10) PENSION PRODUCTS

Question 1

Who is entitled to a state pension?

Answer 1

Payable from 65 years currently to both men and women (66 yrs from 2020 and 67 yrs from 2028) - should have contributed to National Insurance during working life

Question 2

What is the difference between defined-benefit and defined-contribution pension schemes?

Answer 2

Defined-benefit: Pension fund operated by or on behalf of employer, Scheme level investment decisions, invested in a range of equities, bonds, gilts and cash - to pay pension ben to existing pensioners, and also to cover members who will be future pensioners, Can be reassured about a certain level of pension ben. (Final salary scheme)

Defined contribution: Members have more say in what mix of funds the pension can be invested, But have no guaranteed level of pension as pension level will depend on the performance of the investment funds,

Question 3

What tax-reliefs and allowances are available on contributions to personal and occupational pension schemes?

Answer 3

UK earner or resident under 75 years can receive tax relief at highest marginal rate on pension contributions up to the maximum of 100 percent of UK earnings or earnings up to £3600.
The maximum allowed pension contribution that people can invest in a tax year is (for 2020-2021) is £40,000

Question 4

Difference between AVC and FSAVC in pensions (Addl voluntary contributions and Free-standing addl voluntary contributions)

Answer 4

AVCs are addl contributions to occupational pension scheme. In final salary scheme these contributions can purchase addl years’ service. However, mostly for money-purchase arrangements, with ususally employer bearing the cost and admin of these contri
(CONTRI ARE FROM GROSS SALARY i e BEFORE TAX DEDUCTIONS RECEIVES FULL TAX RELIEF)

FSAVCs - extra pension contri made by indi thro a sepa pension provider other than occupational pension, keeps it independent arrangements from pension contri through employer - may attract more cost and admin as member is bearing these and not employer - *(CONTRI ARE FROM TAXED SALARY AND TAX RELIEF AT HIGHER AND ADDITIONAL RATE PAYERS NEED TO CLAIM THROUGH INCOME TAX SELF-ASSESSMENT)

Question 5

What are the eligibility rules for a workplace pension?

Answer 5

1. Should not be contributing to another workplace 
   pension
2. Should be 22 yrs or over
3. Earning more than £10,000
4. Under state pension age
5. Works in UK

Question 6

What are the options for taking benefits from a personal pension?

Answer 6

1. Up to25% tax free lump sum
2. Annuity - (Payment of lump sum in exch for income -
   can be moved to a diff provider after shopping
   around for best annuity rates)
3. Flexi-access drawdown (FAD)
4. Uncrystallised lump sum

Question 7

How does flexi-access drawdown in a pension work?

Answer 7

FAD -
* Pension fund moved to drawdown acc
* can take 25% of of value of pension fund tax-free
* While only tax free sum is taken £40,000 allowance
remains
* Access can be through lump sum or flexible income
* Balance of the fund remains invested
* If benefits more than 25% is drawn then it is subject
to income tax
* Once more than tax free cash is drawn then the
MPAA (Money Purchase Annual Allowance) of
£4,000 is triggered

*

Question 8

What is UFPLS? (in pensions)

Answer 8

UFPLS - Uncrystallised Fund Pension Lump Sum

Pension fund is not moved to a drawdown acc like FAD
Means pension fund remains invested as no lump sum is taken or FAD is drawn
Member can use fund to draw a series of lump sum to meet their needs
25% of each payment is tax free with balance subject to income tax
When a UFPLS is taken, MPAA is triggered

Question 9

Describe various options that might apply when a pension scheme member dies

Answer 9

Pension benefits upon death dep on the scheme the member was in, and also if death was during employment or in retirement
Defined -benefit scheme -
*In service, lump sum is avai either as fixed sum or a multiple or earnings. Additionally, a spouse/dependent pension can be paid
*After retirement -
1. either continued pension for fixed period OR
2. Pay spouse/dependent pension paid as a proportion of pension that was being paid to member

Defined-contribution scheme-
*In-service - Can provide income or lump-sum

• After retirement - Payment to spouse/dependent/civil partner
  1. continued pension OR
  2. Lifetime annuity paid to an agreed period OR
  3. Lifetime annuity protection lump sum OR
  4. continuing drawdown income