Introduction to SIPP & SSAS Administration By Laura Wilson

Transcription

1 Introduction to SIPP & SSAS Administration By Laura Wilson About me after 10 years working for SIPP & SSAS providers and managing my own team, I am passionate about the career potential the industry offers. It has opened up many doors for my own career, which is why I decided to set up the website. I want to pass on my own experience and tips to help others achieve the same results. About the guide it has been designed to summarise the administration requirements for a SIPP &/or SSAS scheme. It covers the starting points that I think all SIPP/SSAS administrators need to be familiar with. When I have trained people up in my team, I have always drawn up a training programme to include all the elements in this guide but tailored it to the individual and their experience. The objective being that at the end of the programme they will be able to administer a scheme with very little assistance. They can then move onto the more advanced technical aspects like administering property, unlisted shares and loans. 1

2 The Basics... 3 What are SIPPs & SSASs?... 3 SSAS v SIPP Key Differences... 4 HMRC Responsibilities... 5 Financial Conduct Authority (FCA) Responsibilities... 6 The Pensions Regulator (TPR) Responsibilities... 6 The Life Cycle of a SIPP & SSAS scheme... 7 Contributions... 7 Transfer Ins... 9 Investing the money Annual Illustrations (SIPPs only) Drawing Benefits What are the pre 6 th April 2015 capped drawdown rules? Death Benefits (not applicable to annuities) Lifetime Allowance & Benefit Crystallisation Events (BCE) What if someone exceeds the Lifetime Allowance? Transitional Protection Glossary

3 The Basics What are SIPPs & SSASs? In simple terms, SIPPs & SSASs are a type of pension fund. What is a pension fund? These are a long- term tax efficient savings plan that generally can t be accessed until the minimum retirement age (currently age 55). See the pensions advisory service website for more information and explanations of pension funds. pensions/pensions- basics/what- is- a- pension- scheme So, what exactly are SIPPs & SSASs? They tend to allow greater investment flexibility than any other pension fund. SSAS > Small Self- Administered Schemes > Small occupational schemes where members are trustees and can influence and make investment decisions. SIPP > Self- Invested Personal Pensions > are personal pensions but with greater investment options than your standard personal pension. These schemes are subject to the same tax regime as any other registered pension scheme so the rules on contributions and benefits for example are the same; however there are some differences between these two types of scheme, which I have outlined in the table over the page. 3

4 SSAS v SIPP Key Differences Whilst SSASs and SIPPs are subject to the same tax regime there are still a number of differences between them. The following table is a quick comparison outlining some of the key differences: SSAS SIPP Set up > Usually set up under a trust for each SSAS. Usually by sponsoring Usually set up under a Master SIPP Trust and then a employer, commonly through a supplemental deed to appoint the individual SIPP member as a product provider who can assist member trustee. with the administration and regulation. Regulated by > The Pensions Regulator (TPR) Financial Conduct Authority (FCA) Members > Up to 12 members. Each SIPP has one member. You can have a variation to this with a Group SIPP that can be set up by employers or families. Investment Decisions > Loans > Determined by members who are trustees. Loans up to 50% of the assets of the scheme to an employer, as long as they meet the five key HMRC tests. No limit (as long as on a commercial basis) for unconnected third parties although should still be cautious with such loans. Range of investments is determined by the SIPP provider. Member can make decisions within the range. Only to unconnected third parties (as long as on a commercial basis, caution should be taken with such loans) Borrowing > Up to 50% of the fund. Up to 50% of the fund. Self- Investment > As a SSAS has a sponsoring employer, it is allowed to invest up to 5% of the SSAS fund value to purchase shares in the sponsoring employer. PCLS > Income Options > A SSAS can buy shares in more than one sponsoring employer as long as the total market value at the time the shares are bought is less than 20% of the total value of the scheme. SSASs can potentially own 100% of a company's shares so long as the value doesn't exceed 5% of the value of the SSAS. Standard is 25% of fund but some SSAS Members could be entitled to more which is called Scheme Specific Tax Free Cash or Protected Tax Free Cash. Scheme pension/drawdown pension. Trustees can purchase an annuity. As a SIPP doesn t have a sponsoring employer, the member could own a company that the SIPP can invest into without any limits. However, if the member was a controlling director of that company then it would be deemed taxable property, which results in excessive tax charges. Many SIPP providers will therefore steer clear or will charge high administration fees because of the risks associated with these investments which SIPP providers are liable to. Standard is 25%. Some members may be entitled to more with a protected tax free cash amount. Drawdown pension. Or they can purchase a lifetime annuity. Some providers may offer scheme pensions. 4

5 HMRC Responsibilities It s important to keep up to date with HMRCs Responsibilities as these do get updated regularly. You can subscribe for updates by clicking on the below link: tax/pension- scheme- administration Some quick links relevant for running SIPP & SSASs that I mostly use: > Overview of pension scheme administration requirements- for- pension- schemes- the- basics > Unauthorised Payments schemes- and- unauthorised- payments > HMRC Reporting Requirements administrators- reporting- to- hmrc > Relief At Source (Tax relief claim on contributions paid in) administrators- reclaim- tax- relief- using- relief- at- source > Relief At Source Annual Information Requirements administrators- ras- annual- information- returns > Annual & Lifetime Allowance Statements administrators- annual- and- lifetime- allowance- statements > Pension Scheme Newsletters these are really useful to keep up to date with the many changes revenue- and- customs- pension- schemes- newsletters > Registered Pension Scheme Manual Keep up to date or find information you need for a particular technical question by searching through this manual. pension- schemes- manual- rpsm/registered- pension- schemes- manual 5

