4 - PENSIONS (fin.) Flashcards
Why is pension planning hard
- inflation can be damaging because DB schemes can be limited to lower of inflation/2.5% increases
- DC schemes place longevity risk on client
- cost rising
- increasing life expectancy
- annuity rates have been low recently in low rate environment + increasing life expectancy
- state pension age is increasing
- state pension only represents 20% of avg net earnings (+ it’s taxable + uses up PA)
Reasons for common pension shortfall
- 79% of people have c.135k shortfall vs funds for moderately comfy retirement
- present bias
- cossie lives
- UK savers often prefer property - more trust in market
- pensions can appear complex and expensive
- several miselling scandals
- pension fraud
- DB schemes unable to meet liabilities
- gov legislation can change dramatically
Retirement planning process
- establish current financial position and retirement strat currently being used (future inheritence, employers, amount avail for regular contributions)
- establish client health and medical condition
- establish retirement aspirations? realistic? stochastic modellling?
- determine capital required to fund plans
- assess clients existing retirement plans and protection products
- develop strat to meet needs
- identify appropriate solutions
- implement stat and keep it under review
3 ways to catergorise pensions
Trust or contract based
- trust based = typically occupational scheme - large comps typically trust based. in large corps 3 trustees must be active members
- contract based = sold by insurance companies, can be occ or personal e.g. SIPPs
Occupational or individual
- occ = workplace. can be contributory or non
- indiv = personal pension or SIPP
DB or DC
- DB = comp promises specified payment/lump sump/combo depending on employee earnings history, tenure, age. risk borne by company
DC = employer and employee decide set amount of contributions which are invested - no promise of a specific level of income, pension pot depends on contributions and investment performance
Collective money purchase scheme
-DC/DB hybrid
- trust based occupational pension scheme
- alt to DC and DB schemes
- offer members more certainty over the level of benefits they will receive than DC but be less financial burden on employers than DB
- risk shared collectively by members
-provides target level of benefits (e.g. Royal mail 1/90th pensionable pay for each year in scheme)
Features of state pension
- paid gross but is taxable
- not means tested, everyone with 35y of NI contributions/credits are entitled
- need min of 10y contributions to recieve anything
- guaranteed and payable for life
- relies on current contributions of working individuals to fund
- inflation proofed with triple lock protections - increases annually by higher of UK ewage growth/last12m CPI/2.5%
- can be deferred - 9 weeks = 1% extra (5.8% pa)
- credits towards NI
- 221.20PW if not additional state pen and not contracted out
- taken between 66 and 68 depending
State pension post 2016 retirees
- previously 2 tiered - basic flat rate pension and additional earnings related pension (based on NI contributions)
- now single tier - increased in April 2024 to £221.20 pw (11502 pa)
- Need 35y of NI contributions for full amount
- if people contracted out of additional state pension before april 2016, they may need to work longer to get required numbers of years in (you cant contract out now since there is no longer additional state pension)
Credit towards basic state pension
Individuals claiming unemployment, sickness and maternity benefits.
