6 - Drawing Pension Benefits Flashcards
Can you withdraw your entire pension pot? If so how will it be taxed?
Yes
25% tax free, remaining 75% taxable at marginal rate of income tax
What kind of job roles can typically have a lower normal pension age?
Physically demanding job roles e.g. firefighter, policeman: armed forces
Purpose of secondary annuity market and are they available now?
For people who have already taken an annuity and cannot benefit from new pension freedoms
No longer available
Triviality
What type of pension scheme is triviality applicable to?
pension pots lower than the trivial limit of £30k then can take as a lump sum instead of having to buy a form of retirement income
Due to pension freedoms now only applicable in DB schemes
What is limit of tax free PCLS? And what is timeframe of payment to be acceptable?
25% so also 25% of LTA of £1,073,100
Must be made 6months before or 12months after member becomes eligible
Scheme pension
Only income option for members of DB OPS scheme and must take CETV and transfer their pension benefits pre-crystallisation
Requirements for pension income to qualify as a scheme pension
Must be paid atleast annually and not reduce
Must be paid by scheme itself or insurance company chosen by the scheme
Can include guaranteed income period, lump sum on death or payment of a dependent pension
Effect of death of a scheme member pre and post retirement
Pre - Income tax charge on lump sum above members LTA
Post - Not a BCE, pension may die with them
2 types of pension income for beneficiary on death of a member
- guarantee period
Or
- dependent pension
Pension income for beneficiary on death of a member:
Guarantee period
guarantee period
- pays scheme pension to beneficiary elected by the member for a set period of time.
- the person elected can be anyone
- max. guarantee period of 10yrs
- Tax - Taxable as non savings income on beneficiary
Lump sum payment on death & tax implications:
DB scheme
If die pre-crystallisation - Can take benefits as a lump sum or income. Must be paid within 2yrs or taxable in full at beneficiaries marginal rate.
If die in retirement - Can take benefits as a lump sum or income. No 2yr rule and no LTA check as already done in crystallisation so now just fully taxable to as income for beneficiary.
Pension protection lump sum feature for DB scheme
Annuity protection lump sum for DC scheme
Pension protection lump sum
Give a guaranteed lump sum on death and must be paid within 2yrs
Tax:
Pre age 75 - Tax fee if within LTA
Post age 75 - net income tax at 45% flat rate
Annuity protection lump sum
Give a guaranteed lump sum on death and must be paid within 2yrs
Tax:
Pre age 75 - Tax fee if within LTA and pid within 2yrs
Post age 75 - taxable at beneficiaries marginal income tax rate
Lifetime annuity
Secured income using a DC pension fund to purchase an annuity contract from an insurance company
If you have a DC pension with Scottish widows and were offered an annuity on retirement would you need to accept this if wanting to proceed with an annuity?
No, can exercise open market option and shop around
What do annuity insurance companies typically invest in?
Bonds (GILTS & corporate bonds)
What is the most expensive add on for an annuity policy?
Escalation - Inflation proofing
Enhanced annuity
Impaired annuity
Enhanced
- common and for most people
- improved rates for adverse health and lifestyle choices
Impaired
- for more serious situations and for people with short life expectancies
- improved rates with certain medical conditions diagnosed
With-Profits Annuity
Unit-Linked Annuity
WP - Give regular bonuses compared to usual ups and downs of market. Once bonus received cannot lose.
UL - Value moves up and down in relation to market
Annuity death benefits (3)
- no limit on income payable to dependent or nominee as not classed as BCE
- If die pre age 75 - income is tax free
- If die age 75+ - taxable at recipients income at marginal rate
What is difference between who you can give pension to on death for a pension scheme or annuity?
Pension scheme - can give to dependent only
Annuity - can give to nominee or dependent
What is a guarantee period on an annuity?
Guarantee an annuity will pay out for a set amount of yrs
What if a member takes a dies within guaranteed annuity period then dependent dies within this period also?
Pension would then pass on again until guarantee period ends
What if take pension lump sum at age 75+, is this still tax free?
Yes , upto 25% providing within 25% of LTA also
What is a drawdown pension
Take pension and crystallise but this remains invested.
