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Technical View

Technical View

Welcome to this month’s Technical View, where we look at some of the questions received into the Sanlam technical e-helpdesk, in the hope that it will aid you with queries you may receive from some of your clients.
Question 1

A client with a defined benefit pension scheme with a transfer value of £1.291 million has cancer and is not expected to survive beyond 2 years. They are concerned about the implications of Inheritance Tax (IHT) upon the possible transfer to a Personal Pension Plan to allow access to the new pension freedom legislation. The current pension scheme offers a spouse’s pension of 50% and in addition a cash sum (at the trustee’s discretion) equal to 5 x revalued pension, currently equating to approximately £277,000.
Could you please explain the issues that are needed to be taken into consideration when advising this client?
Answer 1

Firstly, any transfer from the final salary scheme must be reported to HMRC on the IHT409 form if death occurs within two years of a transfer.
HMRC will class the client as having had the right to have the transfer funds paid into his estate, but has not exercised the right. Any decision that redirects these benefits from the member’s estate to another person could be deemed to reduce the estate value and thus be subject to IHT. This will be deemed as a gift by HMRC for IHT purposes and given the value of the pension the client’s nil rate band (£325,000 for this tax year depending on gifts given in the previous seven years) will be utilised.
An estate is exempt from Inheritance Tax if the deceased leaves everything to their spouse who lives permanently in the UK, see here for more information.
More details of any transfers made within the 2 years before death can be found here.
Question 2
A client with a large final salary pension scheme, which is valued in excess of £1 million for lifetime allowance (LTA) purposes is looking for advice with the reduction in LTA, coming into effect in the new tax year. The client believes that the transfer value will be considerably higher than the assumed calculation for LTA.
If the client applies for Fixed Protection 2016, what would happen to that protection if we subsequently transferred the final salary scheme to a money purchase drawdown pension scheme?
Answer 2

Both Fixed and Individual Protection 2016 applies at individual level and aims to reduce or eliminate any lifetime allowance charge applying to the individual’s pension savings. Therefore, on transfer from one registered pension scheme to another, either form of 2016 protection transfers with the member’s pension benefits, as long as no action/occurrence takes place to lose protection.
The circumstances for losing protection would be on the same lines as those for 2014 forms of protection. See here and here for more information.
With regard to the 2016 forms of protection the latest information on this was set out in HMRC’s Pension Schemes Newsletter 73 published on 23 October 2015 please see here.
More information relating to both Fixed and Individual Protection 2016 is due out later in December 2015.
Question 3
Could you confirm please whether the calculation which will affect high earners from April 2016 with regards to the reduction of the annual allowance for pension contributions will include dividends from either:
a)      A share portfolio held for investment purposes
b)      As a form of income from owner managed company.
Answer 3
Both the adjusted & threshold income level will still be based on steps 1 & 2 of section 23 of the Income Tax Act 2007 (see here) and as mentioned in the policy paper, certain pension reliefs are excluded.
Dividend income is included in Step 1 and it should be noted that dividend taxation is changing as of April 2016.
In broad terms dividend income is included in the calculation of both adjusted and threshold income for the purposes of the annual allowance. For your convenience, we have set out steps 1 & 2 below:- 
To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps.
Step 1
Identify the amounts of income on which the taxpayer is charged income tax for the tax year. The sum of those amounts is “total income”. Each of those amounts is a “component” of total income.
Step 2
Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year. The sum of the amounts of the components left after this step is “net income”.
The calculation to work out an individual’s adjusted income includes all pension contributions, including those by an individual’s employer. It also includes any contributions made on behalf of the employee by a company via salary sacrifice.
Hopefully this edition has given you some clarification on outstanding issues you may be experiencing with your clients. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at

Date issued: 9.12.15

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at December 2015 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

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Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH.

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