People aged 18 or over and in full-time approved training that does not last longer than one year
(not applicable to university students)
Parents receiving child benefit for a child aged under 12
Approved foster carers
Carers who care for someone at least 20 hours per week who is receiving disability allowance or
attendance allowance
Individuals earnings between the lower earning limit and primary threshold (below primary threshold dont pay NI but get credit for it)
State pension deferral
Can defer age at which you take your state pension
- 9 weeks min deferral
- 1% per 9 weeks (5.8% pa) - extra amount for life
- no cash option
- estate at best can claim 3m arrears
DB schemes
- pension plan where employer promises specified pension payment/ lump-sum/combo on retirement
- depends on earnings history, length of service and age not investment perf
aka final salary but not all are final salary (can have last 3y avg etc)
essentially promises given level of income @ retirment
Benefits payable depends on
- definitional of pensionable employment
- accrual rate used (e.g. 1/60th, 1/40th)
- definitional of pensionable salary
- whether it deducts basic state pension
Career average
- based on avg earnings over career
- may be revalued with RPI or NAE
- may be improvement in accrual rate
Hybrid
- money purchase or DB underpin (dont know what pension you will get but min amount underwritten
DB schemes are ‘unfunded’ = no defined pot of money, no investment fund built up - benefits just paid out by employer when they fall due alongside salaries of employees
Top up options for DB scheme
Additional voluntary contributions
- usually goes into separate DC scheme
Buy extra years
- employer determines cost and max no. of additional years is set
Invest extra contributions to separate fund
- used to buy extra annuity income @ retirement
- limited fund choice
- employer may not contribute
DB scheme commuting pension
- TFC/PCLS can be provided via commutation or in addition
- max = 25% of the value of the benefits
- formula to work out max TFC
C = based on gilt yields, usually 12 (e.g. for every £1 given up of pension we give 12) - company write to you on retirement giving pension income amount and offer lump sum payment with lower income (this is commuting your pension)
- work out default pension option
= 1/60 * 35* 65000 = 37,917 - Work out max commutation option
= 37,917 * (12/(1+(0.15 x 12))) = 162,501 - Work out adjusted pension
= 37,917 - 162,501/12 = 24,365 pa
Can take any amount of TFC and reduce pension
DB scheme earlly leavers
- benefits may be taken early from 55
- accrued benefits usually reduced by early retirement factor (e.g. 50bps pm)
- ill health early retirement permitted regardless of age
- benefits paid as PCLS and taxed income
- can be commuted for lump sum in case of serious ill health (tho lose IHT benefit if you do this, also wipes out spousal benefits)
- life expectancy <1y, benefit can be paid as TFC up to lifetime allowance
Leaver options DB scheme
- refund contributions
- preserved pension
- CETV = e.g. leaving scheme and transferring to a SIPP
- vest pension (generally 55+ = taking pension early)
Short service lump sum
short service refund can be paid..
- if <2y pensionable service (DB/DC schemes joined before oct 2015 - 30 days for DC schemes joined after)
- if payment is made beofr e75th bday
- provided payment extinguishes entitlement to member’s benefits
Max payment
- total of member contributions (not employers)
- interest can be added and investment growth can be allowed for
Tax
- on scheme administrator
- first 20k @ 20% excess @50%
- administrator deducts tax before refunds made
DB ill health early retirement
- draw benefits before normal pensionable age
- need evidence from doc to sign you off as being incapable of doing own occupation
- can be suspended if health improved
- company has right to put you in front of their own doctor
Serious ill health commutation
- life expectancy <12m
- May be extirely tax free lump sum
- satis metical evidence from registered med practitioner
- otherwise classed as unauth payment
- comp can be very generous or do bare min
TVAs
Transfer Value Analysis
- Calcs annual investment return/critical yield required from indiv pension arrangement to match benefits available from DB occ scheme @ retirement
- used when deciding whether or not to transfer out of DB scheme
- regulator not keen on transferring out of DB as giving up guarantees/protection - default postiion is that it isnt suitable and advisor must prove that it is
- if pension savings are worth 30k or more CETV must take financial advice on transfer
- calc deferred pension @ date you leave scheme
- revaule to normal pension date (using assumed inflation)
- Convert to cash equivalent using assumed annuity rates (work out cost of annuity to generate that level of pension)
- Discount this cash equivalent back to today’s date to give the critical yield (2 types A/B)
Critical yield
Shows investment return required to match income from immediate annuity purchase on retirement
Takes into account mortality drag and charges
TYPE A
- growth rate needed on drawdown investment sufficient to provide + maintain income equal to that obtainable under equiv immediate annuity
