8 - Flexible income options Flashcards
What is a UFPLS
25% of funds taken is tax free
Remainder taxed as pension income via PAYE
Do not receive PCLS
Trigger event for MPAA
When is the amount for a UFPLS less than 25% tax free
Member over 75
Is UFPLS for IHT purposes
Yes it forms part of estate
If a UFPLS is gifted what type of charge it is for IHT
PET
IF UFPLS is gifted to trust what charge it is
CLT
What are the conditions for a payment to qualify as a UFPLS
Paid from uncrystallised rights in DC pension
Meet normal pension age
below 75 - have lifetime allowance remaining
above 75 - some lifetime allowance remaining
Does HMRC limit amount of UFPLS payments taken
no
Can a UFPLS bew taken from crystallised funds?
NO
Can a beneficiary receive death benefits in form of UFPLS
no - as death causes crystallisation
in 2023/2024 - where cannot uncrystallised funds provide an UFPLS
Primary/enhanced proteciton is more than £375k
Scheme tax free protection entitles to more than 25% PCLS of fund
Lifetime allowance enhancement factor and available portion of member portion lump sum is less than 25% of proposed UFPLS
Can a member take a UFPLS from a DC plan where the scheme has specific tax free cash proteciton
NO
What is a drawdown pension
A way for member to draw income at frequency and level to suit circumstances.
What is a drawdown pension also known as
Unsecured pension
What are the two types of drawdown
Capped
Flexi-acess drawdown
What is capped drawdown
Not possible to set up new capped drawdown fund since 06/04/2015
taking a pension directly from a fund instead of buying an annuity. There is, however, a limit on the maximum amount of income that can be withdrawn during a year and this limit is reviewed on a frequent basis
What is the maximum amount under capped drwadown
Equivalent annuity that could be purchased with member drawdown pension fund
What is the equivalent annuinty also known as and what is the max income level set as
Also known as basis amount
Maximum income level is set as 150% of basis amount
What is GAD tables
Government Actuary department
Works out basis amount through annuity rates
What is the rates in GAD tables based on (gield yields length)?
GAD is based on 15 year gilt yields
What is the notional annuity in GAD tables
Level in payment
Single life
Payable monthly in arrears
Has no guarantee
What happens if the withdrawl under capped drwadown is for a dependent under 23
5 year gilts are used
What is the gilt Yield used in May 2023 for GAD
3.75%
Is a member allowed to carry for ward unused amount than max GAD income
no
what happens if the member exceeds max 150% withdrawl from capped drawdown
Turns into flexi-access drawdown
When is the reference date for capped drawdown
1st day of pension year
When is the basis amount calculated for members under 75 (capped drawdown)
Applies for following 3 pension years, then recalculated and for another 3 years
When is the three year review period stopped (capped drawdown)
Request to end reference period early
Turning into flexi-access drawdown
Using whole fund to purchase secure income
Dying
Reaching 75
When a member of a capped drawdown reaches 75 when is the review period
Review period becomes annual at start of pension year following 75th birthday
What is the nominated date (capped drawdown)
60 day window on recalculation of basis amount ending on new reference date.
What are three things the scheme admin needs to know to calculate the recalculation on basis amount on nominated date
Members age on nominated date
Yield on 15 year UK gilts on 15th month of prior to nominated date
Value of drawdown pension fund on nominated date
How often can the pension year of an arrangement be changed
Only once
Can a member under 65 request the reference peiod finishing before end of 3 years
Yes
But ther reference period can only end at end of pension year
Scheme admin has to approve
scheme admin then recalculates basis amount and applies for following 3 years
What are 4 other circumstances that will cause a recalculation of basis amount under drawdown pension arrangement
When is recalculation of basis if these occur
- Part of fund is used to purchase lifetime annuity or scheme pension
- Part of fund is used for flexi-access drawdown
- Member getrs divorced and capped drawdown pension reduced due to pension sharing order
- Member designates additional funds to capped drawdown pension arrangement
Takes place on same date as event triggering review - 60 day (nominated date does not apply)
What happens if basis amount has increased after recalculating
Increased max income is available to member immediately
What happens if basis amount has reduced after recalculating
Reduced max income will only apply from start of pension year following even that triggered the review
What were the two ways capped drawdown funds were set up
- New funds set in new arrangements which ran along side existing capped drawdown arrangements, basis amount calculated for each separate arrangement and had 3 year own reference period until member is 75
- New funds placed in existing arrangements. Basis amount applied to all capped drawdown funds and only one three-year reference period. Designation of new funds means basis amount recalculated
What are the conditions for flexi-access drawdown
Funds designated must be
Uncrystallised/unused DC funds or held in capped drawdown arrangements
Under HMRC rules how much can a member take out as PCLS out of flexi-access drawdown
25% total as PCLS - They sometimes will say 1/3 but it will be 1/3 of designated flexi-access drawdown (After PCLS has been taken)
Does designating funds into flexi-access trigger MPAA
No but taking payment from fund does
Is designating funds into flexi-acess drawdown fund before 75 a BCE
Yes
Is designating funds into flexi-acess drawdown fund over 75 a BCE
no
When does MPAA apply if member changes capped drawdown into flexi-access?
