01. Context of pensions planning

Question 1

What are the 3 sources of where a pension might come from?

Answer 1

• The State.
• A workplace pension.
• A private pension arrangement.

Question 2

What did the Pensions Act 1995 do?

How? [2]

Answer 2

Set up regulatory & compensation schemes, ensuring greater protection for members of occupational pension schemes.

These included:

• Minimum funding requirement for schemes.
• Introduction of mandatory increases to pensions in payment.

Question 3

In 2001 accounting rules FRS17 were introduced. What did they require companies to do?

Answer 3

To report pension deficits & surpluses in the year they occurred.

Question 4

What did the Pensions Act 2004 introduce and what did it do?

Answer 4

• The Pension Protection Fund (PPF).
• Ensures members receive some protection should their employer become insolvent.

Question 5

After the introduction of the Minimum Income Guarantee in 1999, what was State Pension Credit introduced in 2003?

Answer 5

A means-tested benefit that tops up the income of the poorest pensioners.

Question 6

When were pension flexibilities introduced?

Answer 6

April 2015.

Question 7

When was A-Day?

Answer 7

6 April 2016.

Question 8

What was introduced on A-Day?

Answer 8

A single pension tax regime, replacing all previous regimes.

Question 9

What change was introduced on 6 April 2016 regarding the annual allowance?

Answer 9

Annual allowance tapering for high earners.

Question 10

Name 2 allowances that A-Day introduced.

Answer 10

• The annual allowance.
• The lifetime allowance.

Question 11

When was automatic enrolment introduced?

Answer 11

October 2012.

Question 12

What is the current SPA and since when?

Answer 12

• 66.
• October 2020.

Question 13

Name 5 challenges to pensions saving.

• Demographics x2.
• Performance.
• Views x2.

Answer 13

• People are living longer.
• Affordability (e.g. rising cost of living).
• Falling stock markets, gilt yields & consequently annuity rates.
• Pension scandals.
• Pensions are complex & people may think State Pension will be sufficient.

Question 14

Over the past few years, what 2 things have decimated annuity rates?

Answer 14

• Falling stock markets.
• Falling gilt yields (annuity rates based on gilt yields).

Question 15

What 2 demographic trends are influencing pensions and leading to a move away from DB schemes?

Answer 15

• Retirement population increasing.
• People living longer.

Question 16

Under DC schemes what 2 risks are borne by the member?

Answer 16

• Investor risk.
• Annuity risk.

Question 17

Name 4 incentives of saving for retirement for individuals.

• Tax x3.
• Pension (+).

Answer 17

• Tax relief on contributions.
• Ability to take a tax-free sum (PCLS).
• Fund investment profits are exempt from income tax & CGT.
• Pension flexibilities.

Question 18

Name an employer incentive of individuals saving for retirement.

Answer 18

Contributions made by an employer are treated as a business expense for corporation tax or income tax purposes.

Question 19

When an employer provides advice to employees, what is it not treated as?

Answer 19

A benefit in kind.

Question 20

When providing financial advice to employees, what is the limit for exemption from income tax & NICs?

Answer 20

£500.

Question 21

Name 5 disincentives of saving for retirement.

• Tax x2.
• Accessibility.
• Views x3.

Answer 21

• Limit to the amount that can be taken as a tax-free lump sum.
• Limit on the amount of individual contributions which get tax relief.
• Benefits (mostly) cannot be taken before minimum pension age of 55.
• Perception they are expensive with high fees.
• Most find pensions complex.
• General mistrust due to past scandals & bad press.

Question 22

Name the 4 types of State Pension pre 6 April 2016.

Answer 22

• Basic State Pension, plus:
• Graduated Retirement Benefit (1961 - 1975)
• State Earnings Related Pension Scheme (SERPS 1978 - 2002)
• State Second Pension (S2P 2002 - 2016).

Question 23

What are the 3 factors that benefits from DB schemes are based on?

Answer 23

• Pensionable service.
• Pensionable remuneration.
• The accrual rate (e.g. 1/60th)

Question 24

What is a cash balance scheme?

Answer 24

A type of money purchase scheme, but it provides a mix between DB & DC, by promising a certain lump-sum payment at a specified age.

Question 25

Name 3 ways a member can take their pension benefits.

Answer 25

• A lifetime annuity.
• Flexi-access drawdown (FAD).
• An uncrystallised funds pension lump sum (UFPLS).

Question 26

What is a flexible lifetime annuity?

Answer 26

One where the annual rate of income can be reduced each year by any amount.

Question 27

Name 3 persons pensions death benefits can be paid to.

Answer 27

• Dependants.
• Nominees.
• Successors (individuals nominated by a dependant or nominee or previous successor).