TYPE B
- growth rate needed to provide and maintain a selected level of income
Type B is capable of rigging as client can select a low yield to make transferring seem favourable, so regulator is very prescriptive about this
- type B illustrations cant be supplied in isolation and must be accompanied by type A
- type A must show annuity purchases @ 65, 60 and 75 at least
Reg prefers type A illustrations to be client specific but allows standardised tables to be used
- for client specific must show at least 2 of total critical yield, underlying annuity investment return and additional yield (diff between total critical yield and UL return)
Factors affecting the transfer value calc
Changes in
- discount rate
- assumed annuity rates
- assumed pension increases rates
- scheme’s funding position
FCA default position is to assume it’s not appropriate to transfer out of DB scheme so advisor must show why it is
Advantages and disadvantages of transferring out of DB scheme
ADV
- Ability to take benefits earlier than scheme may permit (e.g. pre 65)
- choice of when to take TFC and phasing payment whereas DB must be in full/not at all
- greater choice of pension annuity options e.g. enhanced or impaired life
- Flexibility e.g. income drawdown which can be adjusted for changing needs and not poss with DB scheme
- More flexi on range of death benefits and how these are dealt with
- more options on inheritance especially if not married to spouse (if there is money left when you die
- avoids mortality risk of early death with DB scheme
DISADV
- more flexibility comes with increased complexity
- risk of investing funds and longevity risks now on individual - must manage flexi drawdown to ensure certainty of income for whole retirement
- Must exercise management of income withdrawal to judge what is practical and adjust based on investment performance
- protection of pension protection fund is lost
- spousal benefit lost
Retirement planning tax incentives
Tax relief on contributions @ marginal rate
- can help restore PA
- relief at source (personal pensions)
- net pay arrangement (occ schemes)
Tax free lump sum
- PCLS - 25% of pot up to max of £268,275 (lump sum allowance)
- unless TFC protection in place from previous regimes
Fund grows free of UK taxes
- no VAT in management fees
Full flexibility of access and inheritability
Benefits left out of estate for IHT purps
Individual contribution LIMITS
- must be UK relevant individual to receive tax relief on a contribution
- amount that can be received is limited to greater of
- the basic amount (3,600 - 2880 = net amount someone can put in w/out any relevant earnings (e.g. a child)
- the amount of the indiv’s UK relevant earnings for tax year in question
Possi to make contributions on behalf of member - only member as to satisfy eligibility criteria
- tax relief given to member not donor
What is a relevant UK individual
- <75 and who meets one of the below in the tax year
- generate relevant UK earnings in the tax year AND
- be a resident in the UK for tax purposes at least some time during that year, or
- have been resident in the UK at some point during the preceding five years, and in the year of joining a registered pension scheme,
Or
* be (or their spouse be) an overseas Crown Employee with earnings subject to
UK tax.
What are relevant UK earnings
- employment income including taxable benefit in kind
- income derived from carrying out a trade profession or vocation
- income from patent rights
- income from UK or EEA furnished holiday lettings bis
- earnings from overseas crown employment subject to UK tax
Salary sacrifice/exchange
Procs/cons
- may be used by employee
- agree to reduced salary in exchange for employer contribution
Conditions
- written agreement must be in place to reduce salary
- must be in place before salarty reduced
- irrevocable
- cannot reduce salary beyond min wage
2006 - Pension simplification - A day
- A-Day introduced a single set of tax rules for all types of pensions
- Flexi benefits - could take up to 25% TFC
- removal of earnings cap
- introduced fixed annual amount where before it was a % (originally 235k but got up to 255k)
- for contributions pre 75
- 50k 13/14
- 40k 14/15 - 22/23
-60k from 23/24 - carry forward avail for unused annual allowance for last 3y (must thave had relevant UK earnings in the year of contribution for at least the contribution amount - use this year 1st, then back to earliest year then work forwards)
- remove gross amount from previous years to work out how much you can carry back
- accrual in DB schemes uses up annual allowance
How does accrual in DB schemes use up annual allowance
Type of pension: Final Salary
Accrual rate: 1/60ths
Service at start of the year: 25 years
Salary at start of year: £45,000
Salary at end of year£ 46,000
CPI: 1%
Step 1 – opening value @ beginning of year
Benefits accrued at start of the year:
25/60 x £45,000 = 18,750
Step 2 – increase opening value by inflation
Inflate this figure by CPI
18,750 x 101% = 18,937
Step 3 – closing value
Benefits accrued at the end of the year
26/60 x £46,000 = 19,933
Step 4 - difference
Calculate the difference
19,933 – 18,937 = 996
Step 5 – multiply by a factor of 16 (because you do!)
