How to pass the CII R04 | Demystifying the Annual Allowance and Lifetime Allowance

How to pass the CII R04 | Demystifying the Annual Allowance and Lifetime Allowance

Despite HMRC attempts to keep things simple, it’s a well-known issue that pensions are anything but.

The theory is, if we can make pensions easier to understand then more clients will contribute towards their retirement planning, easing the financial burden on the state. In our view, the government still have a long way to go before we can describe pensions and retirement planning as simple…

Pensions, though we here at BTS love them, are full of lots of different terms, hundreds of abbreviations, a variety of dates and pretty much anything else that makes them anything but simple!

Let’s take the annual allowance and the life time allowance and try to demystify things a bit.

What is the annual allowance?

It is an annual cap on defined contribution (DC) pension contributions and the increase in defined benefit (DB) scheme benefits.

What happens if an individual breaches their annual allowance?

There is a tax charge known as (wait for it) the annual allowance charge (AAC)!!!

What rate is the AAC levied at?

The member’s marginal rate so, 20%/40%/45% or a combination of these.

So far so good? We would even stick our neck out here and say so far pension simplification was doing what it stated on its tin. However, the problem with HMRC is they are tweakers when it comes to pension rules.

Following the introduction of the annual allowance, various additions have followed such as carry forward, tapering and (joy of all joys) the money purchase annual allowance. Each of these have added an extra layer of complexity to what was in practice quite simple to start with…

What is the lifetime allowance?

It is a cap on a few pension related areas, starting with the benefits that can be taken from a registered pension scheme. It is also a cap on death benefits that can be left pre-retirement and the £ that can be transferred to certain overseas schemes. A final lifetime allowance test can also be done when a member reaches age 75.

When is a lifetime allowance test carried out?

A test is carried out each time the member has a benefit crystallisation event (BCE), the final point being on reaching age 75. There are 13 BCEs, but for the R04 exam, candidates should concentrate on 11 main ones, not the 2 that are a tad more obscure.

What happens if an individual breaches their lifetime allowance?

There is a tax charge known as the lifetime allowance charge (LAC). We can see a common theme now with both the annual and lifetime allowance and the names given to their respective tax charges.

What rate is the LAC levied at?

This tax charge has nothing to do with the member’s marginal rate and everything to do with how any LAC is being taken/left. If it is being used for income then there is a 25% tax charge, if taken as cash a 55% charge.

However, similar to the annual allowance, we have some extra rules introduced that have made this cap a lot more complicated – yes, we are talking about transitional protection. There are seven forms of fund protection – primary and enhanced which both came in with the LTA, followed by three forms of individual and two forms of fixed protection, giving us our 7 in total. And, wait for it, three forms of tax free cash protection – scheme specific, primary, and enhanced.

BTS R04 Revision Workshops

BTS R04 training is AMAZING. With a subject as complex as R04 you need a facilitator that knows their stuff and has years of experience coaching candidates in this subject. BTS Associate facilitators love pensions as a subject and are skilled at bringing key subjects to life through examples, visuals and exam style practice questions. Painting pictures is essential with pensions as your subject matter to ensure candidates both understand and can apply key concepts to exam style questions.

Not everyone learns best within a group environment. With one-to-one support your BTS facilitator can concentrate on the areas you are struggling with. If you would benefit from some more bespoke training support, get in touch with us to request a call back.

Don't just take our word for it...

“Such an amazing R04 workshop! I wish I had known about this for my previous R0 exams. It’s made a tricky subject a lot more understandable. Thank you BTS.”

Helen Ballantyne | Personal Wealth Support | March 2021

“So pleased to have passed my R04 exam this morning first time with 82%. A huge thank you to Bespoke Training Solutions Ltd who provided a fantastic two day R04 workshop as well as their study guides and study app. Their resources made a huge difference to my revision, and overall understanding. One more to go until I am qualified!”

India Johnston | Paraplanner | March 2021

“I cannot thank you enough for all of your help! It really gave me another outlook on the R04 exam. I felt so much more confident going into the exam than I have done going into all the previous exams.”

Jack Furnell-James | Paraplanner | March 2021

“I am totally thrilled that I have passed another R0 exam with the help of BTS. I have used their Study Buddy app for every exam that I have done. I just did the R04 exam and questions were so similar to the exam so this resource is a must!! I also purchased the Study Guide for this exam. When reading the CII study text my head was all over the place, the BTS R04 study guide explained things so easily for me. I only had to read something once to understand. I cannot recommend BTS enough. I have done two courses with them for R01 with Luiza and R03 with Jeff. These courses really helped me too. Now on to R06 my last exam!! Thank you BTS I could not have done it without you!!”

Alex Curtis | November 2020



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