When the member takes withdrawl from flexi-access drawdown fund
When is day 1 when a member exceeds 150% income in capped drawdown which results in turning into flexi-access?
One from the day before the day on which max income exceeded
Is there member subject to MPAA rules if they had to change to flexi-access as a result of exceeding benefits in capped drawdown
Yes
What are HMRC requirements for an annuity to be a short-term annuity
Must be purchased using funds held in drawdown pension
Payable by an insurance company
For a term not exceeding 5 years
When can death benefits only be included for a short-term annuity
Guarantee period of no longer than 5 years
If no guarantee period is included in short term annuity what happens
Pasyments cease, drawdown fudns used to purchase income are lost
What is the max income payable
flexi access
capped
flexi access - no limit
capped - 150% of basis amount less any income taken from capped drawdown arrangement
Is it possible to transfer a short-term annuity to another provider
Yes
What are the three options available to nominated beneficiaries under drawdown contract
Nominate funds to survivor flexi-access drawdown
Take funds as lump-sum death benefit
Purchase survivor annuity
Can undrawn funds on members death be paid to a successor
No
What happens when survivor dies to their funds (originally a members but they have nominated someone)
Funds can be nominated to a successor (funds will be outside estate for IHT purposes)
Can a survivor annuity have death benefits
No
Where is it possible to transfer assets held in drawdown pension to another drawdown pension scheme
Member capped drawdown/flexi-access
Dependents capped/flexi access
Nominee flexi-access
Successor flexi-access
Can a transfer drawdown funds be placed into an arrangements that holds any other funds or assets
No it will not be recognised as recognised transfer
Can a member tell scheme admin that on transfer of drawdown/capped that the fund is to become a flexi-access fund?
What happens to MPAA
Yes
Triggers MPAA when member takes first payment
What is the case of transfer of drawdown funds in payment prior to 06/04/2006
Funds must be kept in separate arrangements and cannot be merged with any other drawdown funds
What is mortality drag
Loss of the mortality gain that applies to a policyholder who purchases an annuity.
How does mortality gain work?
individuals purchase annuity - pooled together
some annuities die sooner, insurance pay less
extra fund is invested (mortality gain)
insurance company use mortality gain to enhance rain thy offer to individuals (Cross subsidy)
Is there cross subsidy in drawdown
No
When is mortality drag factor taken into account
When calculating critical yield and it increases with age
Older member is, gerater loss of cross subsidy - greater return needed to compensate for loss. Fewer people purchase annuities when they are older
Scheme pension (POST 2015)
Flexibility of income
Tax treatment
Level of scheme pension set at outset based on value of fund and options selected
Income cannot usually be altered once cheme pension is in payment
PCLS can be taken on outset
Income taxable as pension income via PAYE
payment of scheme pension does not usually trigger mpaa
Lifetime annuity (POST 2015)
Flexibility of income
Tax treatment
Level of lifetime annuity set at outset based on value of fund and options selected
Can choose a conventional lifetime annuity/flexible
PCLS can be taken on outset
Income is taxable as pension income via paye
Payment from conventional lifetime annuity does not trigger MPAA
Payment from flexible lifetime annuity DOES trigger MPAA
UFPLS (POST 2015)
Flexibility of income
Tax treatment
Lump sum taken from an uncrystallised DC rrangements
Member can choose how much to take at one time
Normally 25% of value of fund is paid tax free
Balance is taxable as pension income via PAYE
Payment of UFPLS is a MPAA trigger
Flexi-access drawdown (POST 2015)
Flexibility of income
Tax treatment
No restriciton on income taken
Income can be taken from fund - or purchase short-term annuity from fund
PCLS can be taken tax free
Income taxable as pension income via PAYE
MPAA triggered once funds been accessed
Scheme pension (from DC funds) post 2015
Death benefits
Tax treatment
Guarantee period up to 10 years
Dependent scheme pension can be included
Annuity protection lump sum DB can be included
Payments under guarantee/dependent scheme pension taxed as pension income via PAYE
Annutiy protection lump-sum DB paid tax free where member dies before 75
