07. Secured pensions

Question 1

What is crystallisation?

Answer 1

The taking of an income or the provision of a lump-sum payment (in the form of a PCLS, an UFPLS or as a lump-sum death benefit).

Question 2

DC schemes don’t have to offer any flexible access options. Members would need to ___.

Answer 2

transfer their benefits to a scheme that does.

Question 3

PCLS: In most cases ~ of the fund is paid tax free, with the balance taxable as pension income via PAYE assuming member has sufficient ~~.

Answer 3

• 25%
• LSA available.

Question 4

Small pots payments relate to ~ schemes.

Answer 4

DC

Question 5

The limit for small pots payments is:

Answer 5

3 small pots from non-occupational schemes at £10k each

(or unlimited number from unconnected occupational pension schemes)

Question 6

Are small pots payments from uncrystallised funds tested against the member’s LSA or LSDBA?

Answer 6

No.

Question 7

Trivial pots payments relate to ~ schemes.

Answer 7

DB

Question 8

The commutation limit for trivial pts payments is £~?

Answer 8

£30k.

Question 9

For trivial pots payments, what is the nominated date?

Answer 9

The date, chosen by the member, on which all their pension benefits are valued.

Question 10

How long does the member have to start commuting their trivial benefits from their nominated date before they’d have to choose another nominated date & start again?

Answer 10

3 months.

Question 11

Any small pots payments made before the nominated date are ___ when calculating the total for trivial pots benefits.

Answer 11

not included

Question 12

Any trivial pots payment must be made within how long from the *commutation period**? i.e. the start of when the 1st commutation payment was made.

Answer 12

12 months.

Question 13

How many commutation periods can an individual have in their lifetime?

Answer 13

Just 1.

Question 14

Name 2 occasions when a trivial commutation lump-sum death benefit can be paid.

Answer 14

• a survivor commutes a survivor’s pension; or
• a member dies within the guarantee period of a pension they are receiving and the recipient of the guarantee wishes to commute the remaining payments.

Question 15

The maximum trivial commutation lump-sum death benefit is £30,000 ___, not ___.

Answer 15

• per scheme
• across all schemes.

Question 16

Name 2 conditions in order to be able to commute a survivor’s pension for trivial commutation lump-sum death benefit.

Answer 16

• must be paid to a dependant or nominee of the member
• payment must extinguish the survivor’s entitlement to pension & lump-sum death benefits under the scheme.

Question 17

How do you value annuity income / income drawdown in payment before 6 Apr 2006?

Answer 17

Annual income being received / Max GAD withdrawal at 5 Apr 2006 x 25.

Question 18

How do you value annuity income / uncrystallised DB scheme in payment after 5 Apr 2006?

Answer 18

Income at commencement x 20 + any PCLS taken.

Question 19

Name 2 ways a scheme pension can be paid.

Answer 19

• directly from the scheme’s assets; or
• by an insurance company selected by the scheme administrator

Question 20

Name 4 benefits of paying a scheme pension directly from the scheme assets.

• capital
• funds
• rates/health
• health

Answer 20

• no immediate outflow of capital
• funds remain invested
• may benefit from an increase in annuity rates or worsening of member’s health
• benefits from ‘mortality gain’

Question 21

Name 4 drawbacks of paying a scheme pension directly from the scheme assets.

• £
• health
• risk
• ease

Answer 21

• payments must be made no matter what
• members/their dependants may live longer
• scheme retains longevity & investment risk
• more admin for scheme

Question 22

What is the only way a DB pension can pay benefits in retirement?

Answer 22

A scheme pension.

Question 23

Before a DC pension can offer a scheme pension, what must it offer?

Answer 23

A lifetime annuity.

Question 24

Name 3 ways a scheme pension can provide a benefit following the death of a member.

Answer 24

• a dependant’s scheme pension;
• a guarantee period; and
• a lump-sum death benefit.

Question 25

Dependant’s scheme pension choice of how to receive income for:

• DB scheme
• DC scheme

Answer 25

• no choice
• can choose to buy a dependant’s annuity rather than a dependant’s scheme pension

Question 26

A dependant’s scheme pension doesn’t have to be paid for life:

• surviving spouse
• children

Answer 26

• may cease if spouse remarries
• independence age may be reduced from 23 to 18 or 21 (scheme rules)

Question 27

It is not possible to commute a dependant’s scheme pension for a cash lump sum except on the grounds of ~.

Answer 27

triviality.

Question 28

What is the maximum guarantee period for a scheme pension?

Answer 28

10 years max.

Question 29

Name 3 ways a scheme can cease payment to a recipient under a guarantee.

Answer 29

• they get married
• they reach 18
• they stop being in FT education.

Question 30

Name 4 criteria which might make lifetime annuities more attractive.

Answer 30

• lower ATR
• low/no capacity for loss
• need a guaranteed income
• no desire to manage investment of their pension fund
• longer life expectancy
• medical condition so cn get enhanced annuity rate

Question 31

What is a flexible lifetime annuity?

Answer 31

A lifetime annuity set up on or after 6 April 2015 that allows the income paid from the annuity to fall by more than the ‘prescribedamount’.

Question 32

When a lifetime annuity is purchased from uncrystallised funds, what is the timeframe for paying a PCLS?

Answer 32

No earlier than 6 months before or 12 months after the date the member becomes entitled to the lifetime annuity.

Question 33

Unlike a scheme pension, how does a lifetime annuity differ?

Answer 33

Can choose how you wish to set up the income

Question 34

Name 3 ways a lifetime annuity can provide a benefit following the death of a member.

Answer 34

• survivor’s annuity
• guarantee period
• annuity protection

Question 35

What are the 2 main factors affecting annuity rates?

Answer 35

• long-term bond yields
• longevity expectations

Question 36

Annuity rates fall as interest rates ~.

Answer 36

fall

Question 37

If life expectancy of the annuitant pool is slightly lower, annuity rates will be slightly ~.

Answer 37

higher

Question 38

Impaired life annuities offer higher annuity rates to who and why?

Answer 38

Individuals with lower than average life expectancies (typically < 5 years) as the annuity provider would expect to pay them an income for a shorter period of time.

Question 39

Name 2 methods an annuity provider can calculate the annuity rate for an impaired life annuity.

Answer 39

• assess how long they are expected to live then treat them as older
• Anderson Mortality Tables

Question 40

What are enhanced annuities?

Answer 40

Similar to impaired life annuities, enhanced annuities offer higher rates to individuals with particular medical conditions or lifestyles (e.g. diabetes sufferers, smokers and the obese).

Question 41

Name 2 investment-linked annuities.

Answer 41

• with-profit annuities
• unit-linked annuities

Question 42

Why is a unit-lined annuity higher risk than a with-profit annuity?

Answer 42

No smoothing of returns in good years to level out the bad years.

Question 43

Taking income from which type of lifetime annuity will trigger the MPAA, conventional or flexible lifetime annuities?

Answer 43

Flexible annuities.

Question 44

What is the difference between conventional & flexible annuities regarding decreasing income?

Answer 44

Conventional: limited ability to decrease.
Flexible: can decrease by greater amount.

Question 45

Scheme pension does not trigger the MPAA rules unless the scheme pension is paid directly from the funds of what?

Answer 45

A DC pension with less than 11 other members (including dependants) receiving a schemepension.

Question 46

Guarantee periods for:

• scheme pensions
• lifetime annuities

Answer 46

• max 10 years
• no time limits