6 Financial Conduct Authority (FCA) Responsibilities SSASs are not FCA regulated therefore this is only applicable to SIPP providers. For the purpose of this guide, it s not appropriate to go into the technical details of all the FCA regulations because it s the responsibility of senior management to have processes in place to ensure these are met. However, it s important to be aware so you understand the importance of certain procedures you are asked to do. The FCA s SIPP operator guidance, link below, is a good document to assist with your understanding in this area. guidance/fg13-08.pdf Product Sales Data Report to FCA A quarterly return must be submitted to the FCA via the GABRIEL system, on a quarterly basis, within 20 business days of the end of the quarter. The quarter end dates are 31 March (1), 30 June (2), 30 September (3) and 31 December (4). There are three types of submission for the SIPP and these are as follows: 30 - SIPP - All new SIPPs must be reported (even if no transfers or contributions received) Income Drawdown - Only new tranches should be reported (not phased or drawdown transfers). 20 Individual Pension Transfers - Only transfers from Occupational Schemes must be reported See link below for more information: fca/faqs/gabriel/psd The Pensions Regulator (TPR) Responsibilities Trustees SIPP & SSAS Trustees must understand the trustee requirements, please see TPR s guidance on the link below: Employers for SSASs In addition, employers who have set up a SSAS have an extra layer of requirements that Pensions Regulator require. See link for more information: and- regulatory- duties.aspx 6

7 The Life Cycle of a SIPP & SSAS scheme When we say lifecycle, some people may refer to this as cradle to grave administration. It refers to the whole cycle you would expect to see from SIPP & SSAS Schemes (once set up), which can simply be summarised as follows: Putting money in Contributions & Transfer Ins from other pension arrangements the member may have. Investing the money Annual Reviews Taking Money Out Drawing Benefits at Retirement When you die Paying Death Benefits to the dependants/beneficiaries Contributions Who can make tax relievable contributions? Ø A relevant UK individual who must fall into at least one of the following categories: Have relevant UK earnings (see below for details of these) for the tax year Resident in the UK at some time during the tax year in question Resident at some time during the last 5 tax years immediately before the tax year in question and when they joined the pension scheme They or their spouse/civil partner have earnings for the tax year from overseas Crown Employment subject to UK tax Ø What are relevant UK earnings? Employment Income salary, bonuses, overtime, P11D earnings (e.g. company car), commission providing its subject to tax. Self- employed income net relevant earnings Crown Employment Income NOTE Dividends and investment income (savings interest, property income) are not relevant UK earnings. See RPSM link that provides more detail and does confirm this list is not exhaustive: Types of Contributions Individual (also referred as employee or personal) Contributions Employer Contributions Salary Sacrifice Contributions In- specie Contributions Rules on Individual/Employee Contributions Individual Contributions can receive tax relief up to the individual s marginal rate. To receive tax relief, the contribution amount must be 100% of the individual s relevant earnings up to the annual allowance. * see below; Contributions in excess of 100% of relevant earnings can be paid in but they will not receive tax relief. You may wonder why anyone would want to do this if they don t receive tax relief, but it very much depends on the individual s circumstances; 7

8 If there are no relevant earnings or it s less than 3,600, an individual can make up to 3,600 each tax year and receive tax relief. (i.e. net contribution paid in by the individual is 2,880 and HMRC pay the tax relief of 720 into the pension scheme); There is also the Annual Allowance * to factor in. The current Annual Allowance for active members is 40,000 for tax year 2015/16 or if they earn in excess of 110,000, there is a tapered annual allowance, see link for more information: tapered- annual- allowance/pensions- tapered- annual- allowance This is the maximum amount of total contributions that can be paid into a pension scheme in one year. NOTE The Annual Allowance Tax Charge is not the Scheme Administrator s responsibility, it is the individual and they pay the charge, not the pension scheme. The Scheme Administrator should provide them with sufficient information to enable them to complete their self- assessment to pay the charge. Information Requirements are explained in more detail in the below link: There are also two other elements we need to look at for Annual Allowances, which is Carry Forward and Pension Input Periods: 1. Pension Input Periods (PIPs) = the tax year period over which the pension input amount (all contributions paid in) is tested against allowance. Note that the PIPs rule was previously more complicated. They were not always in line with the tax year. You should therefore be aware of the transitions in place to bring them in line with the tax year, see link below: technical- note- transitional- provisions- for- aligning- pension- input- periods 2. Carry Forward = This allows the individual to make use of the annual allowance that they may not have used during the three previous tax years, provided they were a member of a registered pension scheme in those years they are carrying forward and they have enough relevant earnings to support it. Tax Relief at Source Individual contributions are paid in as a net contribution i.e. out of their net salary. The administrator then recovers the tax relief at the basic rate from HMRC on the individual s behalf and paid into the pension scheme by HMRC; If the individual is a higher rate taxpayer, they can claim the balance of tax relief directly from HMRC via a Self Assessment. See link below for more information on tax relief, details of the forms required and processes on tax relief. administrators- reclaim- tax- relief- using- relief- at- source Rules on Employer Contributions There is no limit on employer contributions that can be paid on behalf of an employee; However, remember to factor in the Annual Allowance for each tax year that applies to all types of contributions. So if the individual has already paid in a contribution personally up to the 40,000 annual allowance limit, then the employer contribution is subject to the annual allowance tax charging; There is no need to reclaim any tax at source; From the Employer s point of view, they have to be careful regarding corporate tax. It is generally treated as a business expense provided the contribution meets the rules that it s wholly and exclusively necessary for business purposes. The employer s accountant will be able to give the employer guidance in this area. This is not an area for pension scheme administrator s to assist on. 8

