AF7 Questions

Question 1

John is a member of a defined benefit pension scheme. He decides to take his benefits in 2018/2019 when the lifetime allowance is £1.03 million. John has already used 90% of his LTA And has no transitional protection in place. He is entitled to a scheme pension of £8500 per annum and a lump sum of £42,500. Calculate the lifetime allowance charge.

Answer 1

Before paying out the scheme administrator calculates the value of these benefits to test against LTA.
(£8500 x 20) + £42,500 equals £212,500.
This amounts to 20.63% of the current LTA
John has already used 90% so only has 10% remaining which is £103,000. Therefore it will be subject to a LTA Charge on the XS which is £109,500.

Life time allowance charge rates are given in the pack - 55% of XS over allowance if taken as a lump sum
25% of excess Over weight allowance 50 in the form of income, which is subsequently taxed under PAYE

Question 2

Anita has a pension fund valued at £500,000. She wishes to crystallise sufficient of her pension fund into Flexi access drawdown to allow her to take £35,000 pension commencement lump sum. She will not take any income withdrawals.

Calculate the amount tested against the lifetime allowance:

Answer 2

In order to realise £35,000 pension commencement lump sum Aneta will need to crystallise £140,000 of her pension pot.

Assuming the current LTA Is 1.03 million she will utilise 13.59% of her LTA on this benefit crystallisation event

Question 3

Benefit crystallisation events – 13

Name these events

Answer 3

BCE1 drawdown pension using money purchase assets to provide payment of a drawdown pension – valuation basis Market value of the fund

BCE2 – entitlement of a scheme pension measured as scheme pension X 20

BCE3 - Excessive increase to scheme pension already in payment value at additional increase X 20

BCE4 – purchase of lifetime annuity Purchased under a money purchase arrangement– market value of the fund used

BCE5 – DB test at age 75 – member reaches 75 under a DB arrangement without having drawn all or part of it in title meant to ask invention and/or lump-sum –value scheme pension X 20 Plus amount of the lump sum

BCE5A - test at 75 for drawdown pension (The member reaches 75 with an earlier designated drawdown pension fund which has not been secured by a lifetime annuity or scheme pension)– market value of members capped drawdown pension at age 75 less market value of that designated for drawdown pension at the outset

BCE5B – test it is 75 for uncrystallised money purchase funds - The measure is the amount of any remaining uncrystallised funds

BCE5C unused uncrystallised funds designated for drawdown following the members death (Member dies before age 75 and uncrystallised funds remaining at death are designated before the end of the two-year relevant period following the members death to purchase a dependants or nominees Flexi access drawdown pension– the market value of the assets designated as available for drawdown

BCE5D – unused uncrystallised funds used to purchase a lifetime annuity following members death (the member dies before age 75 and Uncrystallised funds remaining at death are used before the end of the two year relevant period following the members death to purchase a dependence or nominees waste time annuity– the value of the BCE is the market value of the assets used to purchase the lifetime annuity

BCE6 – relevant lump sums i.e. retirement lump sum – the value for BCE purposes is the amount of the lump sum

BCE7 – relevant lump sum death benefit ( A relevant lump sum death benefit being paid in respect of the member, either from a defined benefit scheme or from uncrystallised funds of a money purchase arrangement. – the value is the amount of the lump sum death benefit

BC8 – transfers overseas to a qualifying registered overseas pension scheme – the amount of the transfer value

BCE9 – prescribed event. Where certain payments are made to order in respect of a member that constitutes an event that is prescribed in the regulations - Value is the amount prescribed in the regulations.

Question 4

Exam technique
Read the question carefully
Pay attention to the verbs used: identify, state, list, outline (Outline – make statement and explain what it means)
Thank you for writing
Make sure the answer has enough detail
Apply your knowledge to case study
‘ outline the additional information you need from Jennifer before advising on the suitability of transfer?”

Answer 4

The answer will be things Jennifer can provide – Level of income needed, requirement for a lump sum, pasty for loss, attitude to investment risk, attitude to transfer risk, capacity for loss, health, family longevity, How important are safeguarded benefits to her’ What other pension and investment does she have, what debts does she have, Is she expecting an inheritance or a windfall.

