THE CHARTERED INSURANCE INSTITUTE

AF3
Advanced
Planning

Diploma

in

Financial

Unit AF3 Pension planning

October 2013 Examination Guide

SPECIAL NOTICES
Candidates entered for the April 2014 examination should study this examination guide carefully in
order to prepare themselves for the examination.

Practice in answering the questions is highly desirable and should be considered a critical part of a
properly planned programme of examination preparation.

AF3 October 2013 Examination Guide

AF3 Pension planning

Contents
Important guidance for candidates

Examiner comments

Question paper

12

Model answers

21

Tax tables

27

Published February 2014

Telephone:
Fax:
Email:

020 8989 8464

020 8530 3052
customer.serv@cii.co.uk

The Chartered Insurance Institute 2014

AF3 October 2013 Examination Guide

IMPORTANT GUIDANCE FOR CANDIDATES

Introduction
The purpose of this Examination Guide is to help you understand how examiners assess candidates
knowledge and their ability to apply this to a case study scenario. You can then use this understanding to
help you in your preparation for the examination.

Before the examination

Study the syllabus carefully
This is available online at www.cii.co.uk or from Customer Service. All the questions in the examination
are based directly on the syllabus. You will be tested on the syllabus alone, so it is vital that you are familiar
with it.
There are books specifically produced to support your studies that provide coverage of all the syllabus areas.
However, you should be prepared to read around the subject. This is important particularly if you feel that
further information is required to fully understand a topic or an alternative viewpoint is sought. The reading
list which can be found with the syllabus provides valuable suggestions.

Note the assumed knowledge

For the Advanced Diploma in Financial Planning, candidates are assumed to have studied the relevant units
of the Diploma in Financial Planning or the equivalent. This knowledge is set out on the relevant syllabus.

Read widely
If you do not have experience in advising clients whose financial needs are relatively sophisticated, it is
quite unrealistic to expect that the study of a single textbook will be sufficient to meet all your requirements.
While books specifically produced to support your studies will provide coverage of all the syllabus areas, you
should be prepared to read around the subject. This is important, particularly if you feel that further
information is required to fully understand a topic or an alternative viewpoint is sought. It is vital that your
knowledge is widened beyond the scope of one book. The reading list which can be found with the syllabus
provides valuable suggestions.

Make full use of the Examination Guide

This Examination Guide contains a full examination paper and model answers. The model answers show
the types of responses the examiners are looking for and which would achieve maximum marks.
However, you should note that there are alternative answers to some question parts which would also gain
high marks. For the sake of clarity and brevity not all of these alternative answers are shown.
This guide and previous Examination Guides can be treated as mock examination papers. Attempting them
under examination conditions as far as possible, and then comparing your answers to the model ones,
should be seen as an essential part of your exam preparation. The examiners comments on candidates
actual performance in each question provide further valuable guidance. You can purchase copies of the
most recent Examination Guides online at www.cii.co.uk. CII members can download free copies of older
Examination Guides online at www.cii.co.uk/knowledge.

Know the layout of the tax tables

Familiarise yourself with the information contained within the tax tables printed at the back of each
Examination Guide. These tax tables will be provided to candidates as part of the examination paper.
The tax tables enable you to concentrate on answering the questions without having to worry about
remembering all the information. Please note that you are not allowed to take your own tax tables into
the examination.

AF3 October 2013 Examination Guide

Know the structure of the examination

Assessment is by means of a three-hour written paper in two sections. All questions are compulsory.
Section A consists of one case study worth 80 marks. You will be expected to carry out a variety of tasks
after analysing the information provided.
Section B consists of two shorter case studies worth a total of 80 marks. Again you will be expected to carry
out a variety of tasks based upon the information provided.
Each question part will clearly show the maximum marks which can be earned.

Appreciate the standard of the examination

Candidates must demonstrate that they are capable of advising clients whose overall levels of income
and capital require a more sophisticated scheme of investment than is normally prepared by a
Certificate level adviser. These clients require a critical appraisal of the various financial planning options
available to them.

Read the Advanced Diploma in Financial Planning information for candidates and important
notes for candidates
Details of administrative arrangements and the regulations which form the basis of your examination entry
are to be found in the current Advanced Diploma in Financial Planning Information for Candidates and
important notes for candidates, which is essential reading for all candidates. It is available online at
www.cii.co.uk or from Customer Service.

AF3 October 2013 Examination Guide

In the examination
The following will help:
Spend your time in accordance with the allocation of marks:
The marks allocated to each question part are shown on the paper;
If a question has just two marks allocated, there are likely to be only one or two points for which the
examiner is looking for, so a long answer is wasting valuable time.
Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate answer.
Always remember that if the paper is not completed, your chances of passing will be reduced
considerably.
Do not spend excessive time on any one question; if the time allocation for that question has been
used up, leave some space, go on to the next question and return to the incomplete question after
you have completed the rest of the paper, if you have time.
Take great care to answer the question that has been set.
Many candidates leave the examination room confident that they have written a good paper, only to
be surprised when they receive a disappointing result. Often, the explanation for this lies in a failure
to think carefully about what the examiner requires before putting pen to paper.
Highlighting key words and phrases is a technique many candidates find useful.
The model answers provided in this Examination Guide would gain full marks. Alternative answers
that cover the same points and therefore answer the question that has been asked would also gain
full marks.

Tackling questions
Tackle the three questions in whatever order feels most comfortable. Generally, it is better to leave any
questions which you find challenging until you have attempted the questions you are confident about.
Candidates should avoid mixing question parts, (for example, 1(a)(i) and (ii) followed by 2(b)(ii) followed by
1(e)(i)) as this often leads to candidates unintentionally failing to fully complete the examination paper.
This can make the difference between achieving a pass or a narrow fail.
It is vital to label all parts of your answer correctly as many questions have multiple parts to them
(for example, Question 1(a) may have Parts (i), (ii) and (iii)). Failure to fully distinguish between the separate
question parts may mean that full credit cannot be awarded. It is also important to note that a full answer
must be given to each question part and candidates should not include notes such as refer to answer given
in 1(b)(i).

Answer format
Unless the question requires you to produce an answer in a particular format, such as a letter or a report,
you should use bullet points or short paragraphs. The model answers indicate what is acceptable for the
different types of question.
Where you are asked to perform a calculation it is important to show all the steps in your answer.
The majority of the marks will be allocated for demonstrating the correct method of calculation.
Provided handwriting is legible, candidates will not lose marks if it is untidy. Similarly, marks are not lost
due to poor spelling or grammar.

Calculators
If you bring a calculator into the examination room, it must be a silent, battery or solar-powered,
non-programmable calculator. The use of electronic equipment capable of being programmed to hold
alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator,
provided it meets these requirements. The majority of the marks will be allocated for demonstrating the
correct method of calculation.

