7 - Secure pension options Flashcards
What is the max PCLS that an individual can have
£268,275
What is small ports payments
How many can an individual take?
10k or less
max 3 from non-occupational pension schemes
Unlimited from occupational pension shemes
Can a small pots payment be paid from crystallised funds?
Yes and also uncrystallised
Does a member need to have any lifetime allowance to take out a small pot payment?
No
What is trivial commutation lump sum
What are some conditions so it can be paid out
Respect to DB scheme or “in payment money purchase in house scheme pension”
Member has not been paid a trivial commutation lump sum previously
value does not exceed commutation limit of £30k
lump sum is paid when member has lifetime allowance
When is the nominated date
Date chosen by member which pension benefits are valued
What benefits are valued in nominated date
All pension rights that have been previously crystallised and assessable against lifetime allowance
Any benefits that are uncrystallised
Are any benefits before 06/04/2006 calculated in nominated date?
No
How long is the commutation period for trivial commutation lump sum
12 month commutation period, from when first commutation period payment is made. Can start no earlier than nominated date and no longer than 3 months after nominated date.
How many commutation period can an individual have
1
What are the two occasions when a trivial commutation lump sum death benefit can be paid
A survivor commutes a survivor pension
A member dies within the guarantee period of a pension they are receiving and the recipient of guarantee wishes to commute the remaining payments
Is the max commutation 30k per scheme or all scheme
Per scheme
What is commutation of a pension
giving up part or all of the pension payable from retirement in exchange for an immediate lump sum.
What is some conditions to commute a survivor pension
2
Pension being commuted must be paid to dependent/nominee
The payment made must extinguish the survivor entitlement to both pension amd lump-sum death benefits under the scheme
How do they value previously crystallised benefits
Before 05/04/06 - Annual income received x 25 (ignore tax-free cash taken with pension)
After 06/04/06 - Value of BCE in moentary terms (any associated pcls MUST BE TAKEN INTO ACCOUNT)
How do they value uncrystallised benefits
DC: Value of fund
DB: Annual pension entitlement at nominated date x 20, plus any PCLS paid in addition to pension
What are the two ways a scheme pension can be paid
From scheme assets
Insurance company by scheme admin
(Both for DB scheme or occupational DC scheme)
What are some benefits for a scheme paying pension directly from assets
No immediate flow of capital (monthly costs)
Funds remain invested
Scheme has option to secure income at later date to insurer (annuity)
if member dies sooner, scheme retains unused funds for benefit of members
Drawbacks:
Payments must be made
depedentes may live longer than expected
What is a scheme pension
A pension entitlement provided to a member of a registered pension scheme, the entitlement to which is an absolute entitlement to a lifetime pension
If the scheme pension is secured through insurance company what is the difference if the policy is in name of member/trutees
Member: Pensions payment generally pass directly from insurer to member
Trustees: Pension payments likely to be arranged to go from insurer to scheme -> to member
T/F: A scheme pension is the only way in which a defined benefit scheme can pay benefits on retirement
True
Otherwise they must tansfer benefit out of scheme before retirement (drawdown/lifetime annuity)
How is scheme pension taxed
Pension income under PAYE
What are the HMRC requirements to qualify as a scheme pension
Paid for life of member
Paid at least annualy
incapable of being reduced year on year
paid by scheme admin or insurance company chosen by scheme admin
How many circumstances does HMRC have to reduce annual payments on scheme pension
list 6
9
paid on ill health
reduction is to all scheme pension
briding pension - reduced at SPA
Reduced whilst scheme is being wound up
Pension sharing order
court order
What are the conditions for a lump sum to be treated as a PCLS in a scheme pension
Enitltment must be linked to scheme pension entitlement,
must be paid no earlier than 6 months before an no later than 12 months after the date member becomes entitled to scheme pension
What must a scheme admin of a DC purchase scheme pension what must they offer member first
Choice of lifetime annuity
How many ways a scheme pension can provide benefit following death of a member
3
A dependent scheme pension
A guarantee period
A lump-sum benefit
How do DB/DC schemes differ in a dependent scheme pension when giving money
DB - Dependent has no choice about format of income
DC - Scheme admin must give dependent choice between annuity/scheme pension - they can have option of flex-acess drawdown
What is the difference between scheme pension payable to member and a dependent scheme pension
Does not have to be paid for life of dependent
- surviving spouse - cease if spouse remarries
- child reduces age of indepdence from ages 23 - 18/21
- Does not have to be paid annually
What is the limit of money that a dependent receives if member dies before 75
no limit paid as dependent scheme pension
What is a guarantee period in relation to scheme pension
generally no more than 10 years regardless of member death
it will continue to pay
What are HRMC conditions to cease payments
Get married
Reaches age of 18
ceases to be in full-time education
What are the options payable in lump-sum death benefits
3
Defined Benefit lump sum: Only payable from DB scheme
Pension protection lump sum: Only payable from scheme pension from a DB scheme
Annuity protection lump sum: Only payable from a scheme pension that arises from DC scheme
Can a lump sum be a defined benefit lump sum if it meets payment condition to be a pension protection lump-sum death benefit or a trivial commutation lump sum death benefit?
