5 - DC Schemes Flashcards
DC Schemes
Personal Pension
This is an individual scheme, which can hold contributions from the member, employer or others, along with the tax relief.
At retirement the fund can be used to buy an annuity or for flexible drawdown.
Up to 25% can be taken as a lump sum after age 55 and benefits may be taken before age 55 in the case of ill health.
DC Schemes
Stakeholder Pensions
A type of personal pension with restrictions on certain aspects (eg charges capped at 1.5% first 10 years, 1% afterwards).
They have a simplified selling process to allow a simplified “decision tree” sales process.
They must accept any contribution above a £20 one off payment, so anybody will have a DC choice available regardless of level of wealth.
FCA regulate the sale of these schemes and the scheme must be registered with TPR.
The lifestyle approach will be offered, which shifts risk approach over time as you get closer to retirement.
DC Schemes
Group personal pensions and Group stakeholder pensions
This is when a series of individual personal pensions (or stakeholder pensions) get grouped together. Looks a bit like an employer scheme but actually it’s just a collection of individual schemes.
DC Schemes
Self Invested Personal Pension (SIPP)
This is a type of personal pension with a wider selection of investment possibilities (eg commercial property). The member controls the investments themselves.
These schemes are allowed to borrow money in order to invest (up to 50% of the value of the fund), but they may NOT lend money to employers.
NOTE: Can borrow 50% of the net fund. If you’ve got £250k of assets and £50k of borrowing that means you’ve only got £200k net assets, so can only borrow another £50k.
DC Schemes
Retirement Annuity Contracts
Also known as s226 contracts, they’re the old version of personal pensions, but many still exist.
Be aware that they may have an attractive guaranteed annuity rate (GAR) built in that is above current market levels.
On the other hand they often have poor death benefits.
Best advice may be to replicate death benefits with an assurance contract so they can keep the GAR, rather than transferring to a personal pension.
DC Schemes
Occupational Money Purchase Scheme
This is just an employers pension scheme but on a money purchase basis rather than DB basis.
DC Schemes
Executive Pension Plan
Essentially a one person occupational pension plan.
This is a legacy arrangement from before personal pensions were available.
It was used to provide additional pension benefits to top employees outside the main occupational pension scheme.
DC Schemes
Small Self-Administered Pension Scheme (SSAS)
Small occupational scheme used by small (family) businesses, typically for fewer than 12 people.
Can invest in commercial property, borrow money and can also lend money to the employer.
Every member must be a trustee.
Funds aren’t earmarked for individual members so benefits can be adjusted between the members.
SSAS
What are the restrictions in investing in shares in the sponsoring employer?
- Under 5% can be invested in any single sponsoring employer;
- Under 20% in total in sponsoring employers where there is more than one (5% in each individual employer still applies).
SSAS
What are the restrictions in lending money to the sponsoring employer?
- Up to 50% of scheme net assets (always deduct borrowings from the value of benefits in the scheme);
- Be secured as a first charge against assets of equal value;
- Minimum interest rate of 1% over average base rate of the 6 main clearing banks (rounded up to nearest 0.25%);
- Not longer than 5 years, but can be rolled over once;
- Repaid by equal installments of interest and capital.
DC Schemes
Section 32 scheme
A legacy arrangement pre A-day that allowed you to transfer out of an occupational pension scheme to a money purchase arrangement where you can control the funds (pick funds etc.).
Unlike personal pensions they could retain maximum benefit limits (eg over 25% lump sum), which would be lost had they transferred to a personal pension.
DC Schemes
Targetted Money Purchase Schemes
This is a hybrid DB/DC scheme.
It aims to provide DB like benefits, with contributions set so as to achieve this target.
But crucially there is no guarantee to the benefits (otherwise it would be a DB scheme).
The risk therefore is shared between the employer and the employee.
What is an in-specie contribution and what is the process?
An in-specie transfer is a contribution to a pension scheme in the form of assets (eg shares) rather than cash. The assets could continue to be held within a SIPP, or could be sold and re-invested in any DC scheme.
- The contribution must be specified in advance as a cash amount.
- A seperate agreement is made to settle the contribution with assets.
- If the value of the assets falls before the transfer then the member has to pay additional cash to make up their specified contribution.
- If the value of the assets rises it can be treated as an extra contribution, or the excess can be paid back to the member in cash.
Note that employers can also make in-specie contributions.
What is the legal basis of an occupational DC scheme?
Occupational DC schemes can be set up on a trust basis like DB schemes, or contract basis where a third party takes over the administration.
The contract basis is typical to the group personal pension schemes. They look a lot like occupational schemes and are funded by employer (and employee) contributions, but aren’t actually run by the employer.
Alternatively a master trust basis may be used, which is where the same trust scheme is used by several employers. This can save costs and admin burden, but the employer loses some control since they don’t control any trustees. TPR has guidelines for these schemes to ensure governance is ok.
How does the legal basis of the DC scheme affect tax relief methods?
Trust basis schemes are more likely to use the net pay basis of tax relieving contributions (with tax relief given via payroll).
Contract basis schemes can only use relief at source basis.