Question 5

Outline the conditions that must be met in order for a member of a defined benefit scheme Do you have a statutory right to transfer their safeguarded benefits

Answer 5

Must not have made a request within the last 12 months
Must have ceased accrual/be a deferred member
Must make a formal application to transfer (1) after receiving their statement of entitlement (1)
The request must be made at least one year (1) Before the schemes normal pension age (1)
They must transfer all safeguarded benefits within the scheme (1) unless the receiving scheme is unable to accept GMP benefits (1)

Question 6

The FCA Require advisors to undertake appropriate pension transfer analysis (APTA) before advising a client on a proposed transfer of safeguarded benefits. Outline the FCA’s Main requirements for a firm when preparing an APTA (12 marks)

Answer 6

Rates of return used must reflect the investment potential of the assets in which the clients funds would be invested
Use the assumptions set out in cobs To illustrate the income likely to be paid from the ceding scheme at the point of retirement
The APTA Should take into account the impact the proposed transfer will have on the Clients tax position
Should also take into account any affect transfer will have to state benefits
The APTA Should consider the likely pattern of benefits taken from the ceding arrangement
The APTA Should consider the proposed arrangement.
The APTA should plan for a life expectancy beyond the average
The APTA Should consider how the ceding scheme and proposed scheme would meet the clients income needs
And provide required death benefits
The APTA should consider the trade-offs that may occur when prioritising different client objectives
Must take account of all charges
Including charges that will occur whether or not the transfer takes place
Must include a transfer value comparator (TVC)

Question 7

APTA Used from 1/10/ 2018
To prepare and APTA I firm must follow a two step process
Step one assess the benefits likely to be paid and options available under the ceding arrangement
To compare the results from step one with the benefits and options available under the proposed arrangement.
This will be in the exam

Break up guitar into the four components to make the content easier to remember

Answer 7

Client (3)
- Impact on tax position
– impact on means tested benefits
– position assuming survival past average life expectancy

Advisor (3)
– What are the trade-offs When prioritising client needs
- use a rate of return which reflects investment potential of the assets in which the clients funds would be invested under the proposed arrangement
– document all charges that will occur whether or not the transfer takes place

Ceding Scheme (3)
- Compare the pattern of benefits taken under each
– compare how both options can meet clients income needs
– Compare hobos can provide required death benefits

FCA (2)

• Use assumptions in COBS When illustrating income likely to be paid from ceding scheme at the point of retirement
• Include TVC.

Question 8

Maximum Timeline for statutory process for transfers over £30,000

Outline the timeline for client and trustees.

Answer 8

Member applies for a statement of entitlement

Within one month trustee must write to the member advising of the need to take independent financial advice and that confirmation of advice must be provided within the three month guarantee period.

The guarantee date must be set within three months of the date of the members application

Within 10 days of guarantee date trustees must provide statement of entitlement and inform member of the deadline for receiving confirmation Appropriate independent advice has been given With the deadline being three months from the date the member receives the statement of entitlement. Also Trustee has duty to advise member about the ability of free impartial guidance from money advice service, pensions advisory service and Pensionwise.Specific wording regarding pension scams is also added

Within three months of a guarantee date The members application must confirm we wish to proceed with the transfer in writing and indicate the scheme to which they wish to transfer the benefits.

Within three months of the date on which the statement of entitlement was provided Do you remember the authorised independent advisors written confirmation that appropriate independent advice was provided to the member must confirm that advice have been provided about the transfer, they have the required permission under the relevant legislation to provide advice, the adviser firms FCA authorised reference number, the members name and scheme for which the transfer is to be made

Within six months of the dented it and having checked that independent advice has been received by the member trustees make the transfer.

Maximum time period for the process nine months.

                                   Month 1.             Month 3     Plus 10.          M6.           M6+10.            M9 request S of E.          Trustee.               Guarantee. S of E.           Accept.    Confirm.           Trustee    Member.                   Writes.                Date set.     Provided.     In writing  IFA                      Check IFA
                                   Fin Adv needed.                                             3m GD.                                 Rec’d exec transfer

Question 9

Appropriate pension transfer analysis

When must this be done and what does it look at

Answer 9

Must be carried out before a personal recommendation is made
Can incorporate both behavioural and nine financial analysis
Can include a critical yield if the firm thinks this is a valid approach
Includes new requirements to consider:
– The impact on a clients tax position and access to state benefits
– a reasonable period Beyond average life expectancy i.e. age 100
– trade-offs in a broader sense (Whole of life replacing greater death benefits on transfer)

Even clear defined benefits transferred but no income is taken to look authority can assume income is available and cut benefits

Question 10

Transfer value comparator

The transfer value comparator looks at the cost of transfer compares the transfer value offered and an estimate of the current replacement cost of the pension income.

Describe the four steps of the TVC process

Answer 10

One – revalued pension benefits at date of leaving to scheme pension age of ceding scheme

Two – calculate the capital cost of purchasing an annuity Based on scheme benefits

Three – discount the capital cost back to the date of the calculation using gilt returns

Calculate the difference between the discounted value and the CETV being offered

Question 11

The role of the pension transfer specialist

Note the three things the PTS must insure:

Answer 11

– Check the entirety of the completeness of the advice

– confirm that any personal recommendation is suitable for the client (based on rules contained in COBS 9.2.1R Around assessing suitability)

– confirm in writing that they agree with the proposed advice before it is provided to the client, including any personal recommendation.