Annuity proteciton lump-sum death benefit taxable where member dies after 75
Lifetime annuity
Death benefits
Tax treatment
Guarantee period of any length under annutiy contract
Dependent/nominee annuity can be included
Annuity proteciton lump-sum DB can also be included
Beneficiary annuity income under guarantee where member dies before 75 - tax free
Beneficairy annuity income under guarantee where member dies after 75 - taxed as pension income via paye
Annuity protection lump sum death benefit where member died before 75 - tax free
Annuity protection lump sum death benefit where member died after 75 - taxed
UFPLS
Death benefits
Tax treatment
UFPLS - no pension death benefits (as will crystallised amongst death)
If only part of fund is taken as UFPLS (there will be uncrystallised funds for death benefits)
Any remaining funds will form part of estate for IHT purposes
Flexi-access drawdown
Death benefits
Tax treatment
No restriction on death benefits can be paid to
Survivor - lump sum, flexi access or purchase survivor annuity
Lump sum/ income death benefits paid tax free before 75 (lump sum must be paid within 2 year window for tax free)
Lump sum deth benefit taxable in all other circumstances
continuing income taxed via paye if member dies aged 75 +
What is an Open market option
Describes the ability of a member to move their pension fund to a new provider when they decide to take an income from it
Where must an Open market option statement must be provided
- No more than 2 months after client reaches 50
then at 5 yearly intervals, with Market option statement issued between 4-10 weeks before client bday
(DOES NOT APPLY WHEN - FIRM HAS PROVIDED OMO IN LAST 12 MONTHS/ FULLY CRYSTALLISED PENSION, ILL HEALTH] - If client asks for a retirement quotation more than 4 months before intended retirement date; or a firm does not receive such a request between 4-6 months before client retirement date
A client with an open market option tells a firm that they are considerting or have decided to discontinue income withdrawl/ or take further sum of money
Client requests to access pension for first time, except where they ask pension if ill health - If firm after complying with 1/2 a firm has been unable to provide client with an OMO, firm must provide statement in good time before sells pension decumulation product to client
- Where a firm obligation to sent OMO was cancelled as client is ill. Firm must send statement client within 2 months of decision to reject request.
What does COBS 19.4.6 include - OMO when client reaches 50
Single page summary document
Appropriate risk warnings
What do OMO statements must include
single page summary doc
fact sheet
risk warnings
statements - guarantee apply
How large is a summary doc
A4 doc
What must the single page summary doc include
Client name
intended retirement date
firm name
where client makes/receives contributions
value of client savings
statement whether guarantees applies
statement warning pension savings - exit charges
any other MVR
Asking if client is saving enough -where doc is provided 6 months before retirement date
After the summary page for COBS - what else must be provied (hint pension guidance)
How to access pension guidance and contact
Pension guidance can be accessed by internet, telephone f2f
free impatial service to help options at retirement
government logo and pension guidance logo next to or above statement
If a firm provides its own statement under COBS 19.4.6 what should the information be same as?
Moneyhelper Fact sheet
What must an OMO not include an application for for? COBS 19.4.8
Pension decumulation product
What are some examples of relevant risk factors (COBS 19.4.8)
Client age and intended retirement date
Amount of client pension savings
If ongoing employer contributions
Existence of means tested benefits
Protection under compensation scheme
Clients need to review/ make further decisions about pension savings
When must firm state that accessing pension savings may not be the best option
Between 4-10 weeks before client reaches 55
7 months before they intend to retire
What mus the firm do at least six weeks before client intended retirement date
COBS 19.4.9
Remind client OMO
Tell client what sum of money available in OMO
Make it clear pension guidance
Recommend client seeks appropriate guidance
What mus the firm not do at least six weeks before client intended retirement date
COBS 19.4.10
Not include financial promotions for pension decumulation product
What must firm not provide to a client for a pension decumulation product?
