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Contributions

Individuals:

  • There is no limit to the amount someone can contribute but there is a limit on how much they will get tax relief on.
  • Members can make additional contributions either into their occupational pension or into their own private pension.

Employers:

  • Employers will state how much they will put into a pension for an employee so they know the cost of providing the scheme for its employees.
  • The level of pensionable salary is likely to be lower than the employee’s total remuneration for the year. For example, an employee’s remuneration may consist of basic salary, overtime, a bonus and a company car, but the rules of the scheme only includes basic salary within the definition of pensionable salary.

In specie contributions:

  • It is possible to contribute an asset into a registered pension scheme but the tax rules relating to this type of contributions are as follows:

– the member (or possibly the employer) agrees to make a monetary contribution;

– the contribution is settled by way of a transfer of an asset or assets.

  • The rules state that:

There must be a clear obligation to pay a contribution of a specified sum of money, g. £10,000:

– this creates a recoverable debt obligation;

– if this debt is not created, the transaction is not treated as a contribution and instead is treated as the acquisition of an asset by the

    • A separate agreement is reached between the scheme trustees and the member (or employer) to pass an asset to the scheme for
    • The cash contribution debt is then set against the value of the asset:
    • the scheme effectively agrees to acquire the asset for its market value.
    • If the market value of the asset is lower than the promised contribution the balance must be paid in If the market value is higher then the excess can be moved back or the excess can be treated as an extra contribution.

 

Questions - Use Your Note Taker To Jot Down Ideas / Calculations

Barry is 54 and is a member of his company’s occupational money purchase scheme. His remuneration package for 2018/19 is made up of:

  • a basic salary of £36,000; and
  • a company car with a taxable value of £6,000.

The employer’s contribution to the scheme is 6% of pensionable salary and employee contributions are 4% of pensionable salary. Pensionable salary is defined as basic salary.

Calculate the gross contribution to the scheme paid by Barry and his employer.

Barry’s pensionable salary is £36,000; therefore, the gross contributions to the occupational money purchase scheme are calculated as follows:

  • the employer’s contribution is 6% × £36,000 = £2,160;
  • Barry’s contribution is 4% × £36,000 = £1,440.

In respect of a statutory money purchase illustration, what assumptions are used for inflation and expenses at retirement?

Select one:

a) 2% p.a. for inflation and 2% of the value of the annuity for expenses at retirement.

b) 2.5% p.a. for inflation and 4% of the value of the annuity for expenses at retirement.

c) 2.5% p.a. for inflation and 2% of the value of the annuity for expenses at retirement.

d) 2% p.a. for inflation and 4% of the value of the annuity for expenses at retirement.

B)

Chapter reference 5A4