9 Salary Sacrifice Contributions Please see link that explains the basics of salary sacrific which is aimed for employers, the reporting requirements is not your responsibility. sacrifice- and- the- effects- on- paye From the SIPP/SSAS administrator point of view, it is an Employer contribution. The tax relief is already been taken care of by the deduction of salary. It is therefore up to the Employer to ensure it is deducted as necessary and to pay it into the members pension scheme. This is not an area you will find yourselves having to explain to clients, it tends to come from the accountants or financial adviser. But if you hear the term being used it helps to understand what it is and that you apply it as an Employer contribution. In- specie contributions This is where assets (for example common assets I have seen this happen with are property or shares) are paid across by transfer of ownership into the SIPP/SSAS, instead of paying the contribution by cash. HMRC have issued guidance that must be followed when transacting in- specie contributions. See link: Transfer Ins What is a transfer in? It is the moving of an individual s pension rights from one scheme to another; Pensions legislation gives an individual the right to move without any tax implications, subject to certain conditions; The pension scheme accepting the transfer of benefits takes responsibility to pay the benefits to the member or his/her beneficiaries; To meet the conditions, a transfer must comply with the definition of a transfer to avoid the transfer becoming an unauthorised payment, as follows: A transfer from a UK registered pension scheme to another UK registered pension scheme is a recognised transfer ; A recognised transfer is a type of authorised payment; Therefore no tax charges or sanctions will apply as an unauthorised payment. How is the transfer payment made? As cash (so all investments within the pension fund would be encashed prior to transfer) In specie By assignment (similar to an in specie but is more relevant to older SSAS schemes where they may have an EPP assigned to their SSAS) Or a combination of the above By in specie, this is a good way to transact transfers to ensure the client is not out of the investment market while the transfer is progressing. Although it s normally more simple from an administration point of view to process as a cash transfer! Depending what type of assets of course. For example, a property would have to be transferred in- specie anyway because of obvious reasons like the fact that the client would probably not want to liquidate and then buy back, not just for cost reasons but it s just not practical. With property transfers, it would be a case of liaising with an appointed solicitor (that the client would normally choose unless your company have a panel of solicitors they prefer to use) to change the ownership into the new pension scheme provider. The way the transfer is to be transacted (i.e. cash, in- specie, assignment) would be down to the client or their adviser depending on their circumstances and costs involved. It s not something you as an administrator would be expected to decide on. 9

10 What information is the transferring scheme required to send to the receiving scheme? The transferring scheme provider must provide all details of the members pension scheme to ensure the receiving scheme can take over the members pension effectively, information required would be: Confirmation that the transfer is from a UK registered pension scheme; Transfer Value and if applicable (i.e. not all in cash) how this is broken down (i.e. if in specie transfers made); The status of the members benefit (where crystallised/in drawdown or uncrystallised); If in drawdown, all details of this and what type of drawdown, for example scheme pension, capped drawdown, flexi- access. If capped drawdown then the maximum income, formal income review date, how much income has been drawn in the last pension year; If taking income then a P45 to take over pension payments; If in partial drawdown, the split of funds on transfer between crystallised and uncrystallised; Pre and Post A Day funds if applicable; Lifetime Allowance Used figures, if applicable; Copies of certificates if the member has any type of protection (e.g. enhanced/primary/fixed protection); Members Contribution and transfer history; Details of pension sharing orders/pension credits; Members fund split if it s a SSAS or a group SIPP. As the receiving scheme, you must check all the information has been provided. See RPSM link for more information on transfers in: Please also note for SIPPs only, a cancellation notice is required to send to the member on receipt of a transfer in request. In addition, if the transfer comes from an occupational pension scheme, a Product Sales Data (PSD) is required for submission to the FCA. Investing the money So we have got the money in the scheme, now it s time to invest the money. There are very few restrictions in general for SIPP & SSAS and what is permitted as investments within these pension arrangements. However, SIPP/SSAS providers can operate by having a simple arrangement, which will only allow investments of a limited choice as part of their terms. Then you have the bespoke SIPP/SSASs and these types of schemes operate by allowing almost anything in the permitted investment list: Please also refer to the below link, which provides a good overview and provides information on taxable property: trustees- investments- and- tax Annual Illustrations (SIPPs only) SIPP providers are required to send an annual illustration to SIPP clients that have not yet taken their benefits. The annual illustration is called a Statutory Money Purchase Illustration (SMPI). It is a yearly illustration of the estimated pension a member might get when they retire. The date of retirement is usually the date the member has chosen or perhaps the SIPP provider has a default age for such illustrations. It is adjusted to allow for inflation. The estimated pension figure at retirement is calculated by taking the value of the pension fund at a specified date, usually at the SIPP annual review date. Any regular contributions paid will be taken into account and will assume that they will continue to be paid until retirement. The FCA set out the assumptions for rates of return on the illustrations. See the FCA website: - DES210 10

