new State Pension if you have between 10 and 35 qualifying years.
Run by insurance company, bank or similar institutions.

Will always be a money purchase scheme
Appropriate for employed and self-employed.
If in employment, employer can make contributions
Can have a personal pension in addition to employer pension.
Method of tax relief: Relief at source
Private/Personal Pension
Method of tax relief: Relief at source
tax is deducted at source, like Gift Aid.
pension company recovers the tax deducted at source rom HMRC as charities do with gift aid)
basic and higher tax bands are both increased by the gross amount of the contributions as with the gift
A . Occupational Pension/paid by employee at work:
Method of tax relief: Net pay arrangements
1.Offset the amount from the salary before calculating total income (as per Alex example)
Pension schemes can be salary related or money purchase.
Pension contributions attract relief from income tax.
Employer schemes: deduct contributions from employee’s pay before operating PAYE.
Personal pensions: relief is given at source and scheme recovers BR (basic rate) tax from HMRC.