3 - Retirement Planning - (24/80) Flashcards
Government Role in Pensions
Increasing State Pension Age New State Pension Auto-enrolment LISA ISA allowance increases
Defined Benefit Accrual Rate
Multiplication factor of salary depending on years of service
Typically 1/60 or 1/80
i.e. 20 years service can equal 20/60 or 33% of final salary
Pension Tax Incentives
Income tax relief on contributions
No income tax/CGT on growth
Tax-free PCLS (25%)
Pension taxed at marginal income rates on crystallisation, not CGT
Basic State Pension
£137.60 per week
For men born before April 1951
For women born before April 1953
Changed in 2016
How to qualify for State Pension
Claim 4 months before SPA
SPA = 65
67 in 2028
68 in 2039
10 years of NIC to qualify, 35 years to get full
New State Pension
£179.60 per week
For men and women born after April 1951
Receive higher of BSP and NSP
Requires 35 years of NIC for full amount
Defined Benefit Lump Sum
Public sector gives lump sum as well as income
Private sector allows you to give up some income for a lump sum through commutation
Defined Benefit Advantages and Disadvantages
A: Clear income Keeps up with inflation Helps retention No employee risk
D: Scheme/employer take risk Must appoint trustees, actuaries etc Scheme have to pay to compensate retirees Lost if employer goes bust
DB favours employees
Defined Contribution Advantages and Disadvantages
A: Clear end date Good performance = more pension Lower employer costs and risk Access to pot at 55
D: Members carry risk Poor performance = less pension Unclear final benefits Can run out
DC favours employers
Pension Annual Allowance
Annual allowance = £40,000 or £3,600 if no income
Tapers down by £1 for every £2 over £240,000 - down to £4,000 min
Can carry forward 3 years’ unused
Personal pensions use ‘relief at source’ - have to claim tax back beyond basic rate
Employer pensions use net pay
Pension Lifetime Allowance
LTA = £1,070,100
Comes into effect after a ‘benefit crystallisation event’ (BCE)
LTA hits after 75
Can be inherited tax free if under 75
Going over the LTA:
Income = 25%, then hit by income tax
Lump sum = 55%
DB value = annual pay x 20
Lifetime Allowance Protections
Used to protect those with pots over the LTA when the government reduces it
Primary = factor of [Value - LTA / LTA] multiplied by the LTA, e.g. can go from £1.5m to £1.8m Enhanced = unlimited LTA, but no further contributions allowed Fixed = old LTA still applies Individual = old LTA, but can't have primary also-
Pension Taxation on Death
If under 75 = beneficiaries receive tax-free
If over 75 = taxed at beneficiaries’ income rates
Can take pension tax-free before 55 if in ill health (have <12 months to live)
Benefit Crysallisation Events (BCEs)
Cause LTA charges to trigger
Cashing out pension Unused funds after 75/death Lump sums Payments e.g. fees, errors Taking an income Transferring funds overseas
Pension Benefits Refund
DB = <2 years DC = <30 days
First £20k taxed at 20%, rest at 50%
Small Pension Pots and Trivial Commutation
Small pots (DC) = no tax on 3 pots under £10,000 each
Trivial commutation (DB) = Commute pension tax free if total value under £30,000
Money Purchase Annual Allowance (MPAA)
Forces annual pension contribution allowance down from £40,000 to £3,600
Triggered by taking pension, getting income, going into drawdown etc.
Can’t be rolled forward
Types of Non-Registered Pensions
Employer-Financed Retirement Benefit Schemes = separate to employer schemes
- > not corporation tax deductible
- > taxed on income and CGT
Qualifying Registered Overseas Pension Schemes = transferred from UK
- > exempt from UK tax; taxed in new jurisdiction
- > transfer is a BCE
- > no LTA cap
Qualifying Non-UK Pension Schemes = for British expats and non-doms
Pension Law and Regulation - DB Transfers
Must take advice if value is over £30,000
Adviser must be qualified to advise on transfers
Records must be kept indefinitely
Pension Law and Regulation - Employment Law
Can bring pension discrimination to a tribunal
Employees can opt out of AE but will be enrolled again every 3 years
Employers are allowed to dictate pension scheme rules e.g. min. age
Pension Law and Regulation - Divorce
Valued as at the day of the divorce
Split = part of pension value goes to each partner (clean break)
Portion agreed/pension attachment order = % of future pension income (only when in retirement)
Can ‘offset’ pension against other assets -> partner takes all other assets but leaves pension
Pension Law and Regulation - Bankruptcy
Pension assets are not handed to the bankruptcy trustee
Regular and state pension excluded from estate
Pension Law and Regulation - Pension Protection Fund
Protects DB members when employer goes insolvent
100% of value if over retirement age
90% of value if under retirement age (up to £41,461 per year)
Cap increased by [3% x years served over 20] up to 100%
e.g. 24 years service = 12% higher cap = ~£46,400
Income increases by 2.5% per year
Pension Law and Regulation - Financial Assistance Scheme
Helps DB members not covered by PPF
Covers shortfall of wound-up funds
90% of benefits up to £36,717
Pension Law and Regulation - Trust vs Contract-Based
Trust-based = all DB funds, master trust DC funds = run by trust; net pay taxation Contract-based = GPP etc. = contract directly between scheme and employee
Auto-Enrolment requirements
> 22
< SPA
Earn >£10,000
Min. contribution = 8%
Employer min. = 3%
Defined Benefit - Rules
Normal Retirement Age Eligibility Employer contribution levels Accrual rate Pensionable income (salary vs salary + bonus)
Defined Benefit - Payments
Can top up with AVCs
Can add years of service or pay into a separate DC fund
Contributions must be paid into the scheme within 19 days
Must keep in line with the contribution schedule
Defined Benefit - Retirement Options
Pension Commencement Lump Sum (separate or commuted)
Early/late retirement affects final pay
Ill health allows benefits <55 or NRA
Defined Contribution - Types of DC Pension
GPP = Collection of personal pensions; lower admin costs; trust not needed PPP = For self-employed; Stakeholder or Retirement Annuity Contract (pre-1988) SIPP = Greater selection e.g. shares and property; can borrow against 50% of assets
Small Self-Administered Scheme = Occupational; <12 members and all must have a say in admin
-> Can borrow 50% against assets
Taking a Retirement Income
Deferring state pension -> Earn 1% more for every 9 weeks deferred
-> Can apply to lump sum or income
DB -> Can take at 55 or at the scheme Normal Retirement Age (reduced if early)
DC = Income or lump sum
- > Uncrystallised Funds Pension Lump Sum (UFPLS) = all in one go or mini lump sums
- > Flexi-Access Drawdown = income
- > Annuity purchase
Types of Annuity
Guaranteed = linked to gilts; low rates
With-profits = benefit from investment growth paid as bonuses Unit-linked = linked to a fund; income varies Flexible = decrease by agreed amount
Enhanced life = higher payments for smokers, obese etc.
Impaired life = higher payments for chronic illness
NEST fees
- 3% ongoing
1. 8% contributions
Joint Tenants vs Tenants in Common
Joint Tenants = Passes to SURVIVOR
Tenants in Common = Passes to ESTATE