C0BS - Conduct of business sourcebook

Question 12

Insistent client

What are the four bits of information communicated to an insistent client

Answer 12

– That the firm has not recommended this transaction and it is not in accordance with the firms personal recommendation

– the reason why the transaction will not be in accordance with the firms personal recommendation

– the rest of the transaction proposed by the insistent client

– reasons why the firm did not recommend that transaction to the client

Question 13

Explain the triage service.

Answer 13

The purpose of triage is to give the customer sufficient information about safeguarded benefits and flexible benefits to enable them to make a decision about whether to take advice on conversion or transfer of pension benefits.

Question 14

Attitude to transfer risk

This was added to COBS 19-1 recently and will likely be in the exam in April.

Learn:

The FCA Require the following factors to be taken into account when determining attitude to transfer risk (7)

Answer 14

1 – the risk and benefits of staying in the ceding arrangement

2 – the risks and benefits of transferring into an arrangement with flexible benefits

3 - The clients attitude to certainty of income in retirement

4 – whether the client would like to access funds in arrangement with flexible benefits in an unplanned way – are clients likely to want to take ad hoc payments.

5- The likely impact of taking income and on planned we on the sustainability of the funds over time

6 - The clients attitude to and experience of managing investments or paying for advice on investments so long as the funds last

– The Queens attitude to any restrictions on their ability to access funds in the seating arrangement

Question 15

Detail the early leavers options with a defined benefits pension scheme. There are four main options.

Answer 15

– Preserved pension: must be offered once employee is two years scheme membership

– Cash equivalent transfer value: must be offered what is the employee has been a member of the scheme for three months

– early retirement is minimum pension age reached or satisfies ill-health rules

– short service refund if less than two years qualifying service and the scheme rules offer this option.

Question 16

Early leavers: ill-health

Outline the HMRC That permit a member to take the benefits at any age due to ill health

Answer 16

_The scheme administrator receives qualified medical advice that the member satisfies the ill health condition

– the medical advice confirms that the member is, and will continue to be,

Question 17

Scenario

You are advising Harry who has a 50 K per annum pension entitlement and a commutation rate of 18 to 1. He has been offered a CETV of £1,500,000. I assume also that he has no transitional protection and this is his only pension.

Harry wants to maximise possible PCLS because he doesn’t like paying any more tax and he has two. Based only on information available, outline the factors you would take into account when formulating the advice you would give to Harry.
As an aside remember that the higher the commutation it the better value to the member. Higher commutation however also increases amount LTA used.
16 marks.

Answer 17

Remember you’ve been asked to outline the factors

Max PCLS from Scheme 25% of £1,030,000 equals £257,500
Max PCLS on transfer 50,000×18 / 1+(0.15 x 18)= £243,243
Therefore Harry will receive £40,257 more PCLS if he transfers to a MP scheme (1)
Taking benefits from the DB scheme will not exceed his LTA (pension give up 257,500/18=14,305) So he will receive £35,685 per annum and tax-free cash £257 500. LTA used (£35,685 x 20)+ £257,500 which equals £971,400 so under LTA.(1)
He will exceed his LTA if he transfers (1) incurring a minimum LTA tax charge of £117,500 (Tax sheets provided give you the level of tax for the lifetime allowance charge which is dependent On her benefits are taken so will have this in the exam – in this case it’s 25%)
If transferred funds are placed into FAD He will have complete control of the amount of income he takes (1) which provides him with tax planning opportunities.(1)
The DB income is secure for his lifetime (1) and likely to include inflation proofing(1)
Income from FAD is not secure (1) underfunds could exhaust prior to his death (1)
Taking the maximum PCLS at outset will place significant funds into his estate for I HT purposes(1)
If transferred, PCLS could be accessed in stages (1) and used to provide tax-free income (1) whilst retaining the maximum possible pension funds within the I HT efficient tax wrapper (1)

Question 18

Bridging pensions

Describe what a bridging pension is and how they may be offered by schemes

Answer 18

The bridging pension is an additional amount of scheme pension paid to a member who draws the benefits before State Pension age

The bridging pension stops at the point the member reaches the SPA

Schemes of different methods of providing a bridging pension such as an enhancement to the members pension benefits; or
At the cost of the members via a reduction in the post SPA Scheme pension

Question 19

DB scheme security

Outline and describe the roles played by the employer covenant and the PPS regarding scheme security

Answer 19

Employer covenant

The employers legal obligation and financial ability to support their defined benefit scheme know and in the future

PPF
Established to pay compensation to members of eligible defined benefits pension schemes when there is a qualifying insolvency event in relation to the employer and whether there are insufficient assets in the pension scheme to cover the PPF levels of compensation.

