4 Flashcards
What is a state pension and when does it start? (2)
- Pension income provided by the government
- State pension age is currently 66 years
What kind of of income is state pension tax wise?
Taxed as non-savings income
How do you qualify for the full state pension?
Dependent on national insurance contribution (NIC) record - 35 years for full pension
How much does the full state pension pay?
tax year 24/25: £221.20 per week (approx. £11,500 p.a.)
How does deferal of state pension work? (2)
- Minimum deferral period is nine weeks
- Pension will increase by 1% for every nine weeks (just under 5.8% per year)
What are the features of an occupational scheme? (3)
- provided by an employer
- run on behalf of their employees
- Trust-based to ring-fence the assets from sponsor
What are the two types of occupational schemes?
- Defined benefit scheme (final salary)
- Defined contribution scheme (money purchase)
What does a DB scheme do?
Provides a pension annuity, or ‘defined benefit’ at retirement
For DB schemes, what three factors are benefits based on?
- Years of service as a member
- Member’s final pensionable salary
- Scheme’s accrual rate
What is a DB scheme’s accrual rate? (2)
- Rate at which member’s pension benefits increase while member of the scheme
- For example, 1/60th of final salary for each year of service
What other benefits can you get from a DB scheme apart from a pension annuity?
- NHS provides tax-free cash payment in addition to pension entitlement
- Other schemes allow tax-free cash to be taken, but only via commutation
What is commutation of a DB scheme?
Giving up part or all of pension payable from retirement in exchange for immediate lump sum.
What are the advantages of a DB scheme? (4)
- Certainty of cash flows in retirement
- Benefits keep pace with inflation if member leaves
- Popular with employees
- Helps recruitment/retention of staff
What are the disadvantages of a DB scheme? (4)
- Scheme carries all the investment risk
- Expensive for the employer
- Not portable for the member
- Typically, no death benefits for the member
How does defined contribution scheme work? (2)
- Employer contributes to scheme a specific amount or ‘defined contribution’
- Often a fixed percentage of employee’s pay
For DC schemes, benefit at retirement depends on: (4)
- Returns on assets in the scheme
- Value of the fund at retirement
- Yields on annuities at retirement available to the individual
- Type of pension annuity purchased by the individual
What are the advantages of DC schemes? (6)
- More popular with employer
- Can’t go insolvent
- Good fund performance could lead to higher benefits for members
- Funds can be transferred to a new employer or personal pension
- Pension freedoms
- Death benefits
Why are DC schemes more popular with employers? (4)
Knows when commitment ends
Known contributions
Lower cost to run
No liability to meet
What are the disadvantages of DC schemes? (3)
- Members carry all the investment/annuity risk
- Benefits at retirement are unknown
- Poor fund performance could lead to lower benefits
Who are the usual providers of personal pension plans?
Usually contract based, serviced by an insurance company
What are the similarites of personal pension plans with defined contribution pensions?
- Risk is with the pension holder
- Remain the property of the holder and are therefore portable
What are personal pension plans?
Pensions that you arrange yourself
What are the different settlements of pension benefits in divorce? (3)
- Offsetting
- Attachment order
- Pension sharing
For settlements of pension benefits in divorce, what is offsetting? (2)
- A way to divide assets in a divorce
- By balancing the value of a pension against other assets of similar value
What is an example of pension offsetting?
One partner might keep the pension while the other keeps the family home
For settlements of pension benefits in divorce, what is an attachment order?
court-issued legal document that directs a portion of one’s pension benefits to be paid to spouse upon retirement
What is pension sharing as a pension divorce settlement?
Court issues an order splitting the pension rights between the member and spouse
What’s an advantage of pension sharing (divorce settlement)?
Creates a clean break
How does pension sharing work?
Existing scheme can allow ex-spouse to join scheme or transfer to another registered scheme
On A-day (6 April 2006), pension simplification where different pension regimes were consolidated under one regime.
What were the different regimes? (6)
- Annual allowance
- Lifetime allowance
- Tax free lump
- Minimum retirement age
- Wider range of investment options
- Enabled employee to take benefits while still working
What did the Pension Freedom Rules (2015-16) do? (2)
- Increased flexibility
- Allows unlimited access to pension funds
What do you need to be able to make contributions to a pension and have the full annual allowance?
To make contributions, an individual must have relevant earnings and pay tax
How much is the maximum pension annual allowance?
AA £60,000 per annum
How much is your pension annual allowance if you are not earning and not paying tax? (2)
- Maximum contribution qualifying for tax relief is £3,600 (net contribution £2,880)
- Others can contribute
Is the tapering of AA possible?
