RO4 Exam Question
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holyteej
Posts: 7 Forumite
Hi all,
Apologies for posting this here but as it's not strictly related to my own pension. I'm sitting an R04 pension exam tomorrow and have come across 2 questions in mock exams where I am pulling my hair out a little, I've scoured the info in the textbook as well as well as Aviva, Royal London, Pru e.t.c and can't find an answer as to why. Any boards I've seen for IFA's and the like seem to be dead but I know quite a few post here, so thought it might be a place to ask for a little help.
1. An auto enrolment question asked what the total minimum contributions would be once fully phased in. I went with 8% of qualifying earnings but the answer was 10% qualifying earnings... I haven't been able to find any information with this figure anywhere, does anyone know why/how it is 10%?
2. A question where someone died at 60 with £2 million in an uncrystallised PPP, wife puts £1 million to produce an income and takes £1 million as a lump sum, the question was what tax rate would apply to the lump sum. I went with 55% as the lump sum was the second action, but the answer came back as it not being subject to tax. I just wanted to if this is because the LTA charge would only apply to the funds attracting the lowest charge?
Many thanks for any help anyone can offer on understanding this, I'm fine with most things but I can't make sense of these two.
Apologies for posting this here but as it's not strictly related to my own pension. I'm sitting an R04 pension exam tomorrow and have come across 2 questions in mock exams where I am pulling my hair out a little, I've scoured the info in the textbook as well as well as Aviva, Royal London, Pru e.t.c and can't find an answer as to why. Any boards I've seen for IFA's and the like seem to be dead but I know quite a few post here, so thought it might be a place to ask for a little help.
1. An auto enrolment question asked what the total minimum contributions would be once fully phased in. I went with 8% of qualifying earnings but the answer was 10% qualifying earnings... I haven't been able to find any information with this figure anywhere, does anyone know why/how it is 10%?
2. A question where someone died at 60 with £2 million in an uncrystallised PPP, wife puts £1 million to produce an income and takes £1 million as a lump sum, the question was what tax rate would apply to the lump sum. I went with 55% as the lump sum was the second action, but the answer came back as it not being subject to tax. I just wanted to if this is because the LTA charge would only apply to the funds attracting the lowest charge?
Many thanks for any help anyone can offer on understanding this, I'm fine with most things but I can't make sense of these two.
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Comments
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Nope - I thought it was 8% too...Hi all,
Apologies for posting this here but as it's not strictly related to my own pension. I'm sitting an R04 pension exam tomorrow and have come across 2 questions in mock exams where I am pulling my hair out a little, I've scoured the info in the textbook as well as well as Aviva, Royal London, Pru e.t.c and can't find an answer as to why. Any boards I've seen for IFA's and the like seem to be dead but I know quite a few post here, so thought it might be a place to ask for a little help.
1. An auto enrolment question asked what the total minimum contributions would be once fully phased in. I went with 8% of qualifying earnings but the answer was 10% qualifying earnings... I haven't been able to find any information with this figure anywhere, does anyone know why/how it is 10%?
I would have said 27.5% as my understanding is that post-death BCEs are treated as occurring simultaneously, at least that's my understanding of https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm0870002. A question where someone died at 60 with £2 million in an uncrystallised PPP, wife puts £1 million to produce an income and takes £1 million as a lump sum, the question was what tax rate would apply to the lump sum. I went with 55% as the lump sum was the second action, but the answer came back as it not being subject to tax. I just wanted to if this is because the LTA charge would only apply to the funds attracting the lowest charge?0 -
Can you post the questions? R04 exam questions (like all the other R0x exams) are precisely worded and you need to read the entire question very carefully to ensure you understand what is being asked.