AF3 October 2013 Examination Guide

EXAMINER COMMENTS
Candidates overall performance
Question 1
In Part (a)(i), most candidates included the 2,000 limit and the requirement to reach age 60 in their answers.
A good number also identified that Gwen can commute these benefits because she only has two small pots.
Far fewer candidates stated that the 2,000 could be taken without reference to her other pension benefits.
Some candidates used different limits. 18,000 was the limit most commonly quoted, quickly followed by
15,000 and 10,000. There were also some candidates who stated that retirement annuity plans are
occupational plans, although this error did not affect the marks gained.
In Part (a)(ii), most candidates identified that 25% of the fund values could be taken as a tax-free lump sum.
The majority then went on to state that the balance is taxed at her marginal tax rate or taxed at her highest
marginal tax rate. However, this is not sufficient detail to gain all available marks.
In a pensions exam it is important that candidates clearly state what type of income the payment will be taxed
as; in this case as earned income. In other words, it will be taxed in the first tranche of her income The case
study does not give any details of Gwens other assets and so to state that it will be taxed at her marginal or
highest marginal rate of tax may be incorrect if she has savings and dividend income. By the same token,
stating that it will be added to her income is not sufficient to gain the mark.
If candidates review model answers on previous exam sessions, they will see that the taxation of pension
income is always stated as being taxed as earned income. This level of detail is important in an advanced
level pensions exam.
In Part (b)(i), the majority of candidates either knew or correctly guessed how pension increase exchange
works. Some candidates clearly had not come across this concept previously but used the information
they gained from the case study to formulate an answer and as a result picked up at least one of the
marks available. The most common errors seen in answers were that pension increase exchange is an
incentive to take benefits early or that it involves giving up pension commencement lump sum (PCLS) or the
spouses pension to enhance the members initial pension.
In Part (b)(ii) most candidates gained both marks for this calculation. If marks were lost it was usually due to
the candidate calculating the wrong number of months for the early retirement factor. The information
provided shows that Gwen intends to take early retirement in the month following her 61st birthday. The early
retirement factor is applied for each month or part thereof that she retires prior to her 65th birthday and so the
month in which she reaches age 61 must count in the calculation, giving us an early retirement factor based
on 48 months.
In Part (b)(iii), there were a wide range of answers. Some candidates did very well and had clearly
considered Gwens full circumstances from the information provided in the case study, whilst others seemed
to struggle with what the question was asking them and/or the subject matter covered.
What was interesting was that some candidates who had not performed well on the first two parts of the
question still did well when answering this part of the question by applying common sense and ensuring their
answers took account of the information supplied to them in the case study. This is an example of how good
exam technique can help a candidate gain marks.
Some candidates clearly struggled with what they were being asked to do here. When the examiner asks for
factors it is because the analyse stage of the sales process is being tested. Therefore, candidates should
outline the information they would draw on before offering Gwen advice. This information can include facts
that would support her taking pension increase exchange and those that would not.
Some candidates did not seem to appreciate they were being asked to outline the factors. This involves
slightly more detail than stating them but does not require candidates to supply the examiner with the
reasons why you would want to know something, or how the factors would be used in arriving at their advice.

AF3 October 2013 Examination Guide

In Part (c)(i) a few candidates did not answer the question that was asked and instead calculated the
percentage of her lifetime allowance that would be used up when she crystallised the defined benefit
scheme. This was being tested in Part (c)(ii) of this question.
The majority of candidates made a reasonable attempt at this question. Many candidates gained full marks
by using the lifetime allowance from 2006/2007. However, some applied the underpinned lifetime allowance
of 1,800,000. Where this was used, candidates would still have been able to gain the majority of the marks
on offer as long as they used the correct method in their calculation.
In Part (c)(ii) candidates performed very well, with a significant number gaining full marks. This was in part
because any earlier mistakes that had occurred, in the calculation of income in Part (b)(ii) and the revised
primary protection factor in Part (c)(i), were not penalised a second time. As long as candidates used their
wrongly calculated figures correctly within the calculation then all the marks were available to them.
Where marks were not achieved it was typically because candidates made the error of not including the
retirement annuity plans in their calculation. These plans are not ignored, unlike a trivial commutation lump
sum, as they are authorised lump sum payments under BCE7. Other errors seen less frequently were
multiplying the defined benefit scheme by a factor of 25, applying a 55% tax charge to the excess above the
lifetime allowance, and not answering the question asked, i.e. to calculate the tax charge. Some candidates
instead performed the calculation to the point where the excess had been calculated and then stated that the
lifetime allowance tax charge would be applied to this figure. Had they shown the tax charge of 25% and
then applied it to the excess calculated they would have gained further marks.
Some candidates arrived at an answer which led them to believe that no lifetime allowance tax charge
would apply. Whilst they would still be in a position to gain most, if not all, of the marks available, candidates
should note that the examiner will not ask you to calculate something if the answer is that there is nothing
to calculate. Also, many candidates calculated the percentage used of the lifetime allowance (LTA) each
time a benefit was crystallised. However, as they were all crystallised in the same year it is easier and
quicker to simply total the benefits and work out the excess over the LTA.
Part (d) was well answered on the whole. The most common ommissions were for identifying her capacity
for loss, investment split of any current investments and the likely time span of the investment.
Some candidates spent longer discussing the possibility of her entering flexible drawdown than answering
the question asked. Whilst she could enter flexible drawdown this would not affect the information needed to
invest the funds and so was not relevant to the question being asked. Another issue candidates spent time
on was death benefits. Whilst death benefits are something an adviser should discuss with her they are
unlikely to have a huge influence on the investment at this stage given that she will only be 61 years old.
In Part (e)(i), a good number of candidates did well on this calculation. However, a significant number
of candidates did not display a sufficient level of knowledge of the carry forward rules and process.
Calculating the maximum tax relievable contribution that is within someones remaining annual allowance is
fundamental knowledge for candidates sitting AF3.
The most common errors were ignoring the tax years 2008/2009 and 2009/2010, failing to take account of
the employer contribution in calculating the pension input; not showing all workings and using 255,000 as
the available annual allowance for carry forward purposes for the tax year 2010/2011.
The minority of candidates who grossed up the member contributions were not penalised. The question
asked for the maximum tax relievable contribution she could make without incurring an annual allowance tax
charge and the case study made it clear that she had been maximising the tax relievable contributions in
recent years. Those candidates who grossed up the contributions would have arrived at figures that
showed she had already incurred an annual allowance tax charge, which does not achieve the objectives
as described. This should have been enough to tell them that the contributions shown in the case study were
gross and not net. Also, as the figures were given for pension input purposes it is reasonable to assume that
they are gross and not net. However, as it was not explicitly stated in the case study the marking scheme
was adjusted so that those candidates who did gross up were not penalised for doing so.