COBS 19.4.11
A key features illustration excluding lump sum payment unless client asks for it
What are some examples that may affect level of annuity income
COBS 19.4.13
Marital status
dependents
annuity - fixed/increasing/decreasing income
certaintty of health with annuity
client state of health
client lifestyle choices
What should firm ensure to not miscommunicate with client
Fair and not misleadingrule, client best interest rule and principles 6+7
Mention Money helper fact sheet
enocourage shopping around
When a firm communicates with client about client personal pension scheme, stakeholder pension scheme, FSAVC, retirement annuity contract or pension buy-put contract the firm must
Provide availability of pension guidance
unless they received advice from IFA or reviewed pension guidance already
What does COBS 19.94 state -
A guaranteed quote provided to client must follow specified statement and must provide
Cost of pension annuity expressed as monetary value
charges
helpline to moneyhelper
GAR
GMP
PCLS
What must a firm generate before providing a guaranteed quote to client
COBS 19.97
A market leading pension annuity quote (which of the following provides client with highest annual income)
What is the threshold for a pension pot where a firm does not need to go through q and a about pension
10k
What are the steps firms musttake under COBS 19.7 and Annex 1G
Step 1: Encourage retail client to take pension guidance
Explain pension guidance and book appt
Determine whether consumer has received gudiance
Step 2: Identify risk factors
Step 3: Provide appropriate retirement risk warnings
What must firms record whether the client has received
Retirement risk warnings
Regulated advice, pension gudiance or opted out
What must be included in suitability report (risk factors) when firm is reccomending a drawdown pension/ short-term annuity
capital value changing
investment changing
annuity may be worse in future
income may not be sustainable
tax impliocations
What must be provided at point of sale of new drawdown plan
Key features illustration
Where does a firm must not provide a projection in KFI
if lcient withdrawls all money
What is a standardised deterministic projection
A projection that is generic and produced in accordance with assumpitons in COBS 13 annex 2 - if client does not withdraw funds in full
What is the critical yield calculation used to show
Investment returns required from a drawdown pension arrangement to match income that could be provided by traditional fixed interest annuity
What does critical yield take into account
mortality drag and additional cost of income withdrawl
What are the two types of critical yield
Type A critical yield:
Growth rate needed on drawdown investment to provide and maintain an income obtainable under equivalent immediate nanuity
Type B critical yield:
Growth rate needed to provide and maintain a selected level of income
What are some guidelines of use of critical yields A and B
type b illustrations must be accomppanied by type A illustrations
Type A illustrations must show nanuity purchases at age 65,70, 75
For client specific illustrations what two conditions must be shown
Total critical yield
underlying annuity investment return
Additional yield (difference between total critical yield and underlying annuity investment return)
What is guidance guarantee
Gudiance given for the purpose of helping a member of pension scheme to make decisions about what to do with cash balance benefits or other money purchase benefits given to member
What is the difference in awareness and understanding in financial advisor knowledge
Awareness defined as sufficient breadth of knowledge to put product advice in right contect
Understanding - greater depth of knowledge than having awareness
What is the guidance service called
Pension wise (part of money helper)
What is an important note about guidance service
That it is guidance and not “advice” given
How is guidance funded
levy on regulated financial services
Who provides the guidance
Citizen advice and money helper through f2f or over phone
What are the 4 drivers of vulnearability
Health
Life events
Resillience
Capability
What are the three components of Consumer Duty
Consumer principle
Cross cutting rules
Four outcome
What is consumer principle
Principle 12: firm must deliver good outcomes for retail customers
What is cross cutting rules
Three requirements
Firm must act in good faith
avoid causing foreseeable harm
enable and support retail customers pursue financial objectives
What is four outcomes
Product and service outcome
Price and value outcome
Consumer understanding outcome
Consumer support outcome
What is phased retirement
When an individual chooses to take benefits from pension arrangements at different times in one of two ways
What are the two ways that an individual can phase retirement
Crystallise part of pension fund and then gradually crystallise rest of fund over next few years
Segmentation - different pension policies that can be crystallised at different times
What are the four methods of phasing retirement
Phased annuity purchase
Phased capped drawdown
Phased flexi-access drawdown
Phased taking of UFPLS
What is the process of phasing retirement through annuity purchase
- Member decides how much coming in
- Some of pension funds provided income (some crystallised)
- When member decides they need more income they decide on net income they need
- Then crystallise amount of fund required
- Repeat
Are conventional annuities more flexible than other annuities
No as they build in value - tax-free income via PCLS decreases
How do phasing retirement through capped drawdown pension work
Similiar to phased annuity purchase. Member selects income and sufficient funds are crystallised and placed into capped drawdown pension to provide this
PCLS is used to provide tax free income
Does designating additional fund to capped drawdown plan reset basis period
no
What is special lump sum death benefit charge
45%