No
What is a pension protection lump sum death benefit
A DB scheme -> guarantees a certain amount of pension will be provided. The amount paid =
guaranteed amount - scheme pension paid to member
Compare Defined benefit lump-sum death benefit and a pension protection lump-sum benefit
Defined benefit lump sum death benefit:
Can be paid in respect of crystallised and uncrystallised funds
No upper limit to payment
It is a BCE 7 if member dies before 75 and benefits paid in 2 year window. Amounts paid excess in member available lifetime allowance taxed as recipeient pension income
after 75 - no BCE or payment made outside window
Pension protection lump sum death benefit:
Can only be paid from crystallised funds
Maximum payment permitted is crystallised amount of scheme pension for lifetime allowance purposes less amount of scheme pension paid to member
Not a BCE, not tested against member lifetime allowance
Annuity proteciton lump sum
DC scheme
Can be paid whatever age member is when they dead
Calculation
Amount of scheme pension or annuity which crystallised for lifetime allowance purposes
less
Gross amount of scheme pension/annuity which been paid to member
Not a BCE
No time limit
What is a lifetime annuity
Can only be bought using DC funds.
Funds can be uncrystallisd or previously crystallised held in capped drawdown/flexi access
What is the factor to determine the amount of income for lifetime annuity
Size of fund used to buy annuity
Annuity rates
- members age
- Options selected (guarantee period, survivors pension/ amount of income increase in payment)
What is a flexible lifetime annuity
A lifetime annuity set up on or after 06/04/2015 - allows income paid from annutiy to fall by more than prescribed amount
What is conventional lifetime annuity
A lifetime annuity set up on or after 06/04/2015 - DOES NOT allow income paid from annutiy to fall by more than prescribed amount
What are HMRC requirements for lifetime annuity contract purchased on or after 06/04/2015
Annuity purvhased from insurance company
Annutiy must be payable for members life
Nothing stopping income paid from lifetime annuity reducing by more than amount prescribed by HMRC
What are the three ways a insurance comapny can set a lifetime annuity
- Level income or rising by fixed amount
- An income that varies using any methods 1-5 (indexation, with profits, indexation/withprofits, slected rate of growth, flexible withdrawls)
- An income that decreases by any method set out in contract
How can a lifetime annuity fluctuate in payment
- Indexation - RPI, market value of freely marketable assets (change in income cannot exceed change in index)
- With profits variation - annuity invested in insurance company with profit fund
- Combo of 1/2
- Variation of 1/3 but member annuity starting level assumed annual level of growth between 0-5%
- Flexible withdrawls (must review at least once in every 5 years)
What two methods are conventional lifetime annuity and which method is flexible?
Indexation, with profits - conventional
indexation/with profit (flexible)
What happens when a PCLS is taken to the remainder of the balance
The member can choose how to set up income - frequency, proteciton , survivor pension income
UNLIKE
DB scheme (scheme pension)
How is the income paid from annuity taxed
Member pension income via PAYE
What are the 3 ways a lifetime annuity can provide a benefit following death of a member
Survivor annuity
a percentage of member income
Guarantee period
Annuity protection
What is survivor annuity - HMRC
child
not a child
who must it be paid by
Must be paid to by an insurance company
Child (earlier of)
- Child ceasing to be dependent
- Dying
- Marrying.entering a civil partnership
not a child
- survivor death
- Re-marriage/entry into civil partnership
Guarantee peiord - two exceptions comapred to scheme pension
Length of guarantee period
Taxation of income payments received under guarantee
How is survivor annuity taxed
pre 75: tax free
after 75: taxed under paye - pension income
What is the guarantee period for lifetime annuity
limitless after 06/04/2015
Can a pre 06/04/2015 lifetime annuity transfer to a flexible lifetime annuity
no
only a conventional lifetime annuity contract
What are the two main factors affecting annuity rates
Long term bond yields
Longevity expectations
What are the most common investment linked annuties
With profits
Unit-linked
How do with profit annuities work?
Retruns on with-profit funds are paid as bonuses
How do unit-linked annuties work
Annuity income varies on return of life office unit-linked funds
Compare Scheme pension and lifetime annuity
Income
PCLS
MPAA
Lifetime Allowance
Death benefit options - guarantee
Death benefits option - continuing income
Death benefit option - lump sum
Scheme pension:
Income: Level of income set at outset, can only decrease in limted circumstances as HMRC
Taxed via PAYE
PCLS: DB scheme will determine level of PCLS taken
DC scheme max 25%
**MPAA **not trigger if paid directly funds of DC pension with less than 11 other members receiving scheme pension
Income is assessed using BCE 2
PCLS is assessed using BCE 6
Guarantee period - no more than 10 years, continuing income under guarantee taxed as survivor pension income via paye
Continuing income - only available to those qualifying as dependents taxed as dependent pension income via paye
**Lump sum - **
DB: Defined benefit lump sum or pension protection lump sum
DC: Annuity proteciton lump sum
Lifetime Annuity:
Income - Level of income at outset.
Conventional lifetime annuity limited ability to decrease
Flexible lifetime annuity can decrease
PCLS - member can decide how much PCLS - 25%
MPAA - Taking income from conventional no MPAA,
Receiving income from flexible YES MPAA
Lifetime allowance - Income assessed using BCE 4
PCLS assessed using BCE 6
Guarantee period - Guarantee period no time limit imposed
pre 75 - tax free
post 75 taxed as survivor pension income via paye
Continuing income - Available to any nominated survivor - pre75 tax free
post 75 taxed survivor pension
lump sum - Only annuity protection lump sum
pre75 - tax free no lifetime allowance test
post 75 - taxed as pension income Paye - paying to individual
