1 - Background To Pensions Flashcards
Pension plans are called what?
Registered pension scheme (RPS)
6 Tax benefits of a pension
- income tax relief on contributions
- deductible business expense for employer
- no CGT on pension growth
- IHT free on death
- 25% tax free lump sum
- pension freedoms e.g. take entire pension as cash
What employers had to provide a workplace pension from April 2019? And what scheme started to encourage employees to contribute to a pension scheme?
All employers
Auto enrolment scheme
Can annuity rates be different for different genders?
No must be the same
Public sector net cash requirement
Difference between incomings and outgoings for a country
What method is used to fund the state pension?
Pay as you go - people paying NI now find state pension now
If an annuity rate falls would that benefit a client?
No, want annuity rate to be as high as possible
What did TOPA introduce? (4) And who is this available to?
Available to defined contribution schemes only
Pension freedoms:
- 25% tax free lump sum
- leaving pension tax free post death prior to age 75
- Can take higher levels of pension drawdown
- Can use FAD to specify who to pass pension to using nominees and successors
Defined benefits
Defined contributions
DB - Benefits received are guaranteed. Based upon years of service, final salary, accrual rate
DC - contributions are invested and have multiple options then available upon retirement
How does an accrual rate work e.g. 1/60th accrual rate for £12k salary over 20yrs
1/60th x £12k salary = £200 annual scheme pension per yr of service x 20yrs = £4,000 guaranteed annual pension scheme
Who’s responsibility is it to ensure the pension scheme assets meet the employees pension benefit for a DB scheme?
The employer
What does effect does a communication factor have on DB pension income? E.g. 12:1 ratio
For every £12 of pension income, pension income will reduce by £1
So if income is £12,000
£12,000 / 12 = £1,000
Pension income is £12,000 - £1,000 = £11,000
Advantages (2) and disadvantages (3) of DB scheme
+ guaranteed benefits
+ scheme costs and funding met by employer
- too expensive for many employers
- little access to pension freedoms
- underfunding can lead to insolvency and loss of guaranteed benefits
Advantages (4) and disadvantages (2) of DC scheme
+ guaranteed contributions
+ employer meets scheme costs
+ capital growth potential as funds invested
+ access to pension freedoms
- no benefit guarantees
- benefits depend on contributions, growth, market conditions at retirement
Did you used to be able to opt out of state pension? What would the effect of this be?
Only earning related state pension elements
Some NI contributions would be redirected into a pension scheme and then could hope for greater returns
What did gov. Guarantee when switching to single tier state pension?
No one would be disadvantaged by switch and gave top-up payment to those that were disadvantaged to ensure no one was
Factors leading to a pension crisis (5)
Not enough savings from people for retirement
Changes in employer schemes from DB to DC
Pension scandals damaging reputation
Falling stock market and annuity rates
Pensions are complex
Two main gov. aims for pensions
Ensure pensioners enjoy a min. standard of living
Reduce the cost of the state pension
2 options that gov. give to encourage people to seek advice around pensions
- employer arranged advice allowance - Allows employer to pay for employees to receive financial information and advice upto £500 without it being taxed as a benefit in kind, taxed to employee as BIK over this
- pension advice allowance - members of DC scheme can take upto £500 out of the scheme tax free and can be taken upto 3 times per member, for putting towards cost of financial advice (not only pension advice). Must be paid directly to financial advisor.
P11D benefit
benefits employers have provided to employees and directors
How much must be contributed to an auto enrolment pension? As qualifying earnings, basic earnings or total earnings?
Total
By employer
Employee
**qualifying earnings **
8% total as a min.
3% min. from employer
5% min. from employee
OR
Basic earnings
9% total
4% from employer
5% from employee
OR
Total earnings
7%
3% from Employer
4% from employee
What do you have to consider when considering pension alternatives?
Accessibility
Taxation rules
Limits to investing compared to pensions
Do you pay IHT on a pension?
No!!!