996 x 16 = £15,936 - this is how much of the £60,000 annual allowance has been used by the DB scheme
Step 6
Add any contributions to DC schemes
Annual allowance charge
- indiv responsibility to work this out (if you accidentally go over annual allowance)
- if excess pension savings exist this is added to members taxable income and taxed @ marginal rate
Tapering of annual allowance
Threshold income <200k = no taper
Annual Allowance reduced by £1 for every £2 adjusted income
above £260,000
If threshold above 200k but adjust BELOW 260k no tapering
1st check threshold above/below 200k
then look @ adjusted
Threshold income
If threshold inc <200k = no annual allowance tapering
Annual Allowance reduced by £1 for every £2 adjusted income above £260,000
Max reduction is 50k so min allowance is 10k
Adjursted income
If threshold inc is above 200k - look at adjusted
Can probs ignore gold as overcomplicated
if above 260k and threshold above 200k then tapering
Annual Allowance reduced by £1 for every £2 adjusted income above £260,000
Max reduction is 50k so min allowance is 10k
Money purchase annual allowance
Reduces AA to 10k from 60k
Main ways you trigger
- if you take entire pension as lump sum or start to take ad hoc lump sums
- putting pension into flexi access drawdown and starting to take income
- buying investment linked or flexi annuity where income could go down
- if you have pre April 2015 capped drawdown plan and take payments that exceed the cap
- UFPLS withdrawls where you take lump sumps and 25% of each is TF and rest taxable does trigger
Not triggered when taking SECURED PENSION INCOME
- taking 25% TFC doesnt trigger
- buying lifetime annuity with guaranteed income (includes step ups)
- taking TFC and putting pension into flexi access drawdown scheme but not taking income
- cash in small pension pots <10k
- doesnt apply to DB schemes
Carry forward rules
Assess contributions made in prev tax year against previous annual allowance (40k pa, 60k for 23/24)
Contributions in excess of allowance mus tbe deducted
Unused allowance for earlier yeatrs can be carried forward to 24/25
If MPAA is triggered, carry forward only avail for DB schemes
Lifetime allowance
Limited the amount of savings that could be built up in tax free environment
- applied to all pension savings including benefits built up pre 2006
Lifetime allowance
- £1.5m in 2006 rising to £1.8m in 2010/11
- £1.5m again in 2011/12
- £1.25m in 2014/15
- 1m in 2016/17
- £1.03m in 2018/19
- £1.055m in 2019/20
- £1.0731 since 2020/21 – was going to be stuck at this level until 2026
- Was £1,073,100 for 2022/23
Abolished 2023/24
- Benefits were tested against the lifetime allowance when a benefit crystallisation event (BCE)
occurred.
