Aim 1 - To implement a suitable strategy to enable Jim and Sandra to retire at age 65 Flashcards
1
Q
Identify the additional information you would need to discuss with Jim and Sandra in order to advise them on how to meet this aim
A
- level of income and capital required
- are they willing to erode capital for income?
- is Sandra willing to make further pension contributions/affordability/budget?
- will they continue to fund ISAs in full?
- willingness to transfer holdings to Sandra?
- details of DB Scheme/fully funded/confirm revaluation/indexation in payment/commutation factor
- peformance/charges/fund choices on GPPs/projections
- performance on investments/expected performance/projections
- when will they downsize/cost of new house/how much of proceeds will they use?
- use of CGT exempt amounts/were they used against sale of holiday home?
- will they accept the offer of part time employment from both employers after age 65?
- will they take their state pension at age 66 or defer?
- would they consider a phased retirement from age 65?
- does Jim have any transitional protection?
2
Q
Describe how Jim’s maximum tax relievable pension contribution for the current tax year is determined
A
- take current annual allowance/£40,000
- obtain pension input amount for the current tax year
- employer and employee contributions are included in input/14% of £62,000
- deduct pension input amount from annual allowance of £40,000
- this gives remaining allowance for current tax year
- he must use current years allowance first
- calculate carry forward allowance from previous 3 tax years/start from earliest year
- total contribution cannot exceed earned income in current tax year/£62,000
NB
- if Jim takes more than his TFC from a pension pot using pension freedom options, this will trigger the MPAA of £4,000
- if he triggers the MPAA he will no longer be able to use carry forward to make contributions of more than his annual allowance
- the MPAA won’t normally be triggered if he takes the TFC and buys an annuity or takes the TFC and puts pension pot in drawdown but doesn’t take an income
- if Jim continues to fund his pension, then he is likely to incur an LTA charge
3
Q
Explain to Jim why he could potentially be subject to a LTA charge and how the charge would be applied
A
- the LTA is the maximum amount that can be crystallised before a charge applies
- the LTA is currently £1,073,100 and is set to remain at this level for the next 5 years/until Jim plans to retire
- value assessed at crystallisation/at age 75/on death
- crystallised value for a defined benefit scheme is 20 x the pension plus any TFC/if Jim take his DB benefits at 65 the crystallised value is £304,000
- this would leave £1,073,100 - £304,000 = £769,100/71.69% of LTA remaining
- the crystallised value for a DC scheme is the amount of the fund taken/Jim’s current fund value is £720,000 and total contributions are £8,680 pa
- If Jim’s GPP benefits are in excess of 71.67% of the LTA when crystallised/a LTA charge would apply to the excess
- Jim can choose to take the excess as a lump sum or use to provide income
- if a lump sum is chosen, the scheme administrator will deduct 55% of the amount above LTA and pay to HMRC with the balance paid to Jim
- If income is chosen, the charge is 25% of the amount over the LTA with the balance used to provide an annuity or drawdown
4
Q
Explain the factors Jim and Sandra should consider when deciding whether to increase contributions to the GPPs or keep funding ISAs.