11 Drawing Benefits Benefits can be taken from the Minimum Pension Age, which is currently 55. (This increased from 50 to 55 in 2010). It is rising again, to be 10 years below the state pension age from 2028, therefore it will be 57 from 2028; Some people think that when they reach their State Pension Age, that is when they must take their benefits from their pension plan. So it s important to understand that it is not necessary, they can take it from the Minimum Pension Age. However, it might not be advisable to do so but that s down to the client and their adviser to sort out; Members also don t need to retire/stop working to take benefits from a pension arrangement. Again this is something an adviser would discuss to ensure it is suitable for them to take their benefits if they are still working; The member is entitled to 25% tax- free cash (the correct term for this is Pension Commencement Lump Sum PCLS) of their total fund value at that time. Then the remaining funds are used to provide a pension income; There are different ways to drawing a pension income that you should understand, they are as follows: Buying a Lifetime annuity The value (usually after taking tax free cash) of the SIPP/SSAS can be used to buy an annuity on the open market; The funds are effectively transferred to an annuity provider who will then provide a guaranteed pension to the member depending what the annuity rates are at the time and the value of their pension pot they can use to convert it into a pension income; As you would expect, because it s providing a guaranteed income for life, the rates can be low and provide less of an income than the more risky option like drawdown; Also, it s always a hard one to call because none of us know when we are going to die. Its great value for money if you live until you are 100! But if you die couple years after taking out the annuity then it s not value for money. But then there are options to cover this risk like a guaranteed period for 10 years so if you died within 10 years then the balance of the 10 years of pension is paid out. But of course this is a more expensive option that will therefore reduce the guaranteed income; In addition, when the member dies there is an option to add on a spouses income from 100% to 50% of what is being paid out (however this is more expensive therefore does reduce the guaranteed income) but there is no remaining fund left to pass onto a beneficiary like there is if opted for drawdown, outlined below. Drawdown There are two types of drawdown, pre and post April 2015: - - Post April Flexi Access. This was introduced in April 2015, as part of Pension Reform With flexi access, there is no limit on how much the client takes under this type of arrangement and the funds remain invested, which is an advantage if the investments do well. Pre April 2015 Capped Drawdown. The maximum amount of income is capped and is still available to those that were in drawdown pre April 2015 (more information later in this guide). The member can take any level of income they like from their fund up to this maximum limit set. Second Line of Defence Although SIPPs & SSASs can be accessed more flexibly now, the government and the regulators have put some defences in place to encourage members of pension schemes to make the right decisions. The aim is to deter the risk of people running out of money in retirement but at the same time providing some flexibility. For SIPPs, the FCA has put in place a second line of defence rule. This is where the SIPP provider must check if the client has received advice or sought guidance from Money Advice Service/Pensions Wise. SIPP providers are 11

12 required to send personalised risk warnings to members wishing to access their pension pots if they have not sought advice. For SSASs, The Pensions Regulator s (TPR) general view for the second line of defence simply asks providers to signpost clients to Pension Wise or a regulated adviser, adding that trustees need to highlight the generic risks to be considered when accessing their pension. However, if all members of a SSAS are trustees or if it s a single member scheme, TPR have ruled that providers do not have to deliver the second line of defence risk warning in any circumstances. Uncrystallised Funds Pension Lump Sum Under this method, benefits are crystallised as all or part of the pension fund. The Pension Commencement Lump Sum (PCLS) is taken as tax- free cash. The member then takes the remainder of the amount crystallised as a lump sum, which is subject to income tax. Same applies regarding the second line of defence requirements. Checklist for accessing benefits via a SIPP or SSAS: Here is a checklist of points that is important to check when a client accesses their benefits on a flexible basis: Check the client has received advice or sought guidance from pension wise; Send out risk warnings if applicable and benefit payment form (assuming SIPP/SSAS provider has one); Once received official request, arrange for sufficient funds to be available to pay the benefits; Follow the SIPP/SSAS provider internal process to pay benefits (usually involves obtaining valuation initially to calculate 25% tax free lump sum available); Check if there is sufficient Lifetime Allowance (LTA) available and check if they hold any LTA HMRC protection. If the member is relying on LTA protection to pay benefits out without an LTA tax charge, you must get a copy of the HMRC certificate to evidence this. This would also result in an event report submission (see reporting link administrators- reporting- to- hmrc#event- reports); Once benefits are paid, send out appropriate confirmation documents that must include a Benefit Crystallisation Event (BCE) certificate and a Money Purchase Annual Allowance (MPAA) statement. Assuming its via flexi access and not an existing capped drawdown arrangement; If a SIPP, then a cancellation notice is required together with a Product Sales Data (PSD) report to confirm the drawdown arrangement to the FCA. Other pointers to be aware of when a client accesses their benefits are: Ø Money Purchase Annual Allowance (MPAA) The 2015/16 annual allowance is 40,000, as explained previously. From 6 April 2015, a reduced money purchase annual allowance (MPAA) of 10,000, in respect of money purchase pension contributions, applies to individuals who have flexibly accessed pension benefits. HMRC introduced the MPAA to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their pension benefits under the flexibility rules. Ø MPAA applies when the following occurs: It is only when pension benefits have been flexibly accessed that the reduced MPAA of 10,000 will apply. This includes various different options from 6 April 2015 such as: Taking an uncrystallised funds pension lump sum (UFPLS); Taking income above the maximum GAD limit from a capped drawdown arrangement; Taking income from flexi- access drawdown (please note that flexible drawdown arrangements at 5 April 2015 were automatically converted to flexi- access drawdown); 12