Yes, AA may be tapered up to a minimum contribution of £10,000 if threshold income >£200k and adjusted income >£260k
What are the rules about carrying forward AA? (3)
- Unused AA can be carried forward for up to three years
- Has to be a member of pension scheme in year to be carried forward
- Must be supported by relevant earning in the year contribution is paid
When does your AA turn into a money purchase annual allowance (MPAA)?
When you have accessed your pension benefits
How much is money purchase annual allowance (MPAA) and can it be carried forward?
- Future contributions limited to £10,000 per annum
- This cannot be carried forward
What is threshold income?
Taxable income less pension contributions
What are the threshold income ranges at which one should start considering the tapering of the annual allowance? (2)
- <= £200,000 - no tapering of annual allowance
- > £200,000 - consider adjusted income
What is adjusted income? (2)
- Taxable income plus pension contributions
- > £260,000 - tapered annual allowance
How much does an additional-rate taxpayer’s annual allowance taper when their adjusted income is over £260,000? (3)
- £1 for every £2 for which adjusted income exceeds £260k
- Max reduction is £50k (from £60k -> £10k)
- This applies when adjusted income is £360k or more
How much tax relief do you get when making a pension contribution?
Relief at donor’s marginal rate of tax
How does tax relief work when making contributions into a personal pension scheme? (3)
- Deemed to be paid net of basic rate income tax
- Pension can reclaim BRT from HMRC
- Further claim for HRT/ART relief must be made with HMRC through PAYE code or tax return (extend bands)
How does tax relief work when making contributions into an occupational pension scheme? (2)
- Deducted from gross salary by the employer
- Attract full tax relief at source and do not require a subsequent claim
What are the different retirement options? (4)
- Pension commencement lump sum (PCLS)
- Purchase an annuity/scheme pension
- Uncrystallised funds pension lump sum (UFPLS)
- Flexi-access drawdown (FAD)
What are the features of pension commencement lump sum (PCLS)? (2)
- Take a tax-free lump sum from pension
- 25% pension value subject to a cap of £268,275
Where do you buy an annuity?
Open market option: shop around for the best quote
What are guaranteed annuities?
Pays for a minimum period of time, even if the pensioner dies
What is the tax rate on annuity payments?
Income is taxed at MR
What can happen to an annuity policy if the policy holder dies?
Transfer of annuity on death to a beneficiary, such as spouse
How long do annuity payments last for?
Must be payable for at least the lifetime of the pensioner
What are the different ways annuity payments change through life of policyholder?
Annuities can stay level, increase or decrease if it’s linked to retail price index (RPI) or performance of an investment fund
What happens what you take UFLPS or flexi-access drawdown?
Will trigger the MPAA
What are the similarities between UFPLS and FAD? (2)
- Funds remain invested
- No limits on benefits/income taken
What are the differennces between UFPLS and FAD? (2)
- UFPLS: All withdrawals 25% tax free, 75% taxable
- FAD: Can determine how much of drawdown is income vs. tax free lump sum
What are the features of uncrystallised funds pension lump sum (UFPLS)?
All withdrawals 25% tax free, 75% taxable
What is the tax rate on FAD income?
Income taxed at MR
What is a tax advantage of pensions on death?
Pension avoids death estate (IHT purposes)
What changes the tax rate applied to benefits that a pension beneficiary takes?
If pension holder dies before or after 75
What are the benefit options available to a beneficiary of a pension? (3)
- Tax-free lump sum
- Drawdown pension
- Buy a lifetime annuity
What are the tax rates for pension benefits if the holder dies before 75? (2)
- Any excess taken over tax-free lump sum available is taxed at MR
- Drawdown pension and lifetime annuity: income is tax-free
What are the tax rates for pension benefits if the holder dies after 75?
Benefits taken (as income or lump sum) are taxed at MR
What are the advantages of a SIPP? (4)
- Wider investment opportunities
- Investors have control over investments
- Able to invest in commercial property
- Borrow up to 50% of net scheme assets
What is the cost of SIPPs?
Tend to charge fixed annual fees
Are SIPPs taxed differently to occupational schemes?
Same tax rules and pension access rules
What is a SSAS?
SSAS is an occupational pension scheme established by an employer for the benefit of selected directors/employees
Can a SSAS have multiple sponsoring employers? (2)
- Can have multiple sponsoring employers.
- There must be links between various companies that wish to participate in the same SSAS (e.g. common directorship)
How many members can a SSAS have?
‘Small’ nature of SSASs is defined by having a maximum of 11 members.