Capped drawdown of a pension
Flexi access drawdown of a pension
Capped:
- drawdown from crystallised funds through encashment or annuity purchase
- only on existing plans, no new ones can be set-up
- no min. income requirement
- max income capped at 150% of their GAD rate
- valuation factor of 25:1 used
Flexi:
- no min. or max. withdrawal levels
- all funds can be taken as cash
- drawdown from crystallised funds
- HMRC must be notified of intention to access
- SA must notify member have accessed benefits within 31 days and member has 3 months to notify any other scheme have accessed flexible benefits
- GAD amount
- how to calculate max. GAD income
- How to calculate required income using GAD
- is amount per £1,000 of fund
- ((GAD rate / £1,000) x fund value) x 150%
- For every £75, £25 will be tax free
£75 x GAD / £1,000 = Y
Y x 150% = Z
Z x tax bracket = T
((T + £25) / 100) x income required = answer
What happens to anyone who exceeds their capped drawdown limit of 150% GAD?
Will have their plan converted to flexi-access drawdown
Short term annuity
Temporary arrangement that provides a fixed income for a fixed period of time and income taxable at marginal rate.
Usually used in conjunction with capped or flexi-access arrangements
Max. 5yr term - (SHORT HAS 5 LETTERS)
Must be bought with drawdown pension funds
Limited to 150% GAD for capped drawdown
If die will go to dependent or nominee for set period of time
How often are drawdown plan reviews for capped drawdown and FAD:
Under age 75
Age 75+
Capped drawdown:
- Under age 75 - Every 3yrs
- Age 75+ - Every year
FAD:
- Not relevant
What does FAD offer that no other pension benefit format does?
Can pass on pension income through generations using successor category of recipient and tax treatment will be dependent upon age of member
4 options when giving pension fund to a beneficiary on death
Take the drawdown pension fund as a lump sum
Continue dependent FAD pension in their name
Secure dependent income via annuity or pension scheme
Nominate charity as recipient
TAX IMPLICATIONS
Options when giving a beneficiary pension on death:
- Take the drawdown pension fund as a lump sum
If die before age 75 - tax free
Age 75+ - taxable as recipients income or flat rate of 45% if trust or personal representative
If left to charity - tax free
TAX IMPLICATIONS & RULES
Options when giving a beneficiary pension on death:
- continue dependent FAD in their name
Rules
Dependent income - can be pension scheme, FAD or annuity
Income for a nominee - can be annuity or FAD only
Income for a successor - can be annuity or FAD only
Tax
If die before age 75 - tax free, if paid within 2yrs
Age 75+ - taxable as recipients income
When are pension funds typically taxable for IHT?
Skips first death, usually second death if there is anything left
Spousal bypass trust
Put pension in trust, making spouse the trust beneficiary so the trustees can award the income/capital required. Therefore by passing IHT all together.
What is one way to reduce beneficiaries estate when done a spousal bypass trust?
Loans can be made also to spouse which need to be repaid and thus reducing their estate making it more tax efficient again as reduces their estate.
Mortality gain
Every annuitant will be given a slightly higher annuity rate by the provider, leading to slightly higher incomes
Mortality drag
The extra growth required to cover the mortality gain, as each annuitant gets a slightly higher annuity rate than the last
Mortality gain
Share of the pot for those who have died pre-maturely who have taken an annuity. Therefore a profit for the insurer.
Critical yield
The amount of pension growth required from a drawdown prions in order to be sufficient to cover the annuity income
When must an OMO statement be sent to a client?
4-6months prior to their intended retirement date
3 steps to follow as element of safe guard for those with a DC fund
Must be min. pension pot of £10,000. Is so, must follow 3 steps:
- determine if client has received guidance or advice
- identify and risk factors
- give appropriate risk warnings to client
What must an advisor present to client before they can access their pension fund?
Description of tax implications
What do MAPS & Money Helper do?
Provide information and guidance on retirement options
Phased retirement
Crystallise pension gradually and retire gradually
3 options of a phased retirement
Phased annuity purchase - use 75% of their pension to purchase an annuity. Via Encasing segments or Encashing a set monetary fund.
Phased drawdown/UFPLS - use 75% of their pension to move into FAD or UFPLS
Phased PCLS - Using 25% lump sum to live off and designate the remainder into a drawdown pension so can take when needed and stays invested.
What do you use to decide when is best to crystallise pension?
Wealth
economy
health
dependents
DWP benefits