If the trustees feel employer covenant is strong they cannot reduce CETV even if scheme underfunded as trustees will believe employer will put it right.

Question 20

Pension protection fund compensation levels

You need to know this for the exam. A lot of the detail is given in the exam paperwork provided. You will find how benefits are valued within PPF and how they are escalated and payment.

The CPI figure used in April 2019 will be the CPI figure from September 2018. Must use the word average of CPI in the exam.

outline the levels of compensation received a different stages of employer suffering insolvency event. Remember it’s all about whether you have reached Scheme NRA And nothing to do with whether you are in receipt of pension or not (long service - cap Increased 3% for each year of service over 20 years)

Answer 20

100% compensation
Member (retired or deferred) who has reached the schemes NPA
Member in receipt of a pension on the grounds of ill-health
Member in receipt of survivors benefits

90% subject to a cap <65>
Member (retired or deferred) Who has not reached the schemes NPA

50% compensation
Spouse/civil partner/relevant partner not already in receipt of benefits

Question 21

Pension protection fund revaluation and escalation.

Tanya, age 62, is a deferred member of the XYZ defined benefit scheme. She joined the scheme in March 1998 and left in January 2015. The scheme has recently entered the PPF.
The scheme rules revalued benefits in deferment at a fixed rate of 4.5% and increased benefits in payment in line with the statutory minimum rates.
The schemes normal pension Age is 65.
Note that the scheme has entered the PPF, explain in detail how the inflation protection applied to Tanyas benefits will change in respect of:
– the rate of evaluation applied whilst in deferment (five marks)
– rate of escalation applied while in payment (Three marks)

Answer 21

– All benefits accrued prior to 6/4/09 will be valued in line with the average (1) of CPI capped at 5%
– The average is likely to be less than the 4.5% fixed rate offered by the scheme (1)
Harry meaning benefits/those benefits accrued after 5/4/09 will be divided in line with (the average of) CPI capped at 2.5% (1)
– This will be lower than the fixed rate offered by the scheme (1)
– The level of escalation applied to her benefits will reduce (1)

– This is because although the escalation of the benefits accrued after 5/4/05 will not change (1) the benefits accrued before this date will have the cap reduced from 5% to 2.5% (1)

Question 22

CETV factors in deciding
Bill will be 65 in six months time and is in excellent health. He was a member of the W defined benefit scheme between 1978 and 2013 and the scheme was contracted out prior to 2016. His pension in title meant at the schemes NPA Of 65 is £50,000 per annum. The scheme offers a 50% spouses pension and pays PCLS via competition at a rate of 18 to 1.
Bill, who has a cautious ATR, Has been offered a CETV of £1,500,000. He has no transitional protection and the TVC should that purchasing a lifetime annuity on the same basis as the scheme Would cost an additional £40,000.
Bill has two non-dependent children and has recently been widowed. He plans to take its benefits at age 65 and will need a net income of £25k per annum. To maintain his day-to-day lifestyle plus variable amounts to cover holidays.

– Identified additional information you would require before advising Bill whether or not he should accept the CETV offered by the scheme (six marks)

– based on the information you have available, explain the factors you would take into consideration before deciding whether or not to recommend that Bill accepts the CETV offered by the scheme (12 marks) Remember discuss variable income needs are not flexible income needs.

Answer 22

Additional information required
– family history of longevity
– Rates of escalation and scheme rules
– does he want/need inflation proofed income
– strength of employer covenant
– definition of spouse – at retirement or in death?
– Does he want to leave pension funds to his children/importance of flexible death benefits
– any debts – liabilities – need for PCLS adult set
– other assets available to provide an income

Factors to take into consideration
– he has a cautious attitude to risk (one) and there is no investment risk associated with the DB scheme/he will be exposed to investment risk on transfer unless he purchases a lifetime annuity (one)
– he is an excellent health (one) and so may benefit from the index-linked income provided by the scheme (one)/ and it’s guaranteed income for life (one)
– if he transfers and enters FAD His funds could be exhausted before he dies (one)
– he can take more PCLS if he transfers (one) Althought he is likely to incur A LTA Charge/no LTA tax charge if benefits taken from the scheme (one)
– he has only one chance to take PCLS from the scheme (one) but could take it in tranches/use it to provide tax-free income if he transfers (one)
– the scheme cannot be varied/transferred will allow him to take a variable income to meet his ad hoc needs (1)
– The TVC shows a shortfall but includes a spouses pension he no longer needs (one)
– his income needs are a very small percentage of the CETV/within the usual SWR percentage (one) Safe withdrawal rate– The most popular golden rule for us if withdrawal rate is 4% (danger of exhausting the fund if withdrawals are not made in a sustainable manner one theory of preventing this is to employ a safe withdraw it.)
– the scheme will provide little or no death benefits for his family/may not cover future spouse (one) but transferring may allow him to provide death benefits for his children/Future spouse if he remarries (1)
Remember always discuss variable income needs are not flexible income needs.