- The lifetime allowance charge was scrapped from 2023/24 onwards so the BCE’s are no longer
relevant
Transitional protection
3 forms
- primary
- enhanced
- fixed/individual
made to protect against tax charges when LTA was introed in 2006 - more introed each time LTA was reduced
- primary and enhanced came in 06
- fixed offered when LTA reduced to 1.5m in 2012, 1.25m in 2014 and 1m in 2016
- indiv introed in 2014 for those with existing pension values over 1.25m and 2016 for values over 1m in 2016
- can have both primary and enhanced at once, enhanced takes priority unless revoked
-HMRC must be notified if enhanced revoked within 90 days or 3k fine
protection remains relevant as it now dictates the amount of ‘lump sum allowance’ (LSA) and ’lump sum and death benefit allowance’ (LSDBA) available
Enhanced protection
- avail to everyone with pre A day benefits no matter fund size
- provides an exemption from the LTA charge and can increase the amount of PCLS cash
couldnt make contributions post April 2006 except - DIS cover in place pre April 2006
- NI rebates to contracted-out schemes (when this was applicable)
- could apply at any time and size and would lose if you made contributions
- NOW if claimed before 15 March 2023 - can resume making pension contributions without losing enhanced protec
- lost if you continue contributing or if you enter new regime pre 2023 - cant be lost now really
LSA = capped at amount avail in April 2023
- if value of LSA exceed 375k in April 23 - then 25% of that amount if there is lump sum protection
- if no lump sum protection then 375k
Primary protection
- Pension benefits > £1.5 million LTA on in April 06 - allowed them to protect this value from LTA charge
- LTA Enhancement Factor calculated as:
(Total benefits at 5/4/06 - £1.5m) /1.5m - Benefits at 5/4/06 valued as they are for a BCE
- Result is rounded up to 2 decimal places and applied to LTA in force at date of crystallisation.
- From 6/4/12 the enhancement factor was applied to £1.8m, not the reduced LTA .
- Any benefits in excess of the enhanced lifetime allowance were previously subject to a lifetime
allowance tax charge. - Allows contributions to continue after A day
- cant have fixed or indiv protection if you have primary
- max of 375k LSA if no lump sum protection
- if protek lump sum rights April 06 x 1.2 - prev PCLS payments [x 1.2 if before April 12)
- couldnt really be lost, enhancement factor would be reacalced on divorce if pensions wer subject to debit
Pension funds above the individual’s indexed PLA were still subject to the LTA tax charge of 25% (if taken as income) or 55% (if taken as a lump sum).
Fixed protection
Each round of LTA reduction has been accompanied by fixed protection
FP 2012, FP 2014, FP 2016
Each form allows you return the level of LTA that was previously avail
Must have had no other protection in place
For 2012 and 2014 - claim had to be filed with HMRC before reduction took place
Can resume contributions post April 2023 if you had it before 15 MArch 2023
Similar to Enhanced protection:
- No contributions to a DC scheme after 5/4/2012 (or 2014/16).
- Accrual with DB scheme must cease by 5/4/2012 (or 2014/16).
Individual protection
Gives protected LTA = to value of pension savings on 5.4.2014/2016 subject to max of 1.5m/1.25m
Can make further savings into plan
Transitional protections LSA
LSDBA
Lump sum death benefit allowance
- LSDBA £1,073,100 for most people except those w/ protections in place
- any relevant lump sums previously taken since 6th April 2024 should first be deducted
- Lump sums within LSDBA norrmally tax free
- XS subject to IT
Lump sums which count towards DBLSA
- PCLS
- The tax-free element of any UFPLS payments
- Serious ill-health lump sums (if paid before age 75)
- Lump sum death benefits on death before reaching 75 and paid within two years of the scheme
administrator being made aware of death
Lump sums which dont count towards LSDBA
- LSDB from funds crystallised before 6th April 2024
- Trivial commutation lump sums or death benefits – value of scheme benefits <30k
- Small pot lump sums where the value of the arrangement is <10k
- Charity lump sum death benefits on death before 75
- Winding up lump sums – from an occupational scheme where the value of the benefits are <18k
- LSDB payments made after two years from the administrator being aware of the death
- LSDB where the member died after reaching 75
- Serious ill health lump sums paid after reaching 75
Protections LSBDA
Min pension age
- 55 but will increase to 57 in 2028 (when SPA is 68)
Exceptions
- existing pre A day rights to early retirement
- special retirement ages for pre A day personal pensions and retirement annuity plans for certain approves occs
e.g. certain sportspeaope
SIPP allowed investments (not exhaustive)
Allowed
- stocks/shares on RIE and exchanges not recognised by HMRC (e.g. ISDX)
- unquoted shares
- unit trusts and open ented comps
-ITs
- warrants and covered warrants
- gov and fixed interest stock
- commercial pension (can also get mortgage in pension)
- collective property funds
Not allowed = big unauthorised holding charge
- chattels
- jewellery
- yachts
- resi prop
- paintings
DB pension schemes ongoing vals?