For example, the question could be referring to what income tax would be applied to the lump sum payment, not what LTA charge is applied. The information above is insufficient to determine that.0 -
https://www.pensionsadvisoryservice.org.uk/about-pensions/pensions-basics/automatic-enrolment/how-much-do-i-and-my-employer-have-to-pay
http://www.thepensionsregulator.gov.uk/docs/dg-4-appendix-a.pdf
The above is dated April 2017 - can find no reference to 10%.
https://www.gov.uk/tax-on-pension-death-benefits
http://www.telegraph.co.uk/pensions-retirement/tax-retirement/the-loophole-that-halves-the-tax-liability-on-inherited-pensions/0 -
@The_Doc
The exact wording for the auto enrolment one is nothing more than what I've put, I'm almost positive now that one is just the actual mock exam being incorrect.
For the other the wording is
A Man aged 70 dies leaving an uncrystallised personal pension fund valued at £2 million. He had no transitional protection. His wife, has opted to use £1 million to purchase an income and wishes to use the balance to provide a lump sum payment. How will the lump-sum payment be taxed, if at all?0 -
"http://www.pruadviser.co.uk/content/knowledge/technical-centre/lifetime_allowance/"
"Lump Sums on death
Where the member has died, any crystallisation events occurring under BCE7 (relevant lump sum death benefit) are treated as occurring immediately before the death of the member."
This then is the first BCE. The lump sum payment uses all the LTA, so no LTA charge. There is also no income tax as the death was before age 75."
The remaining amount designated for income (£1m) will be subject to a 25% LTA charge but no income tax.0 -
Thank you! I can't believe it was a simple as that, much appreciated for clearing that up.0
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That section of the Prudential page just talks about lump sum benefits on death, ie BCE7, it doesn't mention drawdown ie BCE5C."http://www.pruadviser.co.uk/content/knowledge/technical-centre/lifetime_allowance/"
"Lump Sums on death
Where the member has died, any crystallisation events occurring under BCE7 (relevant lump sum death benefit) are treated as occurring immediately before the death of the member."
This then is the first BCE. The lump sum payment uses all the LTA, so no LTA charge. There is also no income tax as the death was before age 75."
The remaining amount designated for income (£1m) will be subject to a 25% LTA charge but no income tax.
The HMRC pension tax manual I linked above says:
So the HMRC manual says BCE5C occurs at the same time as BCE7.When more than one post-death BCE occurs following the death of a member, the date of crystallisation is taken as:- the date of payment of the relevant lump sum benefit through each BCE 7, or
- the date of designation for each BCE 5C, or
- the date the person becomes entitled to the annuity for BCE 5D.
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The simultaneous occurrence of both BCE7 and BCE5C was aimed to make it fair when there are more than one beneficiary. That is not the case here. We can assume it also applies in this case but there is no explicit statement. If multiple BCEs occur on same date before death, the pension holder can decide which comes first to their benefit. Its unclear whether this principle holds in the case where the BCEs are post death and there are no other beneficiaries involved.
... which just goes to show how horrendously complicated these pension rules have got.
@holyteej: Let us know if you get an official explanation of the answer to this and the other question.0 -
It's all a bit hypothetical anyway as it seems to be a daft thing to do.The simultaneous occurrence of both BCE7 and BCE5C was aimed to make it fair when there are more than one beneficiary. That is not the case here. We can assume it also applies in this case but there is no explicit statement. If multiple BCEs occur on same date before death, the pension holder can decide which comes first to their benefit. Its unclear whether this principle holds in the case where the BCEs are post death and there are no other beneficiaries involved.
... which just goes to show how horrendously complicated these pension rules have got.
@holyteej: Let us know if you get an official explanation of the answer to this and the other question.
Why not simply designate the entire £2M as drawdown, pay 25% LTA charge on £1M? There's no tax on drawdown so the wife could take £1M straight out of the drawdown pot with no income tax to pay.
Alternatively, use the 2-year rule and designate £1M as drawdown, leaving the other £1M for over 2 years and thereby avoiding the LTA charge, but instead paying income tax - could be a better option depending on the wife's tax situation.
The question doesn't even state whether the man had crystallised any pensions previously - so how do we know how much LTA he had left at death?0
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