Question 23

Question
Sue, age 59, wish to transfer a number of pension contracts in order To access these flexibly. One of these contracts is an uncrystallised retirement annuity contract (RAC). Explain why she has been told that she must receive advice from a pension transfer specialist if she wishes to transfer the RAC(Five marks)

Answer 23

– This would happen if the transfer value of the RAC was greater than £30,000

– it would happen if the contract includes GAR/safeguarded benefits

– the PTS must provide advice because one or more of her other contracts includes GMP

– Or one or more of the contract is from a final salary scheme.

Question 24

Scenario
Sam, age 61 is married to Amy, age 66. We have two non-dependent children and are both in good health. Sams parents died in the early 70s whereas Amy’s parents are still alive.
Someone has recently made redundant from XYZ limited after 20 years of employment as the company is in financial difficulty. He has been offered a CETV of £1.2 million on a scheme pension of £46,000 per annum from age 65. The scheme, which is significantly under funded applies and early retirement factor of 5% per annum, increases pensions in payment at CPI capped at 5% and includes a 50% spouses pension.
Sam has started to receive a scheme pension from a previous employer that pays him £6500 per annum. When he reaches SPA He will receive a state pension of £141 per week. Amy receives a state pension of £149 per week and a scheme pension of £12,000 per annum which increases in line with RPI Captain 5% per annum.
The couple, who have a medium attitude to risk, have an equity based investments portfolio valued at £250,000 and any expects to inherit £800,000 on the death of her parents. Do you need a net, inflation proofed income of £35,000 per annum to maintain your standard of living.

Question – based on the information you have available, explain why you have recommended that Sam should accept the CETV of £1.2 million and transfer the benefits so he can access them flexibly, rather than immediately taking the scheme pension offered by XYZ Ltd (16 marks)

Answer 24

Reasons for transferring
– they have capacity for loss demonstrated by investments and other income/They are expecting on inheritance (one) and they have investment experience (1) a medium ATR (1) So understand/can accept the risks associated with the transfer (one)
– they will only have to draw a very small percentage of the fund to meet their income requirements/rate of withdrawal is within the safe withdrawal rate 4%(one)
– Taking benefits from XYZ Ltd scheme know will incur a 15–20% early retirement factor I.e. 5% between now and age 65 (one) and will mean they are receiving an income in excess of the requirements (one)
– if the scheme enters the PPF before Sam reaches age 65 (One) then Sams income will reduce (one)
– entry to the PPF Will also reduce the rate of escalation applied each year (one)

Question 25

Pre-retirement scenario
Adam, age 48, is married to Harriet, age 43. They are both in excellent health and have two young children. Adam’s parents are aged 80 and 82 and Harriet’s parents are aged 72 and 77. Adam, who has become self-employed, has been offered a CETV of £462,000 in respect of deferred membership of his previous employers defined benefit scheme. The CETV has been reduced by 8% due to scheme underfunding but latest report show the underfunding should be eliminated within five years.
This is Adams only Pension fund. How did it works part time and her only pension fund is a PPP Valued at £46,000. A couple of £25,000 held in the joint building society account, but no other investments. An assessment of the attitude to investment risk shows they are both cautious investor is the couple plan to retire when Adam reaches his state pension age. They believe they will need a joint, index-linked income of around £30,000 per annum once they both retired.

Question – explain why you have recommended that Adam should not transfer his benefits held in the defined benefit scheme to a personal pension plan (12 marks)

Answer 25

Reasons not to transfer
– they are both in excellent health/family history of longevity (one) and they have a cautious ATR (1) No experience of investing in equities (one)
– also, as Adam is self-employed transfer would expose them to the level of risk outside their risk preferences (1)
– Therefore, the secure pension for life offered by the scheme is suitable for them (one) and will provide the inflation proofing they require (1)
– Adam should wait until closer to retirement to transfer (1) as the term to retirement is long/not until Adam reaches age 67 (one) and so there is a degree of uncertainty about the future financial position/income needs/objectives (one)
– Also, the CETV Is reduced (one) but is likely to increase based on reports from the scheme (one)
– finally, the defined benefit scheme is a large portion of the couples retirement provision/very little other savings/pensions (one) and some of their capacity for loss is low (one)

Question 26

Pension protection fund

When is it possible for a member to transfer out when the scheme is within the PPF?

