Free CII R04 Practice Questions: HMRC Pension Tax Regime

CII means Chartered Insurance Institute. R04 is Pensions and Retirement Planning in the Diploma in Regulated Financial Planning. Use this focused CII R04 page as a short practice test for HMRC Pension Tax Regime. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CII questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CII questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: HMRC Pension Tax Regime

Maya is reviewing the death-benefit wording on her SIPP.

Client facts:

• She is 74 and the SIPP is worth £1,250,000.
• She has no transitional protection and has not taken any pension commencement lump sums.
• Her remaining lump sum and death benefit allowance is the standard £1,073,100.
• She wants her husband and two adult children to benefit, but none needs an immediate lump sum.
• The SIPP can offer either a lump-sum death benefit or beneficiaries’ flexi-access drawdown, subject to the scheme administrator’s discretion and her expression of wish.

Which recommendation is most appropriate?

• A. Crystallise the SIPP now, because only uncrystallised pension funds are tested or taxed when paid as death benefits.
• B. Update the expression of wish to request beneficiaries’ flexi-access drawdown, so a pre-75 death need not create a lump-sum LSDBA excess and beneficiaries can manage taxable withdrawals if death occurs at or after 75.
• C. Nominate only her husband, because pension death benefits paid to a spouse are tax-free regardless of the member’s age at death.
• D. Request a lump-sum death benefit, because all benefits paid after a pre-75 death are tax-free without reference to the lump sum and death benefit allowance.

Best answer: B

What this tests: HMRC Pension Tax Regime

Explanation: Death-benefit planning depends on both the member’s age at death and the form in which benefits are taken. If Maya dies before age 75, beneficiaries’ drawdown can normally be paid income-tax-free if the funds are designated within the required two-year period, and it is not a lump-sum death benefit tested against the lump sum and death benefit allowance. A lump-sum death benefit, however, could create a taxable excess because her fund exceeds her remaining allowance. If she dies at or after age 75, benefits paid to beneficiaries are normally taxed as the recipient’s pension income at their marginal rates, so drawdown may still help the family control the timing and amount of taxable withdrawals. An expression of wish does not bind the administrator, but it is the practical planning step.

• A lump-sum route is not automatically tax-free for the full fund before age 75; the lump sum and death benefit allowance can restrict the tax-free amount.
• Crystallising the SIPP does not remove the relevance of age at death, benefit form, or recipient taxation.
• Spouse status does not make all pension death benefits tax-free after age 75; recipient marginal-rate taxation can still apply.

Beneficiaries’ drawdown can avoid an immediate lump-sum allowance issue on death before 75 and allows income timing if death occurs at or after 75.

Question 2

Topic: HMRC Pension Tax Regime

Priya, aged 48, is reviewing her pension input for 2025/26. She is UK resident, is not subject to the tapered annual allowance or the money purchase annual allowance, and has no unused annual allowance to carry forward. The standard annual allowance is £60,000.

Pension saving in 2025/26:

• Group personal pension using relief at source:
  • Priya paid £28,000 net.
  • Basic-rate tax relief of £7,000 was added.
  • Her employer paid £15,000.
• Defined Benefit scheme:
  • Opening pension: £12,000 a year.
  • Closing pension: £13,500 a year.
  • No automatic lump sum applies.
  • For annual allowance purposes, value DB benefits at 16 times the annual pension and revalue the opening value by 5% before comparison.

What is Priya’s annual allowance position for 2025/26?

• A. Total pension input is £49,400, so there is no annual allowance excess.
• B. Total pension input is £50,000, so there is no annual allowance excess.
• C. Total pension input is £64,400, giving an annual allowance excess of £4,400.
• D. Total pension input is £57,400, so there is no annual allowance excess.

Best answer: C

What this tests: HMRC Pension Tax Regime

Explanation: For annual allowance purposes, money purchase pension input includes gross member contributions plus employer contributions. Priya’s relief-at-source contribution is £35,000 gross (£28,000 net plus £7,000 tax relief), and the employer contribution of £15,000 is also included, giving £50,000 DC input. For the DB scheme, the opening value is £12,000 × 16 = £192,000, revalued by 5% to £201,600. The closing value is £13,500 × 16 = £216,000, so the DB pension input is £14,400. Total pension input is therefore £64,400. With no carry forward and no special reduced allowance applying, the excess over the £60,000 annual allowance is £4,400 and is subject to the annual allowance charge.