AF3 October 2013 Examination Guide

For Part (e)(ii), it was encouraging to see how many candidates displayed a good understanding of how
tax relief on a pension contribution works this had not been the case when this was examined previously.
However, there were still a significant number of candidates who showed gaps in their knowledge. This is
core pensions knowledge for anyone wanting to achieve a qualification at this level.
The most frequent errors were around the impact on child benefit. The statement that Sarah has opted to
continue receiving Child Benefit and will pay any tax due via her self-assessment tax return was included
within the case study specifically to help candidates answer this question. There was no other reason for
such a statement to appear and candidates are reminded again that they must take full account of
the information provided in the case study information if they wish to achieve all available marks in the exam.
In Part (f), whilst there were some good answers, many candidates dropped marks through a lack of detail
rather than a lack of knowledge i.e. they answered in general terms instead of basing their answer on the
information in the case study. When a question offers as many marks as this one did it is important that
candidates include the correct level of detail.
Some candidates felt the need to explain what would happen if a trust is not set up. However, this does not
answer the question that was asked and so could not gain them any marks. Also, some candidates believed
that Gwen could only leave her pension benefits to Jack if she adopts him, but this is not the case. If Jack is
named as a beneficiary of the trust then his age/status does not affect his ability to benefit.
Trusts and pensions are interlinked and candidates who wish to pass an advanced level pensions exam
should have knowledge of how trusts work and the duties of a trustee both in respect of an individual trust
and a pension scheme.
For Part (g)(i), most candidates performed well, although some appeared to be confused about when the
changes will be introduced. A few candidates seemed to think that Sarah would be limited to a maximum of
60% of the Basic State Pension (BSP) as she would be the second of the two to reach State Pension Age
(SPA) and there were a small number of candidates who appear to have no knowledge of the forthcoming
changes at all.
In Part (g)(ii), most candidates demonstrated reasonable knowledge in their answers, although a small but
significant number of candidates did not appear to know how the BSP is taxed.
Some candidates did not gain marks because they did not apply their knowledge to the circumstances
outlined in the case study i.e. that Gwen has other private pension income and therefore the tax due in
respect of the BSP will be deducted from this income via an adjustment to her tax coding.
In Part (g)(iii), the question asked how Sarah could ensure that she receives a full BSP at SPA.
Many candidates simply provided a long list of ways in which someone could accrue credits towards their
BSP, e.g. by receiving child benefit for a child aged under 12 or acting as a full-time carer.
Whilst both of these may allow someone to accrue credits neither method is guaranteed to apply to Sarah
and therefore would not ensure she has a full BSP.

AF3 October 2013 Examination Guide

Question 2
In Part (a)(i), the majority of candidates did not seem to be aware of the process involved and many seemed
to think the property was being purchased by the self-invested personal pension scheme (SIPP) rather than
the company placing the property into the SIPP as a contribution.
Some candidates stated that if the value of the property exceeded his available annual allowance, then
the excess would be an unauthorised contribution and that there would therefore be an unauthorised
contribution charge. This is incorrect the employer contribution, which is what this would be, is unlimited
for tax relief purposes within the wholly and exclusively rules and the only charge that would apply
would be an annual allowance tax charge payable by Jim, not an unauthorised contribution charge, which
does not exist.
Other candidates stated that Jim would pay a tax charge of 55%, presumably because they were thinking
that an unauthorised payment charge would apply. Again, as above, this is the not the case. If the
contribution exceeds Jims annual allowance then a tax charge based on Jims marginal Income Tax rate will
be due.
In Part (a)(ii) a number of candidates seemed to think that the SIPP had purchased the property but, as
stated above, this is not the case. The property would be added to the SIPP assets without the SIPP needed
to liquidate any shares to pay for anything.
When stating the advantages, most candidates correctly identified the benefit of no Capital Gains Tax on sale
of the property by the SIPP, that rental income paid by the company to the SIPP would not incur tax within
the SIPP and that the property would be protected from creditors in the event of company insolvency.
Few stated that the rental income paid into the SIPP does not count towards Jims annual allowance or that
the addition of the property to the SIPP would allow Jim to borrow further funds. This was an objective
identified in the case study.
In identifying the drawbacks, most candidates identified that the property was illiquid, incurs high costs and
the company must pay a market rent. Few correctly identified that the placing of the property into the SIPP
reduces the value of the company or that it would mean the company could no longer secure borrowing
against the property. Even fewer mentioned that Jim may have an annual allowance tax charge to pay,
despite many having identified that he may not have enough annual allowance in their answer to Part (a)(i).
Part (b) asked candidates to explain why Jim could not borrow as much as he believed he could.
Therefore, those candidates who simply calculated the maximum borrowing without including any narrative
could not gain full marks. Despite the wording of the question, some candidates ignored the value of the
property when explaining how much Jim could borrow.
Overall, given how often this has been tested in recent years, many candidates appeared to struggle with
this question.
Part (c) was not well answered by the majority of candidates, either through an apparent lack of knowledge or
because they did not answer the question asked. The question asked candidates to explain the conditions
that must be met in order that the scheme could be used for auto-enrolment. Most candidates instead
explained the employers duties.
Auto-enrolment is a huge, ongoing change in the UK pensions regime and many candidates displayed little
or no knowledge of this subject. This is an area that future candidates should ensure they have a good all
round knowledge of before attempting this exam.
Some candidates stated that the scheme must offer a lifestyle fund. This is confusing the rules that existed
for stakeholder schemes with those that exist for auto-enrolment. The auto-enrolment rules state that the
scheme must not require the member to make a choice. Because of this a scheme should offer a default
investment fund. There is no legislation in place that requires this fund to be a lifestyle fund.
Other common errors included candidates explaining the worker categories in great detail or explaining the
minimum contribution rules. These were not asked for in the question.

AF3 October 2013 Examination Guide

In Part (d)(i), the majority of candidates appear to have no knowledge of the alternatives available to an
employer who does not wish to use the qualifying earnings definition to determine the minimum level of
pension contributions payable to their defined contribution scheme.
Many candidates answered the question based on the phasing in of the qualifying earnings contribution
levels, despite the question making it clear that it was the situation from October 2018 onward that should
be considered.
In Part (d)(ii) a large number of candidates appeared to completely ignore the information provided in the
case study that the employer wished to continue to pay 5% of basic salary. A small but significant number of
candidates used their answer to show how the employer could pay less than 5% or how salary sacrifice
could be used despite there being nothing in the case study or the question asking candidates to consider
these options.
The question asked for a recommendation of how the contributions should be set up. This requires
candidates to make a recommendation, therefore marks are not awarded where no recommendation is made
and instead candidates have discussed a range of options they believe are available.