- actuarial val required every year
- can be extended to every 3 y where trustees get actuarial reports in intervening years
Statutory funding objectives must be set
- assets valued @ MV
- statement of funding principles required
Schedule of contributions must be produced
(report looks at all members an retirement ages, whether assets>liabilities - schedule of contributions set if scheme is in a deficit)
Schedule of contributions
- trustees must prepare as part of valuation
- specifies rate of contributions to be pai and due dates for payment
- scheme actuary must certify that schedule is sufficient to ensure statutory funding objective is met
- must be reviewed annually
Recovery plan
- Required if val shows statutory funding obj is not met
- sets out steps to be taken to make up shortfall
- must include target date to clear half of the shortfall
- no specific target period but >10y looks bad
- must be submitted to TPR
Methods of reducing a deficit
- Increase employer/employee contributions.
- Reduce or cease future accrual (banks put future accruals in DC scheme)
- Change definition of final remuneration to career average earnings.
- Later normal retirement age.
- Revised investment strategy.
- Transfer existing company assets to scheme.
- Encourage transfer out of the scheme (by offering good transfer values)
- Reduce revaluation/ escalation to statutory min (2.5% or inflation whichever lower
- change accrual rate e.g. from 1/60th to 1/80th
DC pension schemes
- no promise of set pension, employer liability limited to their contribution only
- benefits depend on contributions made, investment growth, charges, benefits selected @ retirement
-employer generally pays charges on DC schemes - plans are portable allowing transfer
- longevity risk borne by employee
- flexibility in contribution options and investment amounts
- flexi benefits on retirement
Factors to consider when selecting a DC scheme
Contribution levels
- set to achieve desired level of pension
Provider
- investment record, past perf, max drawdown
Investment options
- ability to invest in equities in youth
- flexibility to lifestyle investmeents
Charges
- commission and IM fees may erode returns over time
Flexibility
- Ability to switch @ low cost
Benefits available
- expected level of pension
- existence of life cover
- protection for surviving spouse
Age and time to retirement
- older = safe and steady option more attractive
Stakeholder pensions
Type of flexible low cost
personal pension
- many offer default funds
- must acep contributions @ any freq
- cannot set min contribution >£20
- must accept prems paid by cheque, standing order, DD and direct credit
- must accept transfer from another pension source
- must not impose additional charges in respect to transfers in/out
- capped charges
Charges
- max charge is 1.5% of fund for 1st 10y then 1% (before April 05 just 1%)
- charge must cover all operating costs
- additional charges can be levied for additional servs but cannot be compulsory
Investment ops
- must offer default investment option which is a lifestyle arrangement
Personal Pension Plans (PPP) vs Stakeholder pension plans (SHP)
- Introduced 1 July 1988
- individual DC arrangement
- Typically offer a limited range of internally managed funds and possibly some externally managed funds
- a SIPP is a PPP
SHP
- introed 6 April 01
- low cost person pension
- subject to min standards around charging (limited max amount), investment choice (narrower offering), min contributions (lower) and transfer values
GSP - group stakeholder pension or group personal pension
- similar to occ scheme but actually a series of individual arrangements taken out by employees
- many personal pensionsS
SIPPs
- personal pension scheme with wider investment and retirement options vs a personal pension offered by a life office
- can invest in shares or be used to purchase commercial prop
- can offer drawdown and phased retirement as alt to annuity purchase
- SIPP can borrow funds from 3rd party but you cant borrow from a SIPP (max mortgage 50% of SIPP value)
Small Self Administered Schemes (SSASs)
- Similar to SIPPS but occupational scheme for up to people
- often for senior people in bis or company directors
- DC occupational scheme
- has pooled fund so all members pension savings are held in common fund
- each member’s benefits are notionally earmarked
- offer ability to borrow and lend to sponsoring employer
Loans to sponsoring employers
- company can borrow from SSAS scheme
- must not exceed 50% of schemes assets @ date loan is granted
- must be secured as a first charge against SSAS assets
- interest rate must be at least 1% above avg of 6 main clearing banks
- must last for <5y with 1 rollover period allowed
- must be repaid in installments
Borrowing
- max loan is 50% of net assets in scheme before loan
- existing borrowing must be taken into account (deduct from fund before 50% calc)
Right to transfer out of a DC scheme + problem with SSAS
- must be a deferred member (scheme member who has left employment/is not an active member)
- must have flexi benefits
- right must be exercised before cystallisation
SSASs = assets all managed as one but each person has nominated pot
- problem is that first retirees get the most liquid assets
Considerations when transferring between DC schemes
Below must all be included in suitability letter
- loss of any guarantees (e.g. guaranteed annuity rate with retirement annuity pension schemes)
- loss of any protected PCLS in excess of 25% of fund
- comparison of charges and justification is new scheme is higher
- why stakeholder pension not suitable?