How much power does each member of a SSAS have?
All members have to be trustees with an equal say in the running of the SSAS.
Who generally sets up a SSAS? (3)
- Generally family run businesses.
- May offer separate type of pension plan for employees
- Keep the SSAS element for the directors
Can a SSAS use leverage?
Like SIPPs, SSASs are able to borrow up to 50% of the net scheme assets.
What’s the most common reason for SSAS’ to use leverage?
Used for bringing a company’s commercial property under ownership of the SSAS
Can a SSAS lend to the sponsoring employer?
Able to lend money from scheme to sponsoring employer but have to meet certain conditions for these loans to meet
What are the conditions for a SSAS to be able to lend to sponsoring employer? (3)
- <50% of the scheme assets can be lent
- Charge interest at a minimum rate of 1% + base rate
- Maximum term of loan is five years
What happens if a SSAS loan to a sponsoring employer doesn’t meet qualifying conditions?
If any conditions are not met, the loan will be an ‘unauthorised payment’, which could result in SSAS being deregistered
Can a SSAS invest in the sponsoring employer? (2)
- Yes, but extent of investment has been limited since A-day
- Now can only invest up to 5% of scheme assets in any one sponsoring employer
What’s the aim of The Pension Regulator (TPR)?
Protect the benefits of members of occupational schemes
What are the six high level principles set by TPR? (6)
- Schemes deliver good outcomes for members
- Must have a comprehensive governance framework
- Those who make scheme decisions must understand their duties
- Must have effective governance and monitoring
- Schemes are well administrated with comprehensive processes and records
- Communication designed to ensure members are able to make informed decisions
The pension protection fund (PPF) will pay compensation in which specific circumstances? (5)
- Employer becomes insolvent
- They run a DB scheme which is under-funded
- Excludes public sector schemes
- Funded by levies on eligible schemes
- A safety net of last resort
What does insurable interest mean?
Anyone can insure anyone’s life, providing they have a valid reason for doing so
What are the main types of life assurance? (3)
- Term
- Whole-of-life
- Endowment
Who is the proposer in life assurance?
Person who applies to the insurer for the policy
Who is the the life assured in life assurance?
Person whose life is being insured, and on whose death the policy pays out
What compensation does the pension protection fund (PPF) provide for those who have reached normal retirement age?
100% benefits for members who have reached the schemes normal retirement age
What compensation does the pension protection fund (PPF) provide for those who have not reached normal retirement age? (2)
- 90% compensation
- Spouse’s pension is 50% of member PPF compensation
What is single life and joint life?
Single life: One life insured
Joint life: two lives insured, often used for family protection or for IHT planning
What does loading mean in life assurance?
A higher premium than normal due to age, occupation or health issues
What is the payout like for level term life assurance policies? (2)
- The sum assured does not vary during the policy term
- Payout if death within term
What is the surrender value of level term life assurance policies?
Policy expires with no value (no surrender value)
What are the premiums like for level term (vanilla) life assurance policies? (2)
- Level premiums
- If premiums not paid, policy is cancelled
What are the common uses of level term (vanilla) life assurance policies? (3)
- Family protection
- Interest only mortgages
- IHT planning where a PET may become chargeable within seven years
What are the features of increasing term life assurance policies? (3)
- Offsets the impact of future inflation
- Ensure the sum assured is maintained in real terms
- The policy holder has the right to freeze the sum assured at any time
What is the common use of increasing term life assurance policies?
family protection
What are the features of decreasing term life assurance policies? (2)
- Sum assured reduces to zero over the term
- Premiums remain level over the term but cheaper than level term
What are the common uses of decreasing term life assurance policies? (2)
- Repayment mortgage
- IHT planning: where potential tax charge reduces over seven years due to taper relief
What is a feature of renewable life assurance policies?
On expiry the policyholder has an option to extend the term without a medical
When are renewable life assurance policies usually used for?
Business insurance scenarios where the term is uncertain
What are the features of convertible term life assurance policies? (2)
- Allows the policyholder to convert to a whole of life or endowment contract
- Premium would adjust
What are the uses of convertible term life assurance policies? (2)
- When WOL is too expensive at the start
- Get simple term cover first the switch later if can afford to an investment orientated vehicle
Term assurance: What is family income benefit? (2)
- Beneficiaries receive a fixed tax-free regular income rather than a lump sum
- Total benefit decreases each year
Term assurance: What are the uses for family income benefit? (3)
- Often relatively cheap
- Family protection
- Beneficiaries do not need to make complex investment decision regarding a lump sum benefit