• Using £57,400 treats Priya’s personal contribution as the net amount paid, but annual allowance testing uses the gross contribution including basic-rate relief.
• Using £49,400 excludes the employer contribution, but employer contributions count towards the pension input amount.
• Using £50,000 counts only the DC pension input and ignores the DB accrual, which must also be included.

Her gross DC input is £50,000 and her DB pension input is £14,400, making total pension input £64,400 against the £60,000 annual allowance.

Question 3

Topic: HMRC Pension Tax Regime

In 2025/26, Priya, aged 64, asks an adviser to arrange the first payment from her uncrystallised personal pension since 6 April 2024. She wants to maximise any tax-free retirement lump sum.

Relevant history:

• A defined benefit pension came into payment in 2021; she believes no separate lump sum was taken.
• A personal pension paid her a tax-free cash sum in 2023.
• She has no HMRC lifetime allowance protection and no transitional tax-free amount certificate.
• Her current pension provider has asked for evidence before deciding how much of the new payment can be paid tax-free.

What is the best action for the adviser?

• A. Use Priya’s bank statements showing pension credits, because these prove whether earlier payments were taxable or tax-free.
• B. Obtain written confirmations from the previous scheme administrators of actual tax-free lump sums and allowance usage, then support any certificate request before payment.
• C. Use the latest annual statement for each old pension, because current fund values determine the tax status of previous retirement benefits.
• D. Ask the current provider to treat 25% of the new fund as tax-free, because previous benefits are no longer relevant after 6 April 2024.

Best answer: B

What this tests: HMRC Pension Tax Regime

Explanation: The tax-free treatment of a new retirement lump sum depends on verified previous use of the lump sum allowance and, where relevant, the lump sum and death benefit allowance. For pre-6 April 2024 benefits, evidence from earlier scheme administrators is normally needed to confirm the lifetime allowance usage and the actual tax-free lump sums paid. This is especially important where a defined benefit pension came into payment with little or no lump sum, because a transitional tax-free amount certificate may preserve a more accurate allowance position if obtained before the first relevant post-6 April 2024 benefit event. Client recollection, bank receipts, or current fund values do not establish the tax character of previous pension benefits.

• Bank statements show money received, but not the pension tax treatment or allowance usage behind the payment.
• Assuming 25% of the new fund is tax-free ignores the need to test available lump sum allowances after earlier benefits.
• Current annual statements do not verify the historic tax-free amount or lifetime allowance usage from earlier crystallisations.

Official scheme-administrator evidence is needed to verify previous lump sum and allowance use before confirming the tax treatment of the new retirement benefit.

Question 4

Topic: HMRC Pension Tax Regime

A client aged 62 has several registered pension schemes with combined funds of more than £1,073,100. He has no transitional protection and is considering taking a pension commencement lump sum now while keeping a large DC fund invested for possible death benefits for his adult children.

In 2025/2026 pension planning, what is the main purpose of the lump sum and death benefit allowance in this situation?

• A. To restrict the amount of pension income he can draw each year from annuities, scheme pensions, and drawdown arrangements.
• B. To limit the total amount of relevant pension lump sums and lump sum death benefits that can be paid tax free, with excess amounts generally taxable as pension income.
• C. To remove income tax from all pension death benefits paid after age 75 if they are paid within two years of death.
• D. To cap the pension contributions he and his employer can make each tax year without an annual allowance charge.

Best answer: B

What this tests: HMRC Pension Tax Regime

Explanation: The lump sum and death benefit allowance is a tax-free allowance for relevant pension lump sums. It is wider than the lump sum allowance because it also takes account of certain lump sum death benefits. In planning, it helps measure how much of a client’s pension commencement lump sums, tax-free elements of certain lump sums, and relevant death benefit lump sums can be paid without income tax. Where payments exceed the available allowance, the excess is generally taxed as pension income. It does not limit regular retirement income or replace the annual allowance for contributions.