- and MVR (market value reducer) on investments held in with profit funds
- client ATR
- can existing scheme offer sufficient choice
- ensure client knows no guarantee funds will perform better
MVR = deduction taken on withdrawals or switches from, or between, our With-Profits Funds to protect the interests of those who remain invested in volatile market conditions
Options when drawing pension benfits
Secured pension income = not exposed to investment or longevity risk but nothing for dependents (unless dependents pension)
- scheme pension directly from scheme
- lifetime annuity (basically same as above but buying in open market)
Drawdown pension income
- flexi-access
- UFPLS = taking small cash funds ( 25% TF on each payment and rest of fund left to grow)
- short term annuity i.e. if rates v low @ present and dont want to lock in long term
Options @ retirement table
Options @ retirement for DC
Drawing benefits from DC scheme summary
HMRC definition of dependent for death benefits
@ date of member’s death satis 1 of criteria
- married or in civil partnership with member
- child (incl adopted) of member +
- <23
- dependant on member due to physical or mental impairment
3.someone not covered under 1/2 but in op of scheme administrator
- financially dependent on member
- in relationship of mutual financial dependence
- dependent on member due to physical or mental impairment
What to look for when reviewing pension investments
- underperformance or exceeding critical yield
- rebal to bring in line with client ATR
- any changes in ATR due to e.g. lifestyling
- increase in level of income generation required
- perf vs benchmark
- client wanting to annuitize in set timeframe so moving to FI (ALM?CPPI?)
- new investment ops avail
List of factors to consider when taking benefits @ retirement
income req and need for flexi
Amount of PCLS required – all at once?
ATR
age/Health/ life expectancy
Spouse/ dependants – need to provide death benefits?
Flexibility in the death benefits required?
Tax status now and possible changes in
the future
Other assets, other sources of income or
expected inheritance
Views on inflation/ need to provide
increasing income
Costs – willingness to bear increased
costs for drawdown
Critical yield
Possible move overseas?
Current annuity rates
Future contribution needs
Trivial commutation by member
commutating pension = reducing pension for one off lump sum
like small pots rules for DC pensions
- DB schemes only from 5 April 2015 (DC schemes can be commuted under small pots or UFPLS)
- member must be >55 and have avail LTA
-value of all member’s benefits excluding small pots must be <30k - first commutation payment triggers start of 12m commutation period
- all commutations must take place in this period
- member can only have one commutation period
- any payment must be entire entitlement of scheme
DC small pots rules
- up to 3 DC pots
- unlimited number of DB small pots
- value of each pot <10k
- wont trigger MPAA (so doesnt count as taking flexi benefits and doesnt affect annual allowance)
- will not be classed as RBCE
Alternative solutions to pension schemes
ISAs
GIAs
Capital from sale of business
Capital from downsizing home / equity release
Rental income
Income or capital from trusts or inheritances
State pensions + other state benefits
Maturing life assurance plans
Cash on deposit!
