4 - Defined Benefits Flashcards
Who pays into a defined benefits scheme?
Both employee and employer but is employers responsibility to ensure there are sufficient funds in the scheme
Do defined benefits let you take a lump sum also?
Yes but reduces pension income
What is revaluation and escalation of a DB scheme protecting against?
Both increase by an index to combat inflation
Revaluation - Inflation upto taking benefits
Escalation - inflation when receiving benefits
Underpinned scheme
Based on both DC & DB scheme and will pay out dependent on whichever is the highest.
DC underpin:
- will receive higher of DB or DC
DB underpin:
- Receive contributions on DC basis but with a minimum level of earnings
Master trust for DB scheme
Full trust based DB scheme
MT - Tax efficient by placing pension scheme assets in trust by having separate sections for each employee but must be approved by TPR. Must have 1 board and 1 legal trust.
FT - Tax efficient by placing pension scheme assets in trust and employer appoints board of trustees for benefit of employees
DB scheme documents:
- scheme trust deed
- scheme booklet
- statement of investment principles
- statement of funding principles
- scheme trust deed - sets rules of DB scheme for trustees
- scheme booklet - sets rules of DB scheme and passed to employees
- statement of investment principles - sets key investment principles
- statement of funding principles - key areas of funding
Who sets who is eligible to join a DB scheme?
Employer but must abide by TPR rules for discrimination etc.
Do you have to retire to crsytalise DB scheme contributions?
No
When does service period of DB scheme begin from?
Date joined scheme not start of employment
Final salary definition
For exam use what as final salary definition unless states otherwise?
What will use to calculate what will receive as salary on retirement
12months
Open cheque book approach
Employers responsibility to ensure DB scheme is sufficient to cover payments
How often must DB scheme funding rate review be carried out to monitor contributions?
Atleast every 3yrs
(Employers usually contribute at least every 1yr)
What is member nominated trustees within DB scheme?
Right for members to elect 1/3rd of trustees with a minimum of 2 seats or 1 seat if scheme has less then 100 members
Scheme actuary
Carries out valuations of scheme for members and acts as an advisor for future changes to improve funds
DB scheme auditor
The person must be independent of all parties with no vested interest as they must audit the scheme, valuations and reports and make statements that give opinion of payments have been made in line with scheme schedule and if not, why not
Scheme investment manager
Make investments based on investment principles. Can be an employee or external individual/company.
Historical DB scheme:
Contracted out scheme - GMP & requisite benefits but what are the rules of a GMP?
Gave-up earnings related state pensions for DB scheme benefits and so NI class 1 contributions were reduced for these employees also.
GMP (guaranteed minimum pension):
- guaranteed level of earnings that must be higher than earnings related state pension
- 50% dependent pension paid if member died
- 1/80th accrual rate
- max. 40yrs at NPA 65 yrs old
- equivalent pension - DB scheme sometimes bought members back into earnings related state pensions
Bridging pension/integrated scheme
A schemes NPA is lower than the state pension age so the scheme pays a temporarily higher pension payment to bridge the gap.
DB escalation rules:
Non-contracted our benefits
GMP
Requisite benefits
Dates - 6.4.97 - 6.4.97 to 5.4.5 - post 5.4.5
NCB - none - 5% - 2.5%
Dates - pre 1988 - 1989 to 6.4.16 - post 6.4.16
GMP - gov. covered - 3% - gov. covers >3%
Dates - 6.4.97 to 5.4.5 - post 5.4.5
RB - 5% - 2.5%
Pension increase exchange
Members have choice of taking higher initial scheme pension in exchange for giving up some of inflation increases on offer
PCLS calculation formulas
Pg. 212
Death benefits for a DB scheme (2)
Death in service lump sum
Dependent pension
Nomination form
A member completes this form to select who they wish for their pension to go to on death. This is not legally binding as trustees can override this but ensures keeps tax advantages
When is death in service paid to beneficiary tax free and not tax free?
Tax free - If died pre age 75 if within members LTA. Anything above LTA taxable at recipients marginal rate
Taxable - If die age 75+ then entire sum taxable at 45% if paid to trustee or personal representative and/or recipients marginal rate
Dependent pension annual limit receivable?
Unlimited upto 100% of what member would have received. Taxable at recipients marginal rate as earned income
If take pension early due to ill health do you still pay tax?
Usual tax rules apply