• Regular pension income is not capped by the lump sum and death benefit allowance; income is taxed under the normal pension income rules.
• Contributions are controlled by the annual allowance, tapered annual allowance, and money purchase annual allowance rules, not by the lump sum and death benefit allowance.
• Death benefits after age 75 are not made tax free by this allowance; age at death and the form of benefit remain important for tax treatment.

The lump sum and death benefit allowance sets an overall tax-free limit for relevant lifetime lump sums and lump sum death benefits.

Question 5

Topic: HMRC Pension Tax Regime

Amira, aged 62, asks about taking tax-free cash from a SIPP in 2025/26.

Relevant facts:

• In 2021/22 she took benefits from a DB scheme. The benefit crystallisation event statement recorded 50% of the standard lifetime allowance used; the standard lifetime allowance was £1,073,100.
• The only tax-free lump sum she actually received before 6 April 2024 was £70,000.
• She holds no lifetime allowance protection and has had no relevant benefit crystallisation event since 5 April 2024.
• She now wants to crystallise part of her SIPP and take the highest tax-free lump sum available.
• Her planned current-year contributions are within the annual allowance.

What is the best professional action before advising on the SIPP lump sum?

• A. Treat the matter as annual allowance planning, because her current-year contributions are within the allowance and the SIPP lump sum can therefore be paid tax-free.
• B. Apply for a transitional tax-free amount certificate using evidence of the £70,000 lump sum before the SIPP crystallisation, then assess her remaining lump sum allowance.
• C. Crystallise the SIPP first and then ask the scheme administrator to issue a certificate if the standard transitional deduction proves unfavourable.
• D. Ignore the pre-2024 DB crystallisation because the lifetime allowance has been abolished, and assess the SIPP lump sum only against the current lump sum allowance.

Best answer: B

What this tests: HMRC Pension Tax Regime

Explanation: Pre-6 April 2024 benefit crystallisations still matter under the post-lifetime allowance regime. Without a transitional tax-free amount certificate, a standard transitional calculation normally reduces the lump sum allowance by a deemed tax-free amount based on earlier lifetime allowance usage. Here, the standard deduction would be 25% of 50% of £1,073,100, which is £134,137.50. Amira actually took only £70,000 tax-free cash, so evidencing the actual amount could leave more lump sum allowance available for the SIPP crystallisation. This is separate from annual allowance planning, which deals with pension input and tax-relieved contributions, not the amount of tax-free lump sum available when benefits are drawn.

• Lifetime allowance abolition did not reset all earlier crystallisations; transitional rules link earlier usage to the new lump sum allowances.
• Being within the annual allowance avoids a pension input charge, but it does not decide tax-free cash entitlement.
• The certificate should be considered before the first relevant post-5 April 2024 crystallisation, not after the SIPP benefits have already been taken.

Her actual pre-2024 tax-free cash is lower than the standard transitional deduction, so a certificate considered before the first post-2024 crystallisation may preserve more lump sum allowance.

Question 6

Topic: HMRC Pension Tax Regime

Priya is reviewing the tax treatment of benefits from her late father’s registered SIPP.

The provider has confirmed that:

• Priya is an eligible beneficiary under the scheme.
• The fund has been designated to beneficiary’s flexi-access drawdown within two years of the provider being notified of the death.
• Priya wants to know whether future drawdown withdrawals will be paid free of income tax or taxed as her pension income.

Which further fact is needed before advising Priya?

• A. Priya’s age when each withdrawal is taken.
• B. Her father’s age at the date of death.
• C. Whether the SIPP was funded mainly by employer contributions.
• D. Whether Priya is named in her father’s will.

Best answer: B

What this tests: HMRC Pension Tax Regime

Explanation: For registered pension death benefits, the deceased member’s age at death is a key tax fact. Where funds are correctly designated to beneficiary’s drawdown within the required two-year period, benefits following death before age 75 are normally paid free of income tax. If the member dies at or after age 75, beneficiary drawdown payments are taxed as the recipient’s pension income at their marginal rate. Priya’s own age does not decide the income tax treatment of inherited drawdown. A will may be relevant to estate assets, but pension scheme death benefits are usually paid under scheme rules and provider discretion rather than under the will. The source of contributions does not determine the death-benefit income tax treatment.