Question 3
Part (a)(i) is a question that is asked regularly in AF3 exam sessions, and it is therefore disappointing when
we see a high number of candidates fail to explain this process correctly. Gaining AF3 allows the holder to
be designated a transfer specialist by the FCA. The cash equivalent transfer value (CETV) process is well
documented in the relevant study text and there are many examples of what the examiner expects
candidates to include in their answers to be found on previous exam papers.
Many candidates displayed an understanding of the process but did not achieve full marks because they
failed to apply their knowledge to the circumstances set out in the case study. For example, stating that the
benefits will be revalued in line with statutory assumptions does not demonstrate that you know what these
statutory assumptions are, nor does it explain to the client how his benefits are being increased. To gain the
full marks available, candidates are expected to show that they understand that Guaranteed Minimum
Pension (GMP) and non-GMP are revalued separately; that (based on the case study) GMP would be
revalued at a fixed rate of 4% and his non-GMP would be revalued using an assumed rate of Consumer
Prices Index (CPI).
Some candidates used the term inflation instead of stating CPI. Some also spoke of Retail Prices Index
(RPI) being hard wired into the scheme rules. However, if this was the case then the scheme would not be
revaluing at statutory rates, as the case study states. CPI is the inflation factor used for statutory revaluation
and candidates are expected to know this and be able to demonstrate their knowledge accurately when
answering a question.
Even candidates who demonstrated a good knowledge of the process were not able to gain full marks
because they did not take account of the information shown in the case study. For example, the case study
showed that the PCLS is paid in addition to the pension and, to gain full marks, candidates needed to have
made reference to this in their answers. Also, the case study explains that the scheme underfunding has not
been taken into account when calculating the CETV. However, a number of candidates still included the
step of adjusting the CETV based on scheme underfunding as a step in the calculation process. Whilst this
is part of the generic process the question asked candidates to explain how this particular CETV had
been calculated.
In Part (a)(ii), most candidates demonstrated very little knowledge of who does what within a scheme and
seemed to think that the trustees can decide to encourage transfers away. In fact it is the employer who
would make that decision. Candidates must be able to show they understand who can take the actions
identified in order to gain the marks.

10

AF3 October 2013 Examination Guide

In Parts (b)(i), (ii) and (iii) most candidates performed well, although some candidates did not gain all the
available marks because they did not think their answers all the way through. For example, many stated
that an increase in CPI would lead to an increase in the CETV but they failed to state why this was the
case (i.e. because the increase in revaluation means a larger pension at age 65 and greater increases
in payment).
Although this question was well answered in the main, there were still a number of candidates who did not
appear to understand how these assumptions impact on a CETV and tried to cover both increases and
decreases in their answers.
Part (c)(i) was reasonably well answered. Most candidates did identify his cautious attitude to risk as being a
factor and the loss of the guarantees/inflation proofing on the scheme benefits however some candidates did
not take account of the information provided in the case study. For example, few mentioned that the defined
benefit scheme is his only pension. Other commonly missed points were around the cost of ongoing advice if
he transfers and the charges he would have to pay.
Part (c)(ii) overall was less well answered than Part (c)(i). As with Part (c)(i), this seemed mainly to be
because candidates failed to consider the information provided in the case study. For example; that he
wants to take benefits prior to the schemes normal retirement age; that he could transfer the benefits to a
Qualifying Recognised Overseas Pension Scheme if he does move permanently to Canada and that the
transfer at present does not take account of the scheme underfunding.
For Part (d), some of candidates gave a good answer but they were in the minority. A significant number of
candidates did not provide an answer at all. AF3, as with all CII written examinations, is marked positively.
This means that candidates are rewarded for correct information and not penalised for incorrect information.
Therefore, it is better to guess an answer and write something down, which may gain a mark or two, than
leave a question unanswered.

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AF3 October 2013 Examination Guide

THE CHARTERED INSURANCE INSTITUTE

AF3
Advanced
Planning

Diploma

in

Financial

Unit AF3 Pension planning

October 2013 examination
SPECIAL NOTICES
All questions in this paper are based on English law and practice applicable in the tax year
2013/2014, unless stated otherwise in the question, and should be answered accordingly.
It should be assumed that all individuals are domiciled and resident in the UK unless
otherwise stated.

Instructions

Three hours are allowed for this paper.

Do not begin writing until the invigilator instructs you to.

Read the instructions on page 3 carefully before answering any questions.

Provide the information requested on the answer book and form B.

You are allowed to write on the inside pages of this question paper, but you must NOT write your name,
candidate number, PIN or any other identification anywhere on this question paper.

The answer book and this question paper must both be handed in personally by you to the invigilator
before you leave the examination room. Failure to comply with this regulation will result in your
paper not being marked and you may be prevented from entering this examination in the future.

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AF3 October 2013 Examination Guide

Unit AF3 Pension planning

Instructions to candidates
Read the instructions below before answering any questions

Three hours are allowed for this paper which carries a total of 160 marks as follows:

Section A: 80 marks
Section B: 80 marks

You are advised to spend approximately 90 minutes on Section A and 90 minutes on Section B.

You are strongly advised to attempt all questions to gain maximum possible marks. The number of
marks allocated to each question part is given next to the question and you should spend your time in
accordance with that allocation.

Read carefully all questions and information provided before starting to answer. Your answer will be
marked strictly in accordance with the question set.

You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you
should cross through these notes before you hand in the booklet.

It is important to show all steps in a calculation, even if you have used a calculator.

If you bring a calculator into the examination room, it must be a silent, battery or solar-powered,
non-programmable calculator. The use of electronic equipment capable of being programmed to hold
alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific
calculator, provided it meets these requirements.

Tax tables are provided at the back of this question paper.

Answer each question on a new page and leave six lines blank after each question part.

Subject to providing sufficient detail you are advised to be as brief and concise as possible, using
note format and short sentences on separate lines wherever possible.

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AF3 October 2013 Examination Guide

SECTION A
This section is compulsory and carries 80 marks

Question 1
Gwen, aged 60, and Sarah, aged 48, formed a civil partnership in September 2013. This is Gwens second
civil partnership and Sarahs first.
Gwen registered for primary protection in 2006, with a primary protection factor of 0.18. In 2010, at
the dissolution of her previous civil partnership, she had a pension debit of 135,000 applied to her benefits.
The funds in respect of this debit have been transferred to her ex-partner.
Gwen, who is a scientist in the oil industry, intends to stop working when she reaches her
61st birthday on 30 November 2013. Her current pension entitlement is:
Deferred membership of GH plc contracted-in
defined benefit scheme
Personal pension plan fund value
Retirement annuity plan fund value
Retirement annuity plan fund value

Pension entitlement at age 65: 38,000 per annum

Early retirement factor 0.5% per month or part thereof
1,300,000
1,500
1,900

The trustees of the GH plc scheme have recently advised members that they have the option of taking
Pension Increase Exchange. In Gwens case, assuming she started taking her benefits in December 2013,
she would receive an increase of 22% on her starting income.
Sarah, who is a lawyer, is employed with relevant earnings in the tax year 2013/2014 of 102,000.
She has a son, Jack, aged 17, from a previous relationship. Sarah has opted to continue receiving
Child Benefit and will pay any tax due via her self-assessment tax return.
Sarah received a large inheritance from her parents in 2011/2012. She has been using part of this to
place the maximum possible tax relievable pension contributions into her personal pension plan as she
wishes to stop working when she reaches age 55. She has no other pension plans. Her contribution history
has been:
Tax year
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013

Employer contribution
()
10,000
10,000
11,000
12,000
12,000

Sarahs contribution
()
5,000
6,000
6,000
78,000
80,000

Sarahs employer will pay a contribution of 14,000 in the tax year 2013/2014. Her personal pension plan
has a pension input period aligned with the tax year.
Both Gwen and Sarah have previously received a forecast of their State Pension benefits. These show that
Gwen will reach State Pension Age (SPA) on 6 July 2015 and that Sarah will reach SPA on her 66th birthday.
Assuming Gwen ceases working in November 2013, she will have accrued 31 years of National Insurance
Contributions (NICs). If Sarah stops working at age 55 she will have accrued 32 years of NICs.