13 Taking income from a flexible annuity arrangement; Converting a capped drawdown arrangement to flexi- access drawdown and then taking income. Note a member can elect for flexi- access and draw a nil income to retain the 40,000 annual allowance. It s only when an income is drawn after the election that the MPAA trigger applies; Taking a stand- alone lump sum for an individual who has primary protection (and protected tax- free cash); Taking income as a scheme pension from a scheme with fewer than 12 members. Ø MPAA will not apply when: Taking income from a capped drawdown arrangement, which is within the GAD limit; If elected to convert from capped drawdown to flexi- access but not drawing an income yet ; Taking a pension commencement lump sum, and o o buying a lifetime annuity (i.e. not accessing any flexible annuity options), or moving to a flexi- access drawdown arrangement and taking NO income (the MPAA only applies once income is actually taken). Taking a small pots lump sum. Ø Converting from Capped Drawdown to Flexi- Access Drawdown A member can elect to go into flexi- access formally by informing their SIPP/SSAS provider that s what they want to do, or; They will automatically convert to a flexi- access arrangement the moment they draw an income that is higher than their maximum allowable income via capped drawdown. If this happens then the SIPP/SSAS provider must ensure they send out the MPAA statement to confirm their annual allowance is now reduced from 40,000 to 10,000. The provider must send this within 31 days of the date they converted to flexi access. The member is then responsible to inform any other pension schemes they may have that their annual allowance has reduced to 10,000. The member has 91 days to do so. Ø What if a member was in Flexible Drawdown prior to 6 th April 2015? Those in flexible drawdown prior to 6 th April 2015 were subject to the minimum income requirement from other income sources of 12,000 per annum. Now anyone can access his or her arrangement flexibly so the minimum income requirement is no longer. Flexible drawdown members also had no annual allowance, therefore could not contribute. Now these members will continue as they are, but will automatically convert to flexi- access. Therefore the only difference being is that they can now contribute up to the annual allowance of 10,000 applicable for flexi- access arrangements. Ø What if in capped drawdown and doesn t want to convert to Flexi- Access? Someone may want to remain in capped drawdown. It may suit their needs for their current retirement income to stay within the capped income limits or they may be happy with their current investment strategy. Also, if they stay in capped drawdown and don t flexibly access any pension benefits elsewhere, the normal annual allowance rules will still apply. If this is the case then the following applies for capped drawdown: The maximum income cap is 150% of the GAD limit; The pre 6 April 2015 rules (see below) relating to pension years, reference periods and reviews remain unchanged; Additional fund designations into existing arrangements can be made on or after 6 April 2015; A transfer can be made to a new capped drawdown arrangement in another registered pension scheme (if the scheme accepts such transfers). 13

14 What are the pre 6 th April 2015 capped drawdown rules? Calculating maximum income The maximum amount of income that can be taken during a 'pension year' is 150% of the Government Actuary's Department (or GAD) relevant annuity with no guarantee. The member can take any level of income they like from their fund up to this maximum limit. What's a 'pension year'? The maximum amount of income allowed applies for a 12 month period immediately after first taking income and any subsequent 12 month period. These 12- month periods are known as 'pension years'. Reviews To make sure that the income drawdown fund continues to provide an income and isn't used up too quickly, the maximum income that can be taken is reviewed. For members under age 75 this is done on the following basis: Ø Three Year Reviews As a minimum, a review now has to take place at least every three years. Each three year period is known as the 'reference period'. The point at which a review is carried out is called the 'reference date'. The first reference date is on the first day of the fourth pension year following the designation of income drawdown, then again on the first day of the seventh year and so on. At the review date the new maximum income is calculated in exactly the same way as the initial maximum with reference to the GAD tables, value of the income drawdown fund and member's age. The new limit for the next three years is then set at 150% of the revised amount. The maximum amount of income normally changes following a review. By how much depends on the investment performance of the fund, the amount of income taken during the reference period and the GAD interest rate at the time of review. If the fund has benefited from strong investment growth and a low income has been taken, the maximum level of income will undoubtedly rise. Conversely, if fund performance has been poor and maximum income has been taken, the new limit is likely to be lower than before. Also, the higher the GAD interest rate the higher the relevant annuity on which the GAD limit is based. Ø as a result of certain events, for example: o o o Pension sharing order Partial transfer out or annuity purchase Additional fund designation These additional reviews don't alter the existing pension year or reference period structure, or indeed the timing of the next three yearly reviews. Ø When the member requests an additional review. Members don't have to wait three years or for one of the above events to occur. They can request additional reviews but the final decision as to whether to grant one or not lies with the scheme administrator. The new limits apply from the start of the next pension year and can't start immediately. 14

15 What happens at age 75? Reaching age 75 is a benefit crystallisation event (BCE), more information confirmed below on BCEs. In brief, the drawdown fund will be tested against the lifetime allowance. Obviously, going into drawdown in the first place was also a BCE so, to avoid a 'double counting' against the lifetime allowance, the amount originally crystallised when the member went into drawdown is deducted. Only the balance (if any) therefore counts as an additional BCE amount. More relevant for capped drawdown is that the review date changes at age 75 - the maximum drawdown pension will now need to be recalculated at the start of every pension year. The switch over to yearly reviews will happen at the end of the pension year following the member's 75 th birthday. 15

