R03 Pension planning: free practice questions

1. Question 1 of 5

   A higher-rate taxpayer has £8,000 of dividends taxed at 35.75%. A gross personal pension contribution of £8,000 brings them all into the basic rate band. What is the total tax relief on the contribution?

   Option A: £3,600 (45%)Option B: £2,000 (25%)Option C: £1,600 (20%)Option D: £3,200 (40%)

   Show answer

   The answer is A: £3,600 (45%)

   Basic rate relief at source = £1,600. Moving £8,000 of dividends from 35.75% to 10.75% saves £2,000. Total £3,600, an effective 45%.

   Why the other options are wrong

   B

   Basic rate relief at source must be added.

   C

   That's only the basic rate relief at source.

   D

   The dividend rates differ by 25 points, not 20.

2. Question 2 of 5

   Why might a Lifetime ISA appeal more than a pension for a basic-rate taxpayer saving for retirement?

   Option A: Lifetime ISA withdrawals can be taken from 55 penalty-freeOption B: The government bonus is 40% for basic-rate taxpayersOption C: The Lifetime ISA allows £60,000 a year with a bonusOption D: The 25% bonus matches basic rate relief, and withdrawals from 60 are tax-free

   Show answer

   The answer is D: The 25% bonus matches basic rate relief, and withdrawals from 60 are tax-free

   For a basic-rate taxpayer, the 25% bonus is equivalent to 20% relief on the gross amount, and withdrawals from 60 are tax-free, whereas 75% of pension withdrawals are taxable. Higher-rate relief, employer contributions and the higher limit favour pensions for others.

   Why the other options are wrong

   A

   Penalty-free retirement withdrawals start at 60.

   B

   The bonus is 25%.

   C

   The Lifetime ISA limit is £4,000.

3. Question 3 of 5

   What is the main argument for starting pension contributions early in a career?

   Option A: Tax relief is higher for younger peopleOption B: Early contributions can be withdrawn tax-free in an emergencyOption C: The annual allowance is larger for young peopleOption D: Longer compounding in a broadly tax-free fund

   Show answer

   The answer is D: Longer compounding in a broadly tax-free fund

   Early contributions benefit from longer compounding, and the taper for high earners reinforces this. The drawbacks are lack of access before minimum pension age and the chance that circumstances change.

   Why the other options are wrong

   A

   Relief depends on tax rate, not age.

   B

   Pension savings can't usually be accessed before 55 (57 from 2028).

   C

   It's the same at every age.

4. Question 4 of 5

   From April 2027, what could be the combined effective tax on an inherited pension where the member died after 75 and the beneficiary pays 45%?

   Option A: About 67%Option B: 85%, as 40% + 45%Option C: 45%Option D: 40%

   Show answer

   The answer is A: About 67%

   In the worst case, 40% IHT leaves 60%, and income tax at 45% of that leaves 33% for the beneficiary: an effective rate of about 67%.

   Why the other options are wrong

   B

   The income tax applies only to what's left after IHT.

   C

   That ignores the IHT.

   D

   That ignores the income tax.

5. Question 5 of 5

   A client has £15,000 of income taxed at 40%. What size of relief at source contribution gives the most higher-rate relief without wasting any?

   Option A: £60,000 grossOption B: £15,000 net, grossed up to £18,750Option C: £12,000 grossOption D: £15,000 gross, paid as £12,000 net

   Show answer

   The answer is D: £15,000 gross, paid as £12,000 net

   Higher-rate relief comes from extending the band by the gross contribution. Matching the gross contribution (£15,000, or £12,000 net) to the income taxed at 40% maximises relief, subject to the annual allowance.

   Why the other options are wrong

   A

   Only £15,000 of income is taxed at 40%.

   B

   It's the gross contribution that should match the higher-rate income.

   C

   That leaves £3,000 of higher-rate income unrelieved.

R0 Exam Prep is an independent revision tool. It is not produced, endorsed by or affiliated with the Chartered Insurance Institute (CII). Questions and explanations are original. Use it alongside the official study text. About R0 Exam Prep