A
- both grow in a tax free environment
- tax relief on contribution for the pension/no tax relief for ISA
- pension outside estate for IHT/ISA inside estate for IHT
- no administration/no advice costs
- only 25% tax free with remainder taxable/ISA can be withdrawn all tax free
- implications for the lifetime allowance for Jim
5
Q
Explain to Jim the current position regarding his defined benefit scheme
A
- he has a pension income of £15,200 gross payable from age 65 for the rest of his life
- this will be increased in payment by LPI
- this will be taxable at his marginal rate of income tax
- there is a 50% dependant’s pension/spouse’s pension
- the spouse’s pension will be paid to Sandra for the rest of her life
- it will be taxable on Sandra at her marginal rate
NB
- if Jim continues working part time, he can contact scheme administrator/employer to see if he can defer taking his scheme pension
- this may build up further entitlement but depends on scheme rules
- he won’t be able to defer indefinitely
- most schemes will have an age, usually 75, by which time he will need to access benefits
6
Q
State the benefits of Jim retaining his current defined benefit pension scheme entitlement
A
- guaranteed income
- LPI indexation in payment/fixed revaluation
- no investment risk
- no annuity rate risk
- 50% spouses pension for Sandra
- employer takes on liability/security of Pension Protection Fund (PPF)
- no admin/ongoing advice/cost
7
Q
Outline the key drawbacks for Jim of transferring the defined benefit scheme to a personal pension
A
- loss of guaranteed lifetime income
- loss of guaranteed spouse’s benefit
- loss in index linking/expensive to replicate
- cost of transfer/advice charges/cost of setting up alternative scheme/ongoing costs
- administration/time to monitor/complexity
- investment risk
- loss of pension protection fund (PPF)
- CETV may improve in future/CETV may not be attractive
- longevity risk/Jim may live for a long time/good health/family good health
- may have LTA implications
8
Q
Explain to Jim the reasons why he might wish to consider transferring the deferred benefit into a personal pension
A
- DB scheme may offer enhanced CETV
- financial strength of employer/funding position of DB scheme
- Personal pension offers flexible death benefits/DB provides spouse pension only
- IHT-free/larger estate for Anna/income tax free on death before age 75
- potential for growth/can match attitude to risk
- personal pension can vary income/DB income is fixed at outset
- personal pension can manage income tax/DB inflexible for income tax planning
- personal pension may offer higher PCLS
- they have substantial assets/do they need guaranteed income/can use other assets for income
9
Q
State the advantages of using flexi access drawdown to take retirement benefits rather than using a lifetime annuity
A
- flexibility of income/income can be varied
- not locking into an annuity/poor annuity rates/can purchase later/rates may improve
- tax efficient income
- flexible death benefits/annuity/income/lump sum
- tax free death benefits/flexibility of beneficiary/can nominate beneficiary
- potential investment growth
10
Q
State the disadvantages of using flexi access drawdown to take retirement benefits rather than using a lifetime annuity
A
- complexity/ongoing decisions/need for regular reviews
- annual allowance reduced to £4,000
- investment risk/fund could be depleted
- income not guaranteed
- annuity rates may fall further
- legislation may change
- charges
11
Q
Explain how the future benefits under Sandra’s GPP could be taken tax efficiently as a series of ad-hoc lump sums using uncrystallised fund pension lump sum
A
- 25% tax free
- 75%/balance taxed at marginal rate
- can take income up to personal allowance/tax efficient income
- any overpaid tax can be reclaimed
- unlimited withdrawals available/can take over multiple tax years
- balance remains invested/potential for growth
- balance grows tax free
- IHT efficient/tax efficient death benefits
12
Q
Explain how phased flexi-access drawdown can help Jim and Sandra
A
- they will have more control over the amount of income tax they pay
- if they require a lump sum from age 65, they can crystallise some of their GPP
- this will provide them with a PCLS
- the rest can be designated into flexi access drawdown
13
Q
State the death benefit options that would be available from a flexi-access drawdown plan and the taxation treatment of these death benefits
A
- lump sum for nominated beneficiary
- continued drawdown (by nominated beneficiary)
- purchase annuity
- before age 75 all options are tax free to recipient within 2 years of death
- after age 75 income/lump sum taxed at recipient’s marginal rate
14
Q
State the benefits and drawbacks of deferring state pension
A
Benefits
- saves income tax particularly if they carry on working after 65
- increases pension when taken by 1% for every 9 weeks deferred/5.8% per annum
Drawbacks
- no lump sum now available
- loss of immediate income/takes a long time to break even
- limited payment to spouse on death
15
Q
Identify the factors that should be considered before deciding whether to defer state pension
A
- 1% increase for every 9 weeks of deferral/5.8% pa
- tax planning
- other sources of income are available/need for income
- no lump sum option