• Priya’s age affects her own retirement planning, but not the before-75 or after-75 death-benefit tax rule.
• Being named in a will is not the decisive pension tax fact once the scheme has confirmed she is an eligible beneficiary.
• Employer or personal contribution history does not set the income tax treatment of beneficiary drawdown after death.

The member’s age at death determines whether beneficiary drawdown income is normally tax-free or taxable at the beneficiary’s marginal rate.

Question 7

Topic: HMRC Pension Tax Regime

Sanjay, a UK-resident higher-rate taxpayer, has enough relevant UK earnings to support his personal pension contributions.

His pension records for 2025/26 show:

• Relief-at-source personal pension: Sanjay pays £240 a month from his bank account, and the provider claims £60 a month from HMRC.
• Net pay occupational DC scheme: £300 a month is deducted from Sanjay’s gross salary before PAYE is calculated.
• Employer contribution: his employer pays £350 a month into the occupational scheme.

Ignore annual allowance issues. Which statement correctly describes the contributions and tax relief position?

• A. His gross personal contributions are £8,100, employer contributions are £4,200, and both personal contribution types receive provider-claimed basic-rate relief.
• B. His gross personal contributions are £6,480, employer contributions are £4,200, and no further higher-rate relief can arise because all member payments are treated as net of basic-rate tax.
• C. His gross personal contributions are £7,200, employer contributions are £4,200, and further higher-rate relief is relevant only to the relief-at-source payments.
• D. His gross personal contributions are £3,600, employer contributions are £7,800, and the payroll deductions count as employer contributions because they are made before PAYE.

Best answer: C

What this tests: HMRC Pension Tax Regime

Explanation: Under relief at source, the member pays a net amount and the pension provider claims basic-rate tax relief from HMRC. Sanjay’s £240 monthly payment is therefore grossed up by the £60 provider reclaim to £300 gross per month, or £3,600 a year. Under a net pay arrangement, the employee contribution is deducted from gross pay before PAYE, so the £300 monthly deduction is already a gross personal contribution and gives tax relief through payroll. That adds another £3,600 a year of gross personal contributions. The employer’s £350 monthly payment is not Sanjay’s personal contribution, so it is shown separately as £4,200 a year. As a higher-rate taxpayer, Sanjay may need to claim extra relief only for the relief-at-source personal pension payments; the net pay contributions have already reduced taxable pay.

• Treating the payroll deduction as employer funding is incorrect; it remains Sanjay’s own contribution even though it is deducted before PAYE.
• Grossing up the net pay contribution is incorrect; provider-claimed basic-rate relief applies to relief-at-source contributions, not net pay contributions.
• Using only the cash paid or deducted ignores that the £240 relief-at-source payment is grossed up to £300 by the provider’s HMRC reclaim.

The relief-at-source contribution is £300 gross per month and the net pay deduction is already a £300 gross personal contribution, while the employer’s £350 per month is separate employer funding.

Question 8

Topic: HMRC Pension Tax Regime

A client is considering an overseas pension transfer in 2025/26 before retiring abroad. The proposed transfer is from her UK SIPP to a Malta QROPS.

Which conclusion is most appropriate?

• A. The transfer should be free of UK pension tax because the fund is below the overseas transfer allowance and the QROPS is in the EEA.
• B. The transfer should be favoured because using a Malta QROPS will automatically prevent UK tax withholding on all future pension income.
• C. The only UK charge would be 25% of the excess over £1,073,100, so no tax charge arises on the transfer.
• D. The transfer is materially disadvantaged as proposed because a £120,000 overseas transfer charge would apply despite the fund being below the overseas transfer allowance.

Best answer: D

What this tests: HMRC Pension Tax Regime

Explanation: A recognised transfer from a UK registered pension scheme to a QROPS must be checked against both the overseas transfer allowance and the overseas transfer charge rules. The available overseas transfer allowance means there is no charge arising from an excess over £1,073,100. It does not itself create an exemption from the overseas transfer charge. Here, the client is not resident in the same country as the QROPS at the transfer date and there is no employment-linked exemption. The 25% charge would therefore be £120,000. That immediate tax cost is a major suitability factor and may outweigh potential benefits such as currency matching or overseas administration.