16 Death Benefits (not applicable to annuities) The tax treatment of benefits on death depends on the member s age at death, either pre or post 75. The remaining SIPP/SSAS fund is not part of the member s estate for Inheritance Tax purposes regardless of age. Below Age 75 Above Age 75 Crystallised Can pass on completely tax free to any beneficiary as a lump sum or drawdown pension Any beneficiary can draw an income at their marginal or 45% tax charge if taken as a lump sum (which is changing to marginal rate from ) Uncrystallised Can pass on completely tax free as a lump sum to any beneficiary (up to the lifetime allowance) Any beneficiary can draw an income at their marginal or 45% tax charge if taken as a lump sum (which is changing to marginal rate from ) SIPP/SSAS Administration on death benefits: It is important that the member keeps an Expression of Wishes form up to date so that the SIPP/SSAS Trustee know who the member/s would like to benefit from the fund in the event of death. When a member dies, usually, the first thing to do is to request contact details of the Executor of the Will and obtain a copy of the Will. The Will together with the Expression of wishes should be used to determine whom the benefits should be paid to. The trustees would normally liaise with the Executor of the Will to confirm the death benefit options and provide them with a valuation with estimate death benefit figures included. We would normally suggest that they seek financial advice too. The financial adviser can then look into all options like an annuity for the death benefits and what rates are available to compare against drawdown or taking as a lump sum. If the funds are taken as a lump sum post 75, then there will be tax to pay. This should be done via the Accounting For Tax (AFT) return. Details can be found on this link: administrators- reporting- to- hmrc - accounting- for- tax- aft- returns There may also be an Event Report required. See link for information on event reports required: administrators- reporting- to- hmrc - event- reports Attention should also be made to the Lifetime Allowance (LTA) available because if the funds are uncrystallised at death then there will be a test against the LTA. Events that trigger an LTA test are known as a BCE event. More information on these events is confirmed in the next section. 16

17 Lifetime Allowance & Benefit Crystallisation Events (BCE) The standard Lifetime Allowance is currently 1.25 million. It is due to fall to 1 million from 6 th April 2016 and will then become index linked from The Lifetime Allowance is measured whenever a Benefit Crystallisation Event (BCE) occurs, as set out in the table below: BCE No. Event 1 Commencement of drawdown 2 Commencement of a scheme pension 3 When a scheme pension, already in payment, increases above a permitted level 4 Commencement of a lifetime annuity N/A for SIPP / SSAS so for info only - When a member of a defined 5 benefit scheme reaches age 75 with uncrystallised benefits remaining in the scheme 5A* When a member reaches age 75 with a drawdown pension fund* 5B When the member reaches age 75 with uncrystallised money purchase funds, and does not take benefits at that time. Where a member dies before their 75th birthday and unused uncrystallised funds remaining at death are designated, on or 5C after 6 April 2015 but before the end of a two- year period, to dependants flexi- access drawdown pension or nominees flexi- access drawdown pension. 6 Payment of certain lump sums, including a pension commencement lump sum or serious ill health lump sum 7 Payment of a relevant lump sum death benefit (see RPSM for more detail of a relevant lump sum death benefit link below) 8 A transfer to a Qualifying Recognised Overseas Pension Scheme 9** Payment of certain authorised member payments ** * Individuals who commenced drawdown (unsecured pension) before 6 April 2006 are exempt from BCE 5A in respect of the funds that were placed into drawdown at that time. ** E.g. payments of arrears of pension after death; lump sums based on pension errors, PCLS type lump sums after death The above is just a summary table for a quick reference. I would strongly suggest reading the RPSM manual for more detail: 17

18 What if someone exceeds the Lifetime Allowance? If the Lifetime Allowance is exceeded, then there is a Lifetime Allowance excess charge as follows: - 55% charge if taken as a lump sum - 25% charge if taken as an income (remember this excludes any income tax charge) Transitional Protection There are measures for members to reduce or even eliminate the Lifetime Allowance charge by taking out a type of protection in advance of changes to protect funds built up. Those with transitional protection would have a certificate issued by HMRC. These are as follows: 2006 A Day Changes: The lifetime allowance was introduced from April 2006 A Day. It was therefore possible to apply for protection up until April 2009, against a potential lifetime allowance charge on pension funds built up prior to A Day. There are two types as follows: Primary Protection Individuals were given their own protection factor representing the additional amount of lifetime allowance they were entitled to when a BCE occurs. Since April 2012 this factor is applied to the higher of the standard lifetime allowance and 1.8 million. Enhanced Protection This allows members to take benefits with an unlimited lifetime allowance. Although the conditions are that no further contributions can be paid into any other pension scheme otherwise the protection would be lost (whereas you can pay further contributions if you have primary protection) Changes: On 6 th April 2012, the standard lifetime allowance fell from 1.8 million to 1.5 million. Therefore, there was a new type of transitional protection as follows: Fixed Protection 2012 Individuals holding neither primary nor enhanced protection were able to apply for Fixed Protection 2012 by 5th April 2012 to fix their lifetime allowance at the higher of 1.8 million or the standard lifetime allowance. Condition was no further contributions to any pension arrangement. Those with Fixed Protection 2012 were given their own personal lifetime allowance Changes On 6 th April 2014, the standard lifetime allowance fell from 1.5 million to 1.25 million. Therefore, there was a new type of transitional protection as follows: Fixed Protection 2014 Individuals holding no protection were able to apply for Fixed Protection 2014 by 5 th April 2014 to fix their lifetime allowance at the higher of 1.5 million or the standard lifetime allowance. Condition was no further contributions to any pension arrangement. Those with Fixed Protection 2014 were given their own personal lifetime allowance. Individual Protection 2014 Individuals can apply for Individual Protection 2014 to protect against the drop to 1.25 million by setting their allowance at the value of their pensions on 5 th April 2014, up to 1.5 million and continue to make contributions. When measured against the lifetime allowance you use up a percentage of your personalised lifetime allowance. It is possible to have both Fixed Protection and Individual Protection 2014 but not available if the individual has primary protection. This protection can be applied for up until 5 th April Changes: It is expected that a type of protection will be available soon for individuals affected by the reduction to 1 million in Tax Free Cash Protection There are two types of tax- free cash protection: 18

