April 2018 Exam Paper

Question 1

Section A
Q.1
Karin aged 56 requested a cash equivalent transfer value (CETV) from her scheme administrators on 1 April 2018. She expects the CETV to be in the region of £400,000.

Describe the steps that must be followed in the statutory transfer process including the timescales that will apply and who is responsible for each of the steps. (10)

Answer 1

Section A
Model answers
Q.1
- Trustees inform Karin of the need for financial advice within one month
of her initial request
- Trustees set a guarantee date within 3 months of her initial request
- Trustees provide a statement of entitlement within 10 days of the
guarantee date
- Karen must confirm she wishes to proceed with the transfer within 3
months of the guarantee date
- Karen must provide evidence that she has received independent
financial advice no later than 3 months from the date she received the
statement of entitlement
- Before making the transfer the trustees must check that the firm
providing the financial advice holds the relevant regulatory permissions
and that the scheme being transferred to is a legitimate arrangements
- Trustees must transfer the benefits within 6 months of the guarantee
date

Question 2

Section A
Q.2
You are preparing a lifetime cash flow model for a client who is considering transferring their defined benefit pension into a personal pension plan to utilize flexible-access drawdown.

Describe how an increase in the inflation assumption used will impact the cash flow model and the potential suitability of a transfer. (7)

Answer 2

Section A
Model answers
Q.2
- inflation reduce the spending power income and therefore a higher
income would need to be taken from the fund which may lead to earlier
than expected fund depletion
- Higher returns may be required to sustain the fund value which may
lead to an inappropriate level of investment risk being taken
- Revaluation and escalation will be increased within the defined benefit
pension scheme
- This may result in making a transfer out of the scheme less suitable for
the member

Question 3

Section A
Q.3
State the key documentation that an adviser should retain on file for compliance purposes in respect of an advised pension transfer from a defined benefit scheme. (8)

Answer 3

Section A
Model answers
Q.3
- Client fact-find
- Supplementary defined benefit transfer specific client questionnaire 
- Disclosure documentation
- Transfer Value Analysis System (TVAS) report
- Statement of entitlement
- Ceding scheme information
- Recommended plan research
- Suitability report

Question 4

Section A
Q.4
Arthur aged 62 is divorced with two non-dependent children. He is a deferred member of a defined benefit pension scheme and is considering how to take his benefits in retirement.

Outline the potential death benefits payable to his children , including their income tax treatment if Arthur takes his benefits from:

a) The defined benefit pension scheme. (4)
b) A flexi-access drawdown plan following a transfer. (6)

Answer 4

Section A
Model answers
Q.4
a)
- Balance of the payments under under a guarantee period paid as an
income and taxed as the children’s earned income
- Defined benefit lump sum death benefit payment

b)
- Lump sum
- Nominees lifetime annuity
- Nominees flexi-access drawdown
- No income tax is payable if the member dies under the age of 75 and
the death benefit is designated within 2 years
- If the member dies over age 75 or designation is outside of 2 years
then any benefit is taxed as earned income for recipient

Dependents pension if still in eduction
Wife gets nothing

Lump sum tax free before age 75
Lump sum 45% tax if after 75

Question 5

Section B
Case study 1
Q.5
David, who is single and has never married will reach age 59 in May 2018. He is a deferred member of the following defined benefit pension schemes both of which were previously contracted-out.

Francisco Ltd
Date of joining:    9 Sept 1983
Date of leaving: 31 Dec 1998
Projected pension at normal pension age: £18,983pa
Normal pension age: 65
Cash Equivalent Transfer Value: £465,000
Partial transfer allowed: Yes
Transfer value enhanced: No
Early retirement factors: Available from age 60 with 3%pa reduction

Bertram Ltd
Date of joining:     1 Jan 1999
Date of leaving: 30 Jun 2017
Projected pension at normal pension age: £11,240pa
Normal pension age: 60
Cash Equivalent Transfer Value: £393,200
Partial transfer allowed: No
Transfer value enhanced: Yes
Early retirement factors: Available from age 55 with 3%pa reduction

David is self employed and plans to retire no later than 60. He estimates he will initially need a net retirement income of between £17,000 and £20,000pa. While he would prefer part of his income to be secured from the commencement of his retirement, he would like to have the flexibility to take ad hoc lump sums as required. David will receive his State Pension at age 66. He has a low to medium attitude to risk.

David has requested advice on whether the transfer of some of his pension benefits to a personal pension plan would help to meet his objectives.

The critical yield for the Bertram Ltd pension scheme to age 60 is 32.4%pa

a) Explain briefly why this critical yield is so high. (3)

Answer 5

Section B
Model answers
Q.5
a) The initial set up charges and the assumed investment returns
will be annualised over less than 2 full year

Question 6

Section B
Case study 1
Q.5
b) Explain why the critical yield may be less relevant when deciding
whether David should transfer the benefits from his pension scheme
to access them flexibly. (6)

Answer 6

Section B
Case study 1
Model answers
Q.5
b)
- Critical yield assumes a lifetime annuity purchase at scheme retirement
age
- David wants to take ad-hoc lump sums as required and therefore the
fund will remain invested for a longer period
- Critical yield assumes that a spouse’s pension is being provided but as
he is single is unlikely to need a Spouse’s pension