Answer 26

Once the scheme enters the assessment period trustees may only be a transfer value where:

– The member had already requested and accepted the transfer in writing and designated a Scheme willing to accept the transfer; and
– the above actions all occured before the scheme entered the assessment period; and
– The trustees reduce the transfer payment to the amount needed to secure the members PPF level of benefits

Once in the PPF, a member has no right to a transfer.

Question 27

CETV

Legislation provides for two methods of calculating a CETV.

What are they?

The TVC Is very similar calculation but uses FCA Assumptions

Answer 27

-The Best estimate method which is based on the cost of providing the members benefits in the scheme and

– The alternative method used when trustees want to pay CETV’s That are above the minimum amount.
There is no set method for the alternative method - trustees can use a higher multiple for example 45xPension or simply a multiple for example 120% of the best estimate CETV

Best estimate calculates a lump sum needed to the replace member benefits in the scheme.

Question 28

Cash equivalent transfer value calculation.

The best estimate method calculates a lump sum needed to replace member benefits in the scheme. Detail the process used when calculating CETV. There are five steps.

Answer 28

Step one: calculate preserved pension at date of leaving the scheme

Step two: we value the preserved pension to the schemes NRA

Step three: calculate the capital cost of buying revalued pension at schemes NRA
Using trustee/Scheme revaluation rates and assumptions on inflation and utilities and gilt yields.

Step four: discount the cost back to the date of calculation (Date member left scheme) The resulting figure is the initial cash equivalent (I CE)
This calculation is influenced by the trustee assumptions made on investment returns either gilt If less than 10 years to scheme NRA Or equity growth assumptions is greater than 10 years to sheme NRA.

step five: make any necessary adjustments to the ICE. (Best estimate/alternative method/May be decreased due to scheme underfunding)

Question 29

Factors affecting the CETV.

Will need to know the factors that influence the CETV.

Question what are the assumptions that effect the calculation / revaluation of pension at date of leaving Scheme to pension at schemes NRA?

Question what assumptions are made between pension schemes NRA Figure and the capitalised value of the pension?

What assumptions are made when discounting back to the cash equivalent transfer value?

Answer 29

When calculating the pension at the schemes NRA from the pension a deed of living scheme the trustees make assumptions on inflation: RPI, CPI,AEI.

When calculating the capitalised value of the pension trustee makes assumptions on annuity rates. If assumptions on longevity rates increase this effectively decreases the rate of annuity. Expectations on inflation increasing increases the level of escalation And therefore reduces the initial annuity that the lump-sum can purchase and all these will lead to a higher CETV being needed

When discounting back the trustees make assumptions on investment returns with gilts used where there is less than 10 years to scheme NRA And equity returns when there are greater than 10 years. The lower the assumption of growth the higher the CETV needs to be.

If the CETV has increased then the assumption on inflation must have gone up.
If CETV goes down over time then assumption on inflation must have gone down.

Question 30

Transfer value comparator.

The transfer value comparator calculates the Cost to purchase an equivalent annuity in similar way to the CETV but uses FCA assumptions.

Detail the assumptions

Answer 30

Deferred pension at date of leaving is revalued to Scheme NPA using FCA Assumptions on information.

Revalued pension at scheme NRA is capitalised using an FCA Prescribed annuity rate based on scheme benefits.

The capitalised value of the pension is discounted back based on assumed Gilt returns/Equity returns made by the FCA to give the Some now required to purchase the equivalent annuity at Scheme NRA.

Question 31

Enhanced transfer values and PIE (Pension increase exchange)

Enhanced value is usually offered for a limited period and the cost of the announcement is usually covered by the sponsoring employer to ensure the security of the remaining members is not compromised. Don’t to help reduce the schemes future liabilities and risk.

Outline four benefits of PIE And five drawbacks.

Answer 31

Benefits of PIE: Disadvantages
- Higher initial income. – Member may live past the break even point
– higher PCLS. – Higher value tested against LTA
– higher spouses pension. – May affect the members state benefits
– may benefit those with reduced life – Inflation may be higher than expected
expectancy or who intend to spend – May push member into higher income tax bracket
more in early years of retirement wiped

You can only give up increases that are above the statutory minimum. Increase in pension could lead to going over the annual our lifetime allowance. Crossover point decided on family longevity and healthy shoes

Question 32

Transfer club.

Highlight of the transfer club works And in particular who bears the brunt of any shortfall.

Answer 32

– The transfer value is calculated in the usual way CETV
– receiving scheme calculate the service credit using a standard set of actuarial tables used by all club schemes
– the calculation uses The members salary in the old scheme, regardless of any increase in their new role
– if the transfer is between schemes with a denticle provisions it will produce a year for year credit
– where there are differences, for example, different pension ages, a higher on your credit may result.