• Being below the overseas transfer allowance only removes an excess-allowance issue; it does not remove the overseas transfer charge test.
• The EEA location point is not enough to exempt the transfer under the current rules.
• A QROPS does not automatically eliminate UK tax withholding or local tax considerations on future pension income.

The transfer is below the overseas transfer allowance, but no overseas transfer charge exemption applies, so 25% of £480,000 is £120,000.

Question 9

Topic: HMRC Pension Tax Regime

Ravi is taking advice before moving a UK pension to an overseas arrangement.

Transfer facts:

• He is age 56 and has no transitional protection.
• The receiving arrangement is a QROPS.
• His overseas transfer allowance for 2025/26 is £1,073,100.
• He made an earlier QROPS transfer of £300,000 after 6 April 2024, which used part of this allowance.
• He now wants to transfer a further £900,000 from a UK registered pension scheme.
• The provider has confirmed that no overseas transfer charge applies other than any charge arising from exceeding the overseas transfer allowance.

What is the best conclusion for the adviser to explain?

• A. The whole £900,000 transfer is subject to a 25% charge because Ravi has already used part of his overseas transfer allowance.
• B. The transfer should be tested only against Ravi’s lump sum allowance and lump sum and death benefit allowance.
• C. No charge arises because the overseas transfer allowance only applies when pension commencement lump sums are paid.
• D. £773,100 of the proposed transfer is within the remaining overseas transfer allowance, and £126,900 is subject to a 25% charge.

Best answer: D

What this tests: HMRC Pension Tax Regime

Explanation: The overseas transfer allowance limits the amount an individual can transfer from UK registered pension schemes to QROPS without an allowance-related tax charge. For Ravi, the standard allowance is £1,073,100. His earlier post-6 April 2024 QROPS transfer used £300,000 of that allowance, so the remaining allowance is £773,100. A further transfer of £900,000 exceeds the remaining allowance by £126,900. On the facts given, that excess is subject to a 25% overseas transfer charge. The allowance is separate from the lump sum allowance and the lump sum and death benefit allowance, which deal with tax-free lump sums and certain death benefits rather than the gross amount transferred overseas.

• Charging the whole £900,000 ignores the remaining unused allowance of £773,100.
• Treating the allowance as relevant only to pension commencement lump sums confuses it with the lump sum allowance.
• Testing the transfer only against the lump sum allowances misses the specific role of the overseas transfer allowance for QROPS transfers.

The earlier £300,000 transfer reduces Ravi’s £1,073,100 overseas transfer allowance, leaving £773,100 available before the excess is charged.

Question 10

Topic: HMRC Pension Tax Regime

A 58-year-old client is reviewing whether to restart pension funding and consolidate pensions before taking retirement benefits.

Client facts:

• He has not yet taken any pension benefits.
• His main DC pension is worth £1,080,000.
• He applied for fixed protection 2016 in 2018 and still has the HMRC reference.
• His employer is willing to pay new pension contributions from next month.
• He wants to know how much pension commencement lump sum may be available when he retires at 60.

What is the best professional response?

• A. Base the pension commencement lump sum on 25% of the current fund value without checking the HMRC protection record.
• B. Tell him that any new employer contribution will automatically cancel all historic pension protection.
• C. Check the protection details and factor them into the advice before confirming contributions or benefit-drawing figures.
• D. Ignore the protection because the lifetime allowance has been abolished.

Best answer: C

What this tests: HMRC Pension Tax Regime

Explanation: Historic pension protections can still be relevant even though the lifetime allowance has been abolished. They may affect the client’s lump sum allowance and lump sum and death benefit allowance, and some protections can preserve a higher pension commencement lump sum entitlement than the standard allowance. The adviser should confirm the exact protection type, HMRC reference, application date, any previous benefit crystallisations, and scheme records before giving figures or recommending action. It would be unsafe to assume the standard lump sum position, and equally unsafe to dismiss the protection simply because the lifetime allowance regime has changed.

• Ignoring the protection overlooks the continuing relevance of protected lump sum allowances under the current regime.
• Saying that new employer contributions automatically cancel all historic protection is too broad and may be wrong under current rules.
• Using 25% of the current fund without checking protection could understate or misstate the available pension commencement lump sum.

Historic fixed protection may give higher lump sum allowances than the standard position, so it must be verified before planning contributions or benefits.

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