The pensions regulator
- UK body responsible for regulating UK workplace pension schemes
- Established under the Pensions Act 2004
- primary goal is to protect the benefits of members of occupational pension schemes.
- Protect benefits under personal pensions with direct payment arrangements
- Reduce situations arising that may lead to compensation being paid from PPF
- Promote and improve understanding of good administration of the above types of scheme
- Maximise employer compliance
- can inflict sanctions on trustees including dismissal, fines, prosecution
- encourages whistleblowing
The Pension Schemes Act 2021 gave TPR the power to issue contribution notices where an employer fails an insolvency or a resources test and also introduced two new criminal offences,
‘avoidance of employer debt’ and ‘conduct that detrimentally affects in a material way the
likelihood of accrued scheme benefits being received’.
doesnt cover SIPPs and personal pensions
PPF
= pension protection fund AKA bailout fund
Protects members of
- DB schemes
- hybrid schemes in respect of DB element
Compensation paid out if
- employer sponsoring scheme is underfunded
- funds of DB scheme have been misappropriated through fraud
funded by levies on the schemes covered
Requirements for schemes to be eligible for PPF
- must not be DC scheme
- must not have commenced wind up before April 05
- insolvency event must have occured
- must be no chance scheme can be rescued by firm assets
- mut be insufficient assets in scheme to secure benefits on wind up that are at least equal to comp PPF would pay if it assumed responsibility for scheme
Entering PPF
- cant admit new members once you’re in the PPF
- benefits can be paid but only to level of PPF comp (90%)
- PPF can intervene in management of scheme
- PPF review moral hazard issues e.g. recent rule changes
Benefits payable by PPF
- PPF will pay widows pension @50%
Trust vs contract based pensions
Trust based
- commonly associated with occupation schemes tho indiv ones can be set up under trust
Contract based
- commonly indiv plans subject to personal pension rules adopted by provider (e.g. insurance comp or CIS manager)
Scheme trustees + responsibilities
- must act within trust provisions
-must hold and invest trust assets for benefit of trust’s beneficiaries (scheme members) in order to receive best possi benefits - must act impartially and maintain scheme in best interests of members always
Resps
- must not rely on advice from someone they havent appointed themselves
- obtain audited accounts (or face criminal penalities)
- draw up schedule of contributions (employer and employee) and delivery dates
- report delays in delivery time of contributions of >30 days to TPR (early warning system)
- draw up investment prins to guide IMs include voting pol
- instigate recovery plan is val shows scheme doesnt meet statutory funding req
- have final say over disposal of funding surplus (once last person dies, either return to comp and pay tax or donate to charity)
what must trustees know
- trust deed and rules
- scheme explanatory booklet
- minutes of meetings
- scheme accounts
- actual valuations MIN every 3y but ideally annual
- statements of investment prins
- statements of funding prins = how are you going to fund scheme
Pensions on divorce
3 ways of dealing
- Offsetting
Value pension, member keeps pension but must make up 50% of value to spouse (in 50/50 divorce e.g.) - Sharing
If splitting 50/50 DC scheme - debit applied to one and credit applied to spouse (Each pension) - Earmarking (attachment order)
Member keeps pension but other side allocated a percentage when member retires (excluding state pension)
Pensions and Bankruptcy
Pre 29th May 2020
- pensions uncrystallised or in payment could be claimed under bankruptcy laws
- not state pensions or protected rights
Post
- pensions protected against any claim by trustee in bankruptcy excess excessive contributions (deliberate deprivation)
Workplace pension enrollment rules
- employers must offer qualifying scheme to their workers
- eligible jobholders must be auto enrolled into scheme
- autoenrollment must occur within one month
- if eligible jobholders opt out they must be re auto enrolled every 3y
- if they opt out within 1m they are treated as never having been a member and contributions will be refunded
Min pension contributions
- employers must contribute 3% of quali earnings
- since 2018 total of 8% of quali earnings must be contributed - so employee must contribute remaining 5%
- quali earnings = £6,240 - £50,270
pension vs isa