If you transfer 20 years service from one scheme and the receiving scheme calculates that this produces 17 years in their scheme then the receiving scheme is to make up three years shortfall.

Question 33

Safeguarded benefits and Legacy products.

Section 32 buyout
Executive pension plan
Retirement annuity contract

Highlight what each offers.

Answer 33

Section 32 buyout – offers guaranteed minimum pension. Designed to protect GMP. S 32 not set up a trust for death benefits to go into estate. GMP benefits can only go to the spouse or death.

Executive pension plan – provides a guaranteed annuity rate and may have more than 25% tax-free cash. This is a money purchase pot.

Retirement annuity contract – provides a guaranteed annuity rate. 402 personal pensions 30/6/88.

EPP‘s Were marketed to directors of small companies. Prior to 2006 personal pension contributions were limited to percentage of net relevant earnings At a certain age i.e. 17.5%. EPP being occupational scheme that you could put whatever you like in By way of contribution. Your own company could contribute with no limits.

RAC - Death benefits can be poor and may only be return of premium or return of premium plus interest.

Question 34

Guaranteed annuity rate’s.

Highlight the advice requirements around GAR.

Answer 34

– Advice required where transfer value exceeds £30,000
– if only safeguarded benefits are GAR there is no requirement for a pension transfer specialist involvement
– personal recommendation is required but no requirement to provide comparisons set out in COBS 19.1.2R I.e there is no requirement for an Appropriate pension transfer analysis.
– Benefits are safeguarded benefits even if GAR is below rates available on the market place.
– Once GAR Has expired the benefits are no longer considered to be safeguarded benefits

Question 35

Question on retirement annuity contract.

Jenna, aged 59, has a RAC Valued at £60,000 that includes a headline guaranteed annuity rate of 9%. Jenna, married, would like advice on whether or not she should transfer into her existing personal pension.
Outline the additional information you would require about the RAC before you could advise Jenna on whether or not she should transfer the fund (nine marks)

Answer 35

Additional information required:
– When forward/at what age does the guarantee annuity rate apply
– what basis does the annuity need to be taken for the guaranteed annuity rate to apply i.e. single life, with or without tax-free cash, With a without guarantee period, with or without escalation.
– What are the charges on the contract
– does the contract allow for dependants benefits/Income
– what are the death benefits of the contract. May only be a return of premiums or return of premium with interest
– Does the annuity rate allow for escalation
– is it paid in advance or arrears
– does the annuity have a guaranteed period
– Single life annuity is the default can client build in a spouses benefit And how is headline rate affected.
– Can TFC Be taken along with The guaranteed annuity rate
– what are the investment performance of the funds
– what are the investment choices
– whether contract offers flexible income option/UFPLS/FAD.

Question 36

DB scheme death benefits

This will definitely be asked about. Defined benefit scheme is only ever be out to dependants.

– Detail potential death benefits for a deferred member and how they are taxed (4)

– detail the possible death benefits for a pensioner member

Answer 36

Deferred member:
– dependant’s scheme pension may be payable, Subject to scheme rules.
– Income received is taxed as recipients pension income via PAYE. (Always use the phrase taxed as pension income via PAYE)Unlike money purchase which is tax-free on death before age 75.
– May be able to commute income for trivial commutation lump sum death benefit – again this is paid as pension income and tax via PAYE at the recipients marginal rate
– there will be no test against the members lifetime allowance

Pensioner member (on death of a member in receipt of the Scheme pension)
– dependence scheme pension may be payable, subject to scheme rules.
– Income received is taxed as a recipient’s pension income via PAYE.
– Maybe able to commute income for trivial competition lump sum death benefit again taxes pension income on the recipient via PAYE. (Possible where the remaining instalments of the guarantee avoided £30,000 or less.)
– Maybe a continuation of the income under term certain guarantee Of no more than 10 years for scheme pensions. This is the only time death benefits can go to a non-dependent.
– HMRC Does permit pension protection payments With a lump sum maybe people to anyone nominated by the member subject to trustee agreement. The lump sum is tax-free is a member days below the age of 75. In reality pension protection Is rarely offered.

Question 37

Money purchase death benefits.

– Describe the death benefit options under a money purchase scheme (3)

Describe the income tax treatment of these benefits

– describe what happens around the lifetime allowance test on death

– Describe the Situation I don’t inheritance tax.

Answer 37

– Death benefits can take the following forms:
Lump sum, Flexi access drawdown or lifetime annuity (always use the word lifetime annuity) is that this can be paid either to a dependent or a nominee or successor. The nomination form is an expression of wish (direction) and ultimately trustees have discretion. Its benefits on death to be paid to non-dependent children ensure the nomination form is completed otherwise the benefits can only pay out as a lump sum and not an income.