14

AF3 October 2013 Examination Guide

Questions
To gain maximum marks for calculations you must show all your workings and express your
answers to two decimal places.

(a)

In respect of Gwens two retirement annuity plans:

(i)

(ii)

(b)

(4)

Outline the tax treatment of these payments when she commutes these funds in
November 2013.

(2)

Gwen is very interested in the trustees offer of Pension Increase Exchange.

(i)

Explain to Gwen how Pension Increase Exchange works.

(2)

(ii)

Calculate, showing all of your workings, Gwens starting income if she elects for
Pension Increase Exchange in December 2013.
You should assume she elects not to take any pension commencement lump
sum (PCLS).

(2)

Outline the factors that you would take into account when advising Gwen on whether or
not to take up this offer.

(6)

(iii)

(c)

Explain briefly why it is possible for her to commute these funds for lump
sum payments.

Gwen would like to crystallise her GH plc pension in December 2013 and her personal
pension plan in January 2014. She does not wish to take any PCLS from the GH plc scheme.
(i)

Calculate, showing all your workings, Gwens revised primary protection factor.

(ii)

Gwen intends to take up the offer of Pension Increase Exchange, as calculated in

part (b)(ii) above.
Calculate, showing all your workings, the lifetime allowance tax charge payable once
she has crystallised all of her pension arrangements, if she takes the excess over her
personal lifetime allowance as income.

(d)

(4)

(8)

Gwen intends to use the PCLS she takes from her personal pension plan to purchase a
holiday property and then place the balance of the funds into a drawdown arrangement from
which she will draw an ad-hoc income.
State the additional information you would require from Gwen before you could advise her on
a suitable investment strategy for these funds.

Questions continue over the page

15

(8)

AF3 October 2013 Examination Guide

(e)

Sarah would like to maximise her personal contribution to her personal pension plan for
the tax year 2013/2014.
(i)

(ii)

(f)

(g)

Calculate, showing all your workings, the maximum gross tax relievable contribution
she can make in the tax year 2013/2014 without incurring an annual allowance
tax charge. Assume no changes are made to the pension input period.

(10)

Describe in detail, using calculations to support your answer, how the tax relief will
be awarded in respect of the contribution calculated in Part (e)(i) above and the impact
on Sarahs overall tax situation. You should assume she has no other taxable income.

(11)

Gwen and Sarah would like to ensure that, on first death, the survivor can receive an income
from the deceaseds pension funds and then on second death, Jack will benefit from any
remaining funds.
Explain how a spousal by-pass trust works, outlining any benefits or limitations that
may apply.

(12)

State why, based on their current circumstances, Gwen will receive a full Basic State
Pension (BSP) and Sarah will not.

(3)

(ii)

Outline how Gwens BSP will be taxed once in payment.

(4)

(iii)

Assuming Sarah does stop working at age 55, explain briefly how she can still ensure
that she receives her full BSP.

(4)

Total marks available for this question:

80

(i)

16

AF3 October 2013 Examination Guide

SECTION B
Both questions in this section are compulsory and
carry an overall total of 80 marks
Question 2
Jim, aged 42, established Aqua Supplies Ltd in 2002. The company has 93 full-time employees and 26
part-time employees. Jim has calculated that, on average, at least 20% of the employees take home pay is
in respect of overtime.
Jims only pension provision is a self-invested personal pension scheme (SIPP). This was established by a
transfer in of 190,000, from a previous employers scheme. The company has been making annual
contributions of 10,000 since 2006.
The assets of the SIPP consist of 20,000 in cash and 265,000 in individual shares. In 2012 the SIPP
borrowed 30,000 and currently 20,000 of this loan is outstanding.
The company operates from a commercial unit owned outright by Aqua Supplies Ltd. Jim believes the
market value of this unit is around 220,000. Jim, who has an adventurous attitude to risk, would like to
place this property into his SIPP. He would also like the SIPP to borrow additional funds so that he can take
advantage of further investment opportunities.
Aqua Supplies Ltd currently offers employees membership of a group personal pension (GPP).
The company contributes 5% of their basic salary and employees can contribute if they wish to do so.
The companys staging date for auto-enrolment is 1 May 2014. Jim would like to maintain the current
scheme if possible, and has stated that he wishes to continue to pay an employer contribution of 5% of
basic salary. He would prefer not to use the qualifying earnings definition when ensuring the minimum
contribution requirements are met.

17

AF3 October 2013 Examination Guide

Questions
(a)

Outline the process that must be followed in order that the property can be placed into
the SIPP as an in-specie contribution.

(5)

Outline five benefits and five drawbacks to Jim of the SIPP owning the property, rather
than it continuing to be owned by Aqua Supplies Ltd.

(10)

Jim believes that if the property is valued at 220,000, the maximum additional borrowing, the
SIPP can undertake is 242,500. Explain, using calculations to support your answer, why
this is not the case.

(6)

State the criteria that must be met so that Jim can maintain the current GPP for
auto-enrolment purposes.

(5)

Outline the contributions that must be paid under each of the three tiers available to an
existing defined contribution scheme so that at least minimum contributions are being
paid from October 2018.

(10)

Recommend how the contributions to the Aqua Supplies Ltd GPP should be structured
from October 2018.

(4)

Total marks available for this question:

40

(i)

(ii)

(b)

(c)

(d)

(i)

(ii)

Questions continue over the page

18

AF3 October 2013 Examination Guide

Question 3
Robert, aged 45, is divorced with no dependants. After leaving university, he started working for
Ketterman Engineering Ltd and immediately joined their contracted-out defined benefit pension scheme.
He was a member of this scheme until he left their employment after being made redundant. This is his
only pension.
The details of his membership of the Ketterman Engineering defined benefit scheme are:
Date of joining
Date of leaving
Accrual rate
Scheme pension age
Additional benefits
Method of GMP revaluation
Revaluation of non GMP benefits

1 January 1991
31 December 2011
1/80th pension plus 3/80th pension commencement lump sum
65
50% dependants pension
Fixed
Statutory minimum

Ketterman Engineering Ltd has now closed the defined benefit scheme both to new members and in respect
of further accrual for existing members. The latest valuation shows the scheme is in deficit. Robert is
concerned about Ketterman Engineerings financial strength.
When he left employment, Robert received a statement showing a cash equivalent transfer value (CETV)
of 285,000. He recently received a revised statement showing a CETV of 310,000. Included with this was
a note from the Trustees stating that the schemes current underfunding had been ignored in arriving at
this figure. A transfer value analysis report based on this latest CETV shows a critical yield of 5.9%.
Robert, who is in excellent health, has a cautious attitude to risk. He is currently working on a fixed term
contract in the UK but has been offered work in Canada. If he makes the move Robert expects that he will
remain there and plans to retire at age 60.

