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Technical View

Technical View

In this month’s Technical View we are looking at some of the questions received into the Sanlam technical e-helpdesk, in the hope that it will aid you with queries you might be having with some of your own clients.

Technical View aims to answer queries received by you, as a financial adviser for your use when you meet clients in similar scenarios. We hope that this provides useful, topical and valuable information.

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Question 1

A client with Additional Voluntary Contribution (AVC) pension plans, (currently valued at £18,000) wishes to take all their pension benefits. They also have a Public Sector pension, which is the main source of pension income. Could you please clarify the following points with the new pension freedoms legislation in mind:
Do the AVCs need to be transferred to a personal pension contract to access the new pension freedoms legislation with 25% of the funds being paid tax free and the remaining 75% taxable at the clients marginal rate of income tax. And if so does that involve the normal occupational pension transfer procedures?

If main scheme benefits have been taken, can the benefits of the AVC’s be paid out tax free if all of the tax free cash allowable has not been paid out? 

Answer 1

In answer to the points you have raised we have the following comments to make:

  1. Details of the options available to an individual will be set out in the terms and conditions of their AVC contracts and the rules of the appropriate scheme. This will include information on how benefits can be taken and also transfer procedures.  

    The way in which benefits can be taken will also depend on whether the AVC’s are freestanding (FSAVC’s) or not.  Normally an individual can take benefits from an FSAVC from age 55, regardless of whether or not benefits are being taken from the employer’s pension scheme. What flexibilities are available will be up to the scheme in question.

    In house AVC’s can be more complicated. For example, if this is a Local Government Pension Scheme (LGPS), they do have a website which includes information on AVC/FSAVC’s and also gives details on scheme administrators that operate the AVC’s, click here to view this. 

  2. If an individual has chosen not to take PCLS from their main scheme, they cannot transfer any ‘unclaimed’ PCLS from another scheme. As you have confirmed that the AVC schemes in question are free-standing and do not form part of the same scheme, the benefits are also separate and the terms and conditions of the contracts will be different (including with regards to how benefits can be taken and what flexibility is permitted under each scheme).

Question 2

If a parent was to make a third party pension contribution for their child who does not have any relevant UK earnings, should the payment of £3,600 or £2,880 be made?

Answer 2

When a pension contribution is made on behalf of an individual, it is treated as a personal member contribution and should be paid net of tax. As long as the child is a relevant UK individual for the tax year in which the contribution is made, and no other pension savings have been made in any pension input periods ending in that tax year, a personal contribution of £2,880 can be made for example, by the parent or by someone else on behalf of the child. Tax relief will then be applied to bring the contribution up to £3,600.

Question 3

A client who is the director of a company has £10,000 in their company business account and £50,000 in his own personal account. He wants to use this money to make a pension contribution. The client’s relevant UK earnings for this tax year amount to £8,000 gross and so, ideally he wants the company to make an employer contribution so that this contribution attracts tax relief but is not limited to the employee’s relevant UK earnings.

Is it possible for the client to loan the £50,000 in his personal account to the company and the company use that money to make an employer contribution and then the company repay this money back to him via the director loan account?


Answer 3 

Whether the individual can make a loan to the company and for this to be paid back via a director loan account is a matter for the company’s accountant, this is not anything directly to do with a pension arrangement. 

It may be possible for the employer to make a contribution and for this to be treated as a business expense and this matter should be discussed with the company accountant as it very much depends on the individual circumstances of the case.

As you point out, an employer is not restricted by relevant UK earnings when making contributions on behalf of an employee. Unlike personal contributions, employer contributions aren't limited to what the employee earns. Potentially, a company could contribute more than the employee's earnings (up to the current annual allowance of £40,000, or potentially up to £180,000 in some circumstances, if using carry forward and subject to there being sufficient unused annual allowance to do this).  

For the employer contribution to attract corporation tax relief it would have to satisfy the wholly & exclusively rule (see here for more details). Also HMRC may question the contribution if the total salary and benefit package is excessive for the work undertaken and contributions made for non-arms length employees are often reviewed by the local inspector of taxes.

Hopefully this edition has given you some assistance with certain pension queries you or your clients may have. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at technical@sanlam.co.uk.

Date issued: July 2015

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 July 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.

Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

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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