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Tax treatment of member benefits
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Income

Scheme Pension

  • A money purchase scheme can only off a scheme pension if they have first offered the opportunity to purchase a lifetime annuity. A DB scheme can only offer a scheme pension.
  • The income will be taxed under PAYE
  • A scheme pension does no usually trigger the MPAA rules. It is only triggered where it is paid directly from a money purchase arrangement with fewer than eleven other members (including dependents) in receipt of a scheme pension and the member became eligible to receive it on or after 6 April 2015.
  • The LTA is tested under BCE 2 for a scheme pension and BCE 6 if there is a PCLS as well. After 75 then it is tested under BCE 5 if they have not taken the benefits.

Lifetime Annuity

  • Purchased via a money purchase pension and the income is secured for life.
  • The income is taxed under PAYE
  • Flexible annuities do trigger the MPAA rules as these allow payments to reduce beyond those permitted under pre 6th April 2015 rules.
  • If an annuity is purchased with uncrystalised funds before age 75 is it tested under BCE 4 and BCE 6 if there is a PCLS as well.
  • If the annuity is bought after 75 or with crystalised funds there is no test, as these funds have already been tested.

Drawdown pension options

  • There are two forms of drawdown, capped and flexi access.
  • Capped is only available to members who already designated funds to capped drawdown prior to 6th April 2015. It is not possible to set up a new capped drawdown arrangement since.
  • Any income taken from a drawdown pension is taxed as PAYE

Capped drawdown

  • Does not trigger MPAA.
  • A member can convert away from capped drawdown by either asking the scheme to move them into flexi access drawdown or taking an income from their capped drawdown in excess of 150% of the basis amount that applies to the scheme in question. By taking more income than permitted this will trigger the MPAA rules immediately.
  • If the member chooses to change, the MPAA rules are only triggered when the member takes an income from flexi access drawdown.
  • The change cannot be reversed.

Flexi Access Drawdown

  • Moving money into flexi access drawdown does not trigger MPAA rules, only once an income is taken for the first time.

How PAYE operates for flexible payments

  • Where HMRC has not issues a tax code to the pension scheme for income payments, the scheme will use a “month one basis”.
  • This means that all previous tax paid in the year is ignored and the payment is taxed as if it was a monthly payment. Thus it means that a maximum of 1/12th of the personal allowance, 1/12th of the basic rate band etc will be applied to the payment. It usually results in the member paying too much tax.
  • If the payment is likely to be regular then HMRC will issue a tax code to the scheme.