8 - Meeting Customers' Needs: Retirement & Estate Planning Flashcards
What type of occupational pension schemes are there?
Final Salary - (defined benefit) pension is a proportion of their final salary, the longer they have been employed the more of the final salary they receive.
Money purchase - (defined contribution) an agreed contribution is invested for each member and pooled to purchase benefits, which are not guaranteed.
What is meant by defined benefit & defined contribution?
the defined benefit is usually based on salary and the amount detailed and guaranteed, with the trustees making sure the fund has the required capital to pay those pensions. These are very expensive for employers to run and many are moving towards defined contribution, which is based on the employee and sometimes the employer contributes to a fund and these are invested, depending on how well that fund performs, relates to the overall payment to the employer at pension age.
What are the two new proposed pension schemes that were brought in by the pensions act of 2014?
‘Defined ambition’ pensions - have a defined contribution scheme with a guaranteed minimum return at retirement age, if things go well, then it would of course be more.
‘Collective benefit’ schemes - each members pension pot enters a much larger collective pot where the risk and costs are shared out amongst those involved both due the accumulation phase and the payment phase.
What is a self-invested personal pension plan (SIPP)?
Subject to the same rules as a pension, but the investor makes the decisions on risk, by having their funds invested in various bundled unit trusts, OEICs or stocks and shares, property and more. Usually quite expensive to run and tend to be more focused at the wealthy but there are more affordable SIPPS available to the average person.
What are workplace pension schemes?
Employers over a certain size have an obligation to provide their workforce with an auto enrolled pension scheme which the employee can opt out of. The National Employment Savings Trust (NEST) is a basic, simple, low cost charging scheme run by the NEST corporation.
What are the six options available to someone cashing out their defined contributions pension?
1 - Tax Free Cash: (pension commencement lump sum) up to 25% of the pension can be taken as a lump sum.
2 - Uncrystallised funds pension lump sum - 25 % taken as a lump sum, with the rest taken subject to the individuals income tax.
3 - Flexi-access draw down: can apply to all of the fund or part of it, with up to 25% taken as a tax free lump, the rest taken as a regular income which is taxable. The income can be delayed till a later date.
4 - Annuity: After taking the 25% tax-free lump sum, the rest can be used to purchase an annuity - which will provide an income for life, which can be fixed or index linked (with-profits or unit-linked). It can also be arranged to have a reduced income over a period of time. It can also be arranged to be a joint-life annuity so that the spouse can benefit from the income should the pension holder die.
5 - Flexible drawdown: where those with ‘secure’ income (pensions and annuities) of £12,000 or more could withdraw funds as and when they wished, with no limits.
6 - Capped Drawdown: Those with an income below £12K could opt for a limit on their income between 0 and 150% of the income figure set by the Governments Actuarys Department (GAD).