19 Scheme Specific Tax Free Cash If on 5 th April 2006 an individual was a member of a pension scheme where they were entitled to more than 25%, this is automatically protected and is called scheme specific protection. Protected Tax Free Cash If an individual had primary or enhanced protection and their total tax- free cash was worth more than 375,000 on 5 th April 2006, they could have also applied for protected tax- free cash. If an individual has this protection, then it would be shown on the individuals HMRC protection certificate as a percentage for enhanced and cash amount for primary. 19

20 Glossary A Day. 6 April 2006: this was when a single tax regime was introduced for all UK pension schemes. This is often referred to as 'Pension Simplification'. Adviser. An FCA- regulated financial adviser who can advise you on your pension. Annual allowance. This is the maximum amount a member can pay into their SIPP/SSAS and eligible for tax relief in a single tax year. It is currently set at 40,000 for tax year 15/16. Annuity. An annuity is an income paid for the rest of your life. You can buy annuities from an insurance company. An annuity can be a fixed amount. Alternatively, it can increase by either a fixed amount or in line with inflation or decrease. Your husband, wife, civil partner or other dependants can continue to receive the annuity after you die. The annuity may also have a guarantee period such as 5 or 10 years. See also income withdrawal and short term annuity. Beneficiary. An individual who is eligible to receive benefits from the SIPP or SSAS. Benefit Crystallisation Event (BCE). There are various times when part of the lifetime allowance will be used, for example: when benefits become payable such as drawing pension commencement lump sum and moving into drawdown or taking an Uncrystallised Funds Pension Lump Sum (UFPLS). These are referred to as benefit crystallisation events and, at each event, a lifetime allowance test will be carried out. Capped drawdown. A form of income withdrawal. There s an annual maximum for capped drawdown, which is reviewed every three years (and every year after age 75). Capped drawdown ceased for new drawdown entrants from 6th April 2015 however for those who are already in capped drawdown before this date it can continue so long as all the conditions continue to be met. Carry Forward. This allows the individual to make use of the annual allowance that they may not have used during the three previous tax years, provided they were a member of a registered pension scheme in those years they are carrying forward. And they have enough relevant earnings to cover it. Capital Adequacy. This is relevant to SIPP providers only, they must ensure they adhere to the Capital Adequacy rules and ensure they have enough capital in reserve to meet the requirements. Connected party. Examples of a connected party would be: A member or spouse or relative of a member; a partnership where one of the partners is a member or a relative of the member; a company controlled by either of the previous parties. For SSAS this will also be the any company that participates in the scheme. Contracted- out. This refers to contracting out of the State Second Pension or the State Earnings Related Pension Scheme. This was abolished for most pension schemes from 6th April Any contracted out funds that were previously built up can be transferred to a SIPP or SSAS. These funds will be treated no differently to any other funds. Controlling Director. A director who owns or controls, either in his or her own rights or with one or more associates, at least 20% of a company, this includes 20% of any SSAS participating employers. Drawdown. This is another term for income withdrawal. Earmarking. This is the process of allocating a specific share of the total funds to specific members. There is generally no allocation of specific assets under a SSAS. Enhanced Protection. If applied for, the standard lifetime allowance does not apply but there could still be restrictions on the tax free cash that can be taken. You can't accrue further benefits after 6th April

21 Expression of wish. This is the member s notification detailing how they wish their death benefits to be paid. FCA (Financial Conduct Authority). This is the financial services industry regulator. The FCA regulates investment advice, the provision of certain investments and SIPP providers. Not SSASs. Fixed Protection If you have this form of protection, the normal limit on your pension fund size will be replaced by 1,800,000, if greater. Fixed Protection If you have this form of protection, the normal limit on your pension fund size will be replaced by 1,500,000, if greater. Flexi- access drawdown. This is a form of income withdrawal which is not subject to minimum or maximum limits. Flexibly accessing benefits. From 6th April 2015 taking the following benefits from the SIPP are referred to as flexibly accessing benefits and will trigger the Money Purchase Annual Allowance Rules: you take funds from a flexi- access drawdown fund, including receiving payments from a short- term annuity provided from a flexi- access drawdown fund you receive an uncrystallised funds pension lump sum you convert your pre- 6th April 2015 capped drawdown pension fund to a flexi- access drawdown fund and you subsequently take a drawdown pension from that fund you take more than the permitted maximum for capped drawdown from a pre- 6th April 2015 drawdown pension fund you receive a stand- alone lump sum and you are entitled to primary protection with a greater than 375k protected tax free lump sum right you receive a payment from a lifetime annuity where the annual rate of payment can be decreased. GAD (Government Actuaries Department). This is the Government department that provides actuarial advice and guidance to the Government. Guaranteed period. At retirement, you may elect to buy an annuity. An annuity can have a guaranteed period, usually of 5 10 years. This means that even if you die within the guarantee period, these payments will be paid to your nominated beneficiary. HMRC (Her Majesty s Revenue & Customs). HMRC is a Government department. It decides how much tax relief is available under SIPPs. It also decides what rules apply to the benefits you can take Income withdrawal. Also known as income drawdown. This means using some of your pension fund to provide an income while leaving the rest of your fund untouched. The amount you can take will depend on which type of drawdown you use: flexi- access or capped drawdown. Individual protection. If you have this form of protection the normal limit on your pension fund is replaced by an amount equal to your total pension savings on 5th April 2014 over 1,250,000, up to a maximum of 1,500,000. In specie contribution. This is a way of moving existing assets into a SIPP or SSAS without selling those assets. The advantage of an in specie contribution is that it avoids the costs associated with selling and repurchasing the asset. LTA (Lifetime Allowance). The maximum fund a member can accumulate without incurring a tax charge. Tax charges are incurred when you exceed the level of Lifetime Allowance. The Lifetime Allowance is currently 1.25 million for the tax year 2015/2016. It is reducing down to 1 million from 2016/2017 tax year. Loans. SSASs can loan a participating employer up to 50% of the net value their assets. A 1st charge security is 21