19

AF3 October 2013 Examination Guide

Questions
(a)

(b)

(c)

(d)

In respect of Roberts CETV of 310,000:

(i)

Describe, in detail, to Robert how his CETV was calculated.

(ii)

Explain why the schemes current underfunding may have been ignored when Roberts
CETV was calculated.

(10)

(4)

Explain to Robert how a change in the following assumptions may have led the trustees to
increase his CETV.
(i)

Consumer Prices Index.

(3)

(ii)

Life expectancy.

(3)

(iii)

Investment returns.

(2)

Based on the information available, state six reasons why Robert should consider:
(i)

leaving his benefits within the Ketterman Engineering Ltd defined benefit scheme;

(6)

(ii)

transferring the benefits to a new scheme.

(6)

If Robert moves to Canada, he would consider transferring his benefits in the

Ketterman Engineering Ltd scheme to a qualifying recognised overseas pension scheme
(QROPS) in Canada.
Outline the reporting requirements of a QROPS.

(6)

Total marks available for this question:

20

40

AF3 October 2013 Examination Guide

NOTE ON MODEL ANSWERS

The model answers given are those which would achieve maximum marks. However, there are
alternative answers to some question parts which would also gain high marks. For the sake of clarity
and brevity not all of these alternative answers are shown. An oblique (/) indicates an equally
acceptable alternative answer.

Model Answer for Question 1

(a)

(b)

(c)

(i)

Gwen has reached the minimum age of 60.

There are only two small pots payments and neither exceeds 2,000.
The rules of the retirement annuity plans permit them to be taken as small pots payments.

(ii)

25% of the fund value will be paid tax free and the balance will be taxed as Gwens
earned income.

(i)

She will receive a higher starting income, but will forgo some or all of the future increases
to the pension in payment.

(ii)

38,000 - (48 months x %) = 28,880

28,880 x 1.22 = 35,233.60

(iii)

Candidates would have gained full marks for any six of the following:

Expectation of inflation.

Life expectancy/health.

Income needs now and in the future.

Other income/assets available.

Importance of the increases in payment offered by the scheme.

Impact on the lifetime allowance tax charge.

Perceived lack of value/cross-over breakeven point.

Impact on death benefits/dependants pension.

Impact on rate of Income Tax paid.

(i)

(ii)

Value of benefits crystallised

35,234 x 20 = 704,680
+ (Personal Pension Plan of 1,300,000 + Retirement annuity plans totalling 3,400
= 1,303,400)

= 2,008,080 value of benefits crystallised in 2013/2014.

Value of benefits at A Day = 1,500,000 x 1.18 = 1,770,000

1,770,000 - 135,000
= 1.09 revised primary protection factor
1,500,000

Personal lifetime allowance available

Underpinned lifetime allowance of 1,800,000 x revised primary protection factor of 1.09
= 1,962,000 personal lifetime allowance.
Lifetime allowance tax charge payable

2,008,080 - 1,962,000 = 46,080 in excess of her personal lifetime allowance

x 25% lifetime allowance tax charge = 11,520 tax payable

21

AF3 October 2013 Examination Guide

(d)

(e)

(i)

Planned withdrawals from the drawdown funds?

Health/life expectancy.
Attitude to risk.
Capacity for loss.
What other assets does Gwen have?
Where are they invested/current investment split?
Ethical preferences?
When does she plan on purchasing an annuity/time span for the investment?

The following was one of many acceptable ways candidates could have set out their answer
and gained full marks.
2011/2012 Carry Forward

Total pension input was 90,000 therefore 40,000 needs to be carried forward from
earlier years.

Pension input in 2008/2009 was 15,000 so 35,000 is carried forward to 2011/2012.

Pension input in 2009/2010 was 16,000 so 5,000 can be carried forward to 2011/2012
leaving 29,000 available to carry forward to 2012/2013.
2012/2013 Carry Forward

Total pension input was 92,000 therefore 42,000 needs to be carried forward.

29,000 available to carry forward from 2009/2010 leaving a further 13,000 to be carried
forward from 2010/2011.

Pension input in 2010/11 was 17,000 so 13,000 carried forward to 2012/2013 leaves
20,000 available to carry forward to 2013/2014.
2013/2014

Annual allowance of 50,000 plus carry forward of 20,000 from 2010/2011 gives a total
pension input possible, without incurring a tax charge, of 70,000.

Sarahs employer is contributing 14,000 leaving Sarah with a gross contribution

of 56,000.

(ii)

Sarah will receive 20% tax relief at source, by making a net contribution of
56,000 x 0.8 = 44,800.
Her basic rate band of 32,010 will be increased by the gross pension contribution of
56,000 to 88,010, which will provide her with an additional 20% tax relief.
This will be claimed via her self-assessment tax return.

Her adjusted net income will be reduced to 102,000 - 56,000 = 46,000.

As a result she will not have any tax charge to pay on her child benefit, saving her
20.30 x 52 = 1,055.60 in tax.

She will reclaim her lost personal allowance of 2,000/2 = 1,000, saving an additional
1,000 x 0.4 = 400 tax.

22

AF3 October 2013 Examination Guide

(f)

(g)

(i)

On first death, pension benefits will be nominated to the trust, thereby remaining outside of the
survivors estate for Inheritance Tax (IHT).
The survivor will be a beneficiary and a trustee, so can draw an income or take loans. Loans will
be repaid from the survivors estate on death, thereby reducing their estate for IHT.
Jack will also be a beneficiary and will gain full access to the funds on the survivors death.
Lump sum benefits from the drawdown plan or any other crystallised funds will suffer a 55%
tax charge.
The trust is complex/will incur periodic and exit charges/is expensive to run.

Gwen will reach State Pension Age (SPA) before 6 April 2016 and therefore only needs
30 years National Insurance Contributions to receive a full Basic State Pensions.
Sarah will need at least 35 years National Insurance Claims (NICs) as she will reach SPA
after 6 April 2016 when the rules change.

(ii)

The Basic State Pension will be paid gross and any tax owed will be collected via Gwens
private pension income by adjusting her tax coding.

(iii)

Paying three years of Class III NICs within six years of the end of the tax years she
has missed.

23

AF3 October 2013 Examination Guide

Models Answer for Question 2

(a)

(i)

(ii)

The current market value of the property is established.

Aqua Supplies Limited then create a legal debt to pay an equivalent monetary sum into
the self-invested personal pension scheme (SIPP).
A separate agreement between Aqua Supplies Limited and the SIPP allows the property
to be used in consideration of this debt.

Benefits

Rental income is not taxed within the pension.

Rental income does not count towards Jims annual allowance.

It is protected from creditors.

No tax to pay on gains in value when the SIPP sells the property.

Increases the borrowing potential of the SIPP.

Drawbacks
Candidates would have gained full marks for any five of the following:

Illiquid asset.

Paying it into the SIPP reduces the value of the company.

Costs/complexity will impact on the performance of the SIPP.