Income tax treatment – income received this tax free of death is under age 75 and designated/paid within two year window. Otherwise via PAYE.

Lifetime allowance – tested if death before 75 and benefits uncrystallised otherwise no test. If you have taken PCLS you have crystallised your pension.

Inheritance tax – usually outside the estate, HMRC May deem it a transfer of value if this is within two years of transfer

Question 38

Use of a spousal bypass trust. This was covered in October so not likely to be up again

You have recommended that Rachael transferred the value of her defined benefit and they comment into a personal pension plan.

Evaluate the suitability and outline the children’s income tax position if the death benefits are nominated:

A- Directly to the children; (Eight marks)
B dash to a bypass trust with her children as the potential beneficiaries. (Seven marks)

Answer 38

A- The benefits can pass direct to her children via a nomination form this makes her wishes clear to the trustees however it is not legally binding, and they could decide to pay some or all of the funds to someone else based on financial interdependency i.e. a partner.
Children can take a lump sum or an income from the death benefits if they wish.
The funds can grow tax-free well remain in a pension fund.
This benefits paid tax free if death of the member is before age 75 and designated Within two years otherwise they are taxed as the recipients earned income under PAYE.

B- If spousal bypass trust is used funds are distributed at the trustees discretion However the letter of wishes can be provided to them prior to death.
The assets are not part of the beneficiaries estate for bankruptcy or divorce purposes.
Can be complex and may have Pediotic and exit charges.
If death occurs after age 75 then there is a 45% tax charge levied on the fund on entry into the trust.
Any income paid from the trust is paid with a 45% tax credit which may be reclaimed depending on the beneficiaries tax status affectively taking the income at their marginal rate.
The tax rate on Trusts is in the paperwork provided.

Question 39

Spousal bypass trust continued

Outline One major advantage of using the trust and for less attractive features (five marks)

Answer 39

The spousal bypass trust Can help to mitigate I HT liability on second death and falls outside the beneficiaries estates.

• Using the trust is complex and costly, with the possibility of periodic and exit charges.

– On death after 75, funds paid into trust net incur a 45% tax charge

– Majority of income within the trust taxed at 38.1% and 45%

– income paid from the trust eight with 45% tax credit meaning tax will be paid at the recipients marginal rate

Question 40

Transfer when in ill-health

How do HMRC deem transfer of pension benefits to be (one mark)

Answer 40

• HMRC deem a transfer of pension benefits to be a “lifetime transfer of value.”

The volume is deemed nominal (so no IHT issues) unless:
– member is in poor health; and
– Days within two years of transfer

In this instance HMRC Will investigate and may allocate a value for IHT purposes. They will allocate a value for IHT purposes on death within two years if they can prove you knew you were in ill-health And knew you would likely die within two years. In the exam mention that if someone is in ill-health and dies within two years of transfer then HMRC may investigate and may give it a value for IHT purposes.

Question 41

Protection policies

This benefits is one of the major reasons cited for transferring but a protection policy may be an alternative.

Give benefits and drawbacks of this approach

Answer 41

– By not transferring client may retain generous revaluation rates Within the scheme, and a secure information proved income in retirement.

– Drawbacks maybe the cost of the cover, healthy shoes precluding cover and the term of the cover i.e. would really need to be a whole of life contract.

Question 42

Death benefits and how they are taxed or treated.

Bill was a deferred member of the defined benefit scheme which will be his wife independence scheme pension of £15,000 per annum

Bill crystallised £120,000 personal pension plan in March 2015 taking 30,000 pension commencement lump sum placing the balance into capped drawdown. This plan is currently valued at £110,000
Describe the lifetime allowance position and tax treatment of bills death benefits.

Answer 42

The £15,000 per year dependence pension will not be subject to lease term of those test because it is not a benefit crystallisation event.
Income is taxed as spouses Pension income via PAYE.

Regarding the £110,000 To drawdown fund this will not be subject to lifetime allowance test Because it was tested in March 2015.
The benefit is tax-free if paid/designated within the two year window.

Question 43

Death benefits and how they are taxed or treated.

Ted was in receipt of the £40,000 per annum scheme pension On his death. Full payments will continue for two years and then his wife will receive £20,000 per annum dependants scheme pension.

Ted has an uncrystallised personal pension plan valued at £80,000.

what is the lifetime allowance position And tax treatment of Ted’s death benefits?

Answer 43

• The £40,000 scheme pension will not be subject to lifetime allowance test because it is not a benefit crystallisation event.

Income will be taxed as spouses pension income via PAYE.

Regarding the uncrystallised £80,000 personal pension pot this will be subject to a lifetime allowance test Because it is uncrystallised and he died before age 75.
Tax-free if paid/designated within the two year window