22 required. This is the only connected party a SSAS can loan to. SIPP schemes cannot loan to any connected party. There is no limit for loans to unconnected parties for either SIPP or SSAS. Money Purchase Annual Allowance Rules. These rules apply when benefits are flexibly accessed. This reduces the Annual Allowance available to 10,000 per annum. Money Purchase Scheme. This is a pension scheme where your money is invested and the size of your fund is determined by how those investments perform. SSAS and SIPP are both Money Purchase Schemes Non Standard Investments. Typically these are complex high risk investments marketed to the sophisticated investor. Examples of these would be Hedge Funds, CFDs (Contracts for Difference) and UCIS (Unregulated Collective Investment Schemes). Occupational Pension Scheme. This is a scheme set up by an employer to provide pension benefits for their employees. A SSAS is an Occupational Pension Scheme. Participating Employer. Means the Principal Employer and any other company that participates in an occupational scheme, i.e. a SSAS. PCLS (Pension Commencement Lump Sum). PCLS is the tax free lump sum that can be paid to a member when their benefits are crystallised. Where Protection does not apply, typically this will be 25% of the member s fund. Pension input periods. These are part of the technical method used to calculate what contribution amounts can be paid to a pension scheme. Pension Simplification. See A Day. Pensions Regulator (TPR The Pensions Regulator). These are the regulator for SSASs. Their role is to protect members in occupation schemes and provide guidance to trustees operating them. Primary Protection. Applied to pension benefits at April 2006 which were equal to or over 1,500,000. This replaces the normal limit on your pension fund by a higher personal lifetime allowance which increases in line with the standard lifetime allowance, if applied for. This can be affected if you flexibly access your benefits (see flexibly accessing benefits ). Principal Employer. This is the company that establishes an occupational scheme, i.e. a SSAS. Protection. Some members may have benefits valued in excess of the Lifetime Allowance or a Pension Commencement Lump Sum of greater than 25% and they have safeguarded them against a tax charge. That safeguarding is referred to as protection. This can be affected if you flexibly access your benefits (see flexibly accessing benefits ). Short term annuity. A short term annuity is an income paid for up to 5 years. You can buy annuities from an insurance company. An annuity can be a fixed amount. Alternatively, it can increase by either a fixed amount or in line with inflation. SIPP (Self Invested Personal Pension). A SIPP is a form of personal pension. SIPPs can include a very wide range of investments, accept transfers including in specie contributions, and be used for income withdrawal. Some SIPPs are 22

23 fully flexible (Known as Bespoke) pension arrangements, while other SIPPs are more limited to what can be provided to clients, depending on the providers rules. Simplification. See A Day. SSAS (Small Self Administered Scheme). A SSAS is a form of occupational pension scheme. SSASs can include a very wide range of investments, can accept transfers including in specie contributions, and can be used for income withdrawal. Some SSASs are fully flexible (known as Bespoke) pension arrangements, while other SSASs are more limited to what can be provided to clients, depending on the providers rules. Transitional arrangements. These are special rules that apply to people who already had large pension funds on 5 April Transitional arrangements may reduce or remove the extra tax charge for large funds. You have to register with HMRC to benefit from transitional arrangements. Trust. A trust is a set of assets and it is governed by rules set out in a document called a trust deed. Trustees make sure that the trust is run in line with those rules. Trustee. A trustee is an individual or a company with responsibilities to make sure that a trust is run in line with its rules. UK relevant earnings. This is an earnings limit used to set the maximum contribution that you can make and get tax relief for (although your employer may be able to make a larger contribution than this). UK relevant earnings are broadly the same as your taxed earnings, but they do not include dividends or bank interest. Uncrystallised Funds Pension Lump Sum ( UFPLS ). This is a lump sum that is paid from the fund instead of buying an annuity or using drawdown. Generally, 25% of the lump sum can be taken tax free with the remaining 75% being taxed. The portion of the lump sum that is taxable will be paid net of income tax. Taking UFPLS is a Benefit Crystallisation Event (see Benefit Crystallisation Event ). Winding Up. This is when a pension scheme is terminated, usually by transferring the members benefits to another pension arrangement. 23