Potential annual allowance tax charge payable by Jim.

Company/ Jim have reduced control over the asset.

The company must now pay a market rent to the SIPP

(b)

Maximum permitted borrowing is 50% of net assets.

The 20,000 of existing borrowing means the SIPP has net assets of 485,000.
The maximum borrowing is 50% of this figure, i.e. 242,500, however the existing borrowing
must be included in this total, therefore once the existing borrowing is taken into account this
gives maximum additional borrowing of 222,500.

(c)

Candidates would gain full marks for any five of the following:

The scheme must not require a workers consent to join.

A worker must not be required to provide any information or make any choices when joining
the scheme.

The scheme must allow a worker to join from the first day of employment.

Minimum contribution levels must be paid into the scheme.

Worker contributions must be deducted through payroll.

The provider must confirm the scheme can be used for auto-enrolment purposes.

(d)

(i)

TIER 1

9% of basic pay/pensionable pay with employer contributing at least 4%.

TIER 2

8% of basic pay/pensionable pay where on average across the scheme 85% of earnings
are pensionable with employer contributing at least 3%.
TIER 3

7% of all earnings with employer contributing at least 3%.

(ii)

Employer pays 5% of basic pay and employees pay a minimum of 4% gross.

24

AF3 October 2013 Examination Guide

Model Answer for Question 3
(a)

(i)

(ii)

(b)

(c)

(d)

His benefits were calculated at date of leaving and then revalued to age 65 at 4% fixed
rate for his Guaranteed Minimum Pension (GMP) benefits and using an assumed rate of
Consumer Prices Index (CPI) for non-GMP benefits.
The pension benefits were then capitalised using an annuity rate that includes a 50%
spouses pension and then added to the revalued pension commencement lump sum.
This lump sum was then discounted using an assumed rate of investment growth to the
date of the cash equivalent transfer value (CETV) calculation.
The employer wishes to encourage transfers away and is prepared to cover the
additional cost.
Employer covenant is strong so the trustees are confident the deficit will be eliminated.
Short time remaining on the Recovery Plan.

(i)

An increase in CPI will mean his pension at 65 will be greater and once in payment, will
increase at a higher rate.

(ii)

An increase in life expectancy will mean his pension will be paid for longer and therefore
that annuity rates have reduced.

(iii)

A decrease in investment returns will mean his CETV is assumed to grow at a slower rate.

(i)

Transferring doesnt match his attitude to risk/critical yield is high for his attitude to risk.
He has no other pension benefits.
He will lose the inflation proofing/guarantees on the benefits.
Pension Protection Fund (PPF) protection is available.
There will be costs/charges associated with transferring the funds.
Simpler/reduced need for ongoing advice.

(ii)

Candidates would have gained full marks for any six of the following:

Could transfer the benefits to a Qualifying Recognised Overseas Pension Scheme

(QROPS).

Investment timeframe at least 15 years/sufficient time before intending to draw benefits.

He wishes to take his benefits before the scheme Normal Retirement Age.

He has no need of the spouses benefits.

He is concerned about the financial strength of the employer/scheme may enter the PPF.

The transfer value is not reduced at the moment/future CETVs may take account of
scheme underfunding.

Would provide lump sum death benefits payable to whoever he chooses.

The QROPS must notify HM Revenue & Customs if pension income commences, any lump sums
are paid/transfers made, or death benefits are paid out where these occur within 10 years of the
date the transfer is received by the QROPS.

25

AF3 October 2013 Examination Guide

All questions in the April 2014 papers will be based on English law and practice applicable in the tax
year 2013/2014, unless stated otherwise and should be answered accordingly.

The Tax Tables which follow are applicable to the October 2013 and April 2014 examinations.
The Tax Tables for the October 2014 examination can be found online on the CII website
www.cii.co.uk.

26

AF3 October 2013 Examination Guide

INCOME TAX
RATES OF TAX
Starting rate for savings*
Basic rate
Higher rate
Additional rate
Starting-rate limit
Threshold of taxable income above which higher rate applies
Threshold of taxable income above which additional rate applies
Child benefit charge from 7 January 2013:
1% of benefit for every 100 of income over

2012/2013
10%
20%
40%
50%
2,710*
34,370
150,000

2013/2014
10%
20%
40%
45%
2,790*
32,010
150,000

50,000

50,000

*Restricted to savings income only and not available if taxable non-savings income exceeds starting
rate band.
MAIN PERSONAL ALLOWANCES AND RELIEFS
Income limit for Personal Allowance
Personal Allowance (basic if born after 5 April 1948)
Personal Allowance (if born between 6 April 1938 and 5 April 1948)
Personal Allowance (if born before 6 April 1938)
Married/civil partners (minimum) (if born before 6 April 1935) at 10%
Married/civil partners (if born before 6 April 1935) at 10%

100,000 100,000
8,105
9,440
10,500 10,500
10,660 10,660
2,960
7,705

3,040
7,915

25,400
2,100

26,100
2,160

Enterprise Investment Scheme relief limit on 1,000,000 max

30%

30%

Seed Enterprise Investment relief limit on 100,000

50%

50%

Venture Capital Trust relief limit on 200,000 max

30%

30%

Income limit for age-related allowances

Blind Persons Allowance

the Personal Allowance reduces by 1 for every 2 of income above the income limit irrespective of age
(under the income threshold).
where at least one spouse/civil partner was born before 6 April 1935.
Child Tax Credit (CTC)
- Child element per child (maximum)
- family element
Threshold for tapered withdrawal of CTC

2,690
545
15,860

27

2,720
545
15,910

AF3 October 2013 Examination Guide

NATIONAL INSURANCE CONTRIBUTIONS

Class 1 Employee
Lower Earnings Limit (LEL)
Primary threshold
Upper Accrual Point
Upper Earnings Limit (UEL)

Weekly
109
149
770
797

Monthly
473
646
3,337
3,454

Yearly
5,668
7,755
40,040
41,450

CLASS 1 EMPLOYEE CONTRIBUTIONS

Contracted-in
Contracted-out rate (final
rate/contracted-out (money
salary)
purchase)
Nil
Nil
12%
10.6%
12%
12%
2%
2%

Total earnings per week

Up to 149.00*
149.01 770.00
770.01 797.00
Above 797.00

*This is the primary threshold below which no NI contributions are payable. However, the lower earnings
limit is 109 per week. This 109 to 149 band is a zero rate band introduced in order to protect lower
earners rights to contributory State benefits e.g. Basic State Pension.
CLASS 1 EMPLOYER CONTRIBUTIONS
Contracted-in rate
Contracted-out rate
Final
Money
salary
purchase
Nil
Nil
Nil
13.8%
10.4%
13.8%
13.8%
13.8%
13.8%
13.8%
13.8%
13.8%

Total earnings per week

Below 148.00**
148.01 770.00
770.01 797.00
Excess over 797.00
** Secondary earnings threshold.
Class 2 (self-employed)
Class 3 (voluntary)
Class 4 (self-employed)

Flat rate per week 2.70 where earnings exceed 5,725 per annum.
Flat rate per week 13.55.
9% on profits between 7,755 - 41,450
2% on profits above 41,450.

