1 - Background To Pensions

Question 1

Pension plans are called what?

Answer 1

Registered pension scheme (RPS)

Question 2

6 Tax benefits of a pension

Answer 2

• 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

Question 3

What employers had to provide a workplace pension from April 2019? And what scheme started to encourage employees to contribute to a pension scheme?

Answer 3

All employers

Auto enrolment scheme

Question 4

Can annuity rates be different for different genders?

Answer 4

No must be the same

Question 5

Public sector net cash requirement

Answer 5

Difference between incomings and outgoings for a country

Question 6

What method is used to fund the state pension?

Answer 6

Pay as you go - people paying NI now find state pension now

Question 7

If an annuity rate falls would that benefit a client?

Answer 7

No, want annuity rate to be as high as possible

Question 8

What did TOPA introduce? (4) And who is this available to?

Answer 8

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

Question 9

Defined benefits

Defined contributions

Answer 9

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

Question 10

How does an accrual rate work e.g. 1/60th accrual rate for £12k salary over 20yrs

Answer 10

1/60th x £12k salary = £200 annual scheme pension per yr of service x 20yrs = £4,000 guaranteed annual pension scheme

Question 11

Who’s responsibility is it to ensure the pension scheme assets meet the employees pension benefit for a DB scheme?

Answer 11

The employer

Question 12

What does effect does a communication factor have on DB pension income? E.g. 12:1 ratio

Answer 12

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

Question 13

Advantages (2) and disadvantages (3) of DB scheme

Answer 13

+ 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

Question 14

Advantages (4) and disadvantages (2) of DC scheme

Answer 14

+ 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

Question 15

Did you used to be able to opt out of state pension? What would the effect of this be?

Answer 15

Only earning related state pension elements

Some NI contributions would be redirected into a pension scheme and then could hope for greater returns

Question 16

What did gov. Guarantee when switching to single tier state pension?

Answer 16

No one would be disadvantaged by switch and gave top-up payment to those that were disadvantaged to ensure no one was

Question 17

Factors leading to a pension crisis (5)

Answer 17

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

Question 18

Two main gov. aims for pensions

Answer 18

Ensure pensioners enjoy a min. standard of living

Reduce the cost of the state pension

Question 19

2 options that gov. give to encourage people to seek advice around pensions

Answer 19

• 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.

Question 20

P11D benefit

Answer 20

benefits employers have provided to employees and directors

Question 21

How much must be contributed to an auto enrolment pension? As qualifying earnings, basic earnings or total earnings?

Total
By employer
Employee

Answer 21

**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

Question 22

What do you have to consider when considering pension alternatives?

Answer 22

Accessibility

Taxation rules

Limits to investing compared to pensions

Question 23

Do you pay IHT on a pension?

Answer 23

No!!!