PENSIONS
TAX YEAR
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014

LIFETIME ALLOWANCE
1,500,000
1,600,000
1,650,000
1,750,000
1,800,000
1,800,000
1,500,000
1,500,000

ANNUAL ALLOWANCE
215,000
225,000
235,000
245,000
255,000
50,000
50,000
50,000

ANNUAL ALLOWANCE CHARGE

20% - 45% members tax charge on the amount of total pension input in excess of the annual allowance.
LIFETIME ALLOWANCE CHARGE
55% of excess over lifetime allowance if taken as a lump sum.
25% of excess over lifetime allowance if taken in the form of income, which is subsequently taxed
under PAYE.

28

AF3 October 2013 Examination Guide

INHERITANCE TAX
RATES OF TAX ON DEATH TRANSFERS

2012/2013 2013/2014

Transfers made after 5 April 2013

- Up to 325,000
- Excess over 325,000
- Lifetime transfers to and from certain trusts
*For deaths after 5 April 2013, a lower rate of 36% applies where at least 10% of
deceaseds net estate is left to charity.

Nil
40%
20%

Nil
40%
20%

No limit
55,000
No limit

No limit
325,000
No limit

Lifetime transfers
- Annual exemption per donor
- Small gifts exemption

3,000
250

3,000
250

Wedding/civil partnership gifts by

- parent
- grandparent
- other person

5,000
2,500
1,000

5,000
2,500
1,000

MAIN EXEMPTIONS
Transfers to
- UK-domiciled spouse/civil partner
- non-UK-domiciled spouse/civil partner (from UK-domiciled spouse)
- UK-registered charities

100% relief: businesses, unlisted/AIM companies, certain farmland/building

50% relief: certain other business assets
Reduced tax charge on gifts within 7 years of death:
- Years before death
0-3
- Inheritance Tax payable
100%

3-4
80%

4-5
60%

5-6
40%

6-7
20%

CAR BENEFIT FOR EMPLOYEES

The charge for company car benefits is based on the carbon dioxide (CO2) emissions.
reduction for high business mileage users.

There is no

For 2013/2014:
Cars that cannot emit CO2 have a 0% charge.
The percentage charge is 5% of the cars list price for CO2 emissions of 75g/km or less.
For cars with CO2 emissions of 76g/km to 94g/km the percentage is 10%.
For cars with CO2 emissions of 95g/km to 99g/km the percentage is 11%.
Cars with CO2 emissions of 100g/km have a percentage charge of 12% and thereafter the charge
increases by 1% for every complete 5g/km to a maximum of 35% (emissions of 215g/km and above).
There is an additional 3% supplement for diesel cars not meeting Euro IV emission standards. However,
the maximum charge remains 35% of the cars list price.
Car fuel

1.
2.
3.
4.
5.

The benefit is calculated as the CO2 emissions % relevant to the car and that % applied
to a set figure (21,100 for 2013/2014) e.g. car emission 100g/km = 12% on car benefit scale.
12% of 21,100 = 2,532.

Accessories are, in most cases, included in the list price on which the benefit is calculated.
List price is reduced for capital contributions made by the employee up to 5,000.
Car benefit is reduced by the amount of employees contributions towards running costs.
Fuel scale is reduced only if the employee makes good all the fuel used for private journeys.
All car and fuel benefits are subject to employers National Insurance Contributions (Class 1A)
of 13.8%.

29

AF3 October 2013 Examination Guide

PRIVATE VEHICLES USED FOR WORK

Cars
On the first 10,000 business miles in tax year
Each business mile above 10,000 business miles
Motor Cycles
Bicycles

2012/2013 Rates

2013/2014 Rates

45p per mile

25p per mile
24p per mile
20p per mile

45p per mile

25p per mile
24p per mile
20p per mile

MAIN CAPITAL AND OTHER ALLOWANCES

2012/2013
Plant & machinery (excluding cars) 100% annual investment allowance (first year)
Plant & machinery (reducing balance) per annum
Patent rights & know-how (reducing balance) per annum
Certain long-life assets, integral features of buildings (reducing balance) per annum
Energy & water-efficient equipment
Zero emission goods vehicles (new)
Qualifying flat conversions, business premises & renovations

2013/2014

25,000
18%
25%
8%
100%
100%
100%

250,000
18%
25%
8%
100%
100%
100%

Motor cars: Expenditure on or after 01 April 2013 (Corporation Tax) or 06 April 2013 (Income Tax)
CO2 emissions of g/km:
95 or less*
96-130
131 or more
Capital allowance:
100%
18%
8%
first year
reducing balance
reducing balance
*If new
Research & Development:

Capital expenditure

100%

MAIN SOCIAL SECURITY BENEFITS

Child Benefit

First child
Subsequent children
Guardians allowance

Employment and Support Allowance Assessment Phase

Age 16 24
Aged 25 or over
Main Phase
Work Related Activity Group
Support Group
Attendance Allowance

Lower rate
Higher rate

Retirement Pension

Single
Married

Pension Credit

Single person standard minimum

guarantee
Married couple standard minimum
guarantee
Maximum savings ignored in calculating
income

Bereavement Payment (lump sum)

Widowed Parents Allowance
Jobseekers Allowance

Age 16 - 24
Age 25 or over

Statutory Maternity, Paternity and

Adoption Pay

30

2012/2013

20.30
13.40
15.55
Up to 56.25
Up to 71.00

2013/2014

20.30
13.40
15.90
Up to 56.80
Up to 71.70

Up to 99.15 Up to 100.15
Up to 105.05 Up to 106.50
51.85
77.45

53.00
79.15

107.45
171.85

110.15
176.15

142.70

145.40

217.90

222.05

10,000.00

10,000.00

2,000.00
105.95

2,000.00
108.30

56.25
71.00

56.80
71.70

135.45

136.78

AF3 October 2013 Examination Guide

CAPITAL GAINS TAX

EXEMPTIONS

2012/2013

2013/2014

10,600
5,300
6,000

10,900
5,450
6,000

Individuals:
Up to basic rate limit
Above basic rate limit

18%
28%

18%
28%

Trustees and Personal Representatives

28%

28%

Individuals, estates etc

Trusts generally
Chattels proceeds (restricted to five thirds of proceeds exceeding limit)
TAX RATES

Entrepreneurs Relief* Gains taxed at:

10%
10%
Lifetime limit
10,000,000 10,000,000
*For trading businesses and companies (minimum 5% employee or director
shareholding) held for at least one year.

CORPORATION TAX
Full rate
Small companies rate
Small companies limit
Effective marginal rate
Upper marginal limit

2012/2013

2013/2014

24%
20%
300,000
25%
1,500,000

23%
20%
300,000
23.75%
1,500,000

2012/2013

2013/2014

20%
77,000
75,000

20%
79,000
77,000

VALUE ADDED TAX

Standard rate
Annual registration threshold
Deregistration threshold

31