Chapter 1 - Context of Pension Planning

Question 1

Greater protection for members of occupational pension schemes

Support for the poorest pensioners

Changes to State Pensions and State Pension age

Answer 1

-The Pensions Act 2004 introduced the Pension Protection Fund (PPF)

• 2003 the State Pension Credit was introduced, which is a means tested benefit that tops up the income of the poorest pensioners.
• Before April 2016 the State Pension was made up of the Basic State Pension and a number of Additional State Pensions. The Additional State Pensions were generally only available to employees and changed several times, with the final change being the introduction of the State Second Pension (S2P) in 2002. The S2P was available to certain low earners and individuals receiving certain State benefits, such as Carer’s Allowance.

-In April 2016 all of the previous State Pensions (apart from the State Guarantee Credit) were replaced by the new State Pension. Eligible for individuals who paid NI for 35 years

SPA must be reviewed in each parliament.

Question 2

Falling stock markets, gilt yields and annuity rates

Answer 2

Annuity rates are based on gilt yields and so reductions in gilt yields have had a significant impact.

• At the start of the 1990s he could achieve an annuity rate in excess of 15%, so a pension fund of £100,000 could provide an annual income in excess of £15,000 p.a.
• By 2000 the annuity rate he could achieve had reduced to around 9% and by early 2022 it had fallen again to around 5.4%, meaning that the same £100,000 pension fund would now only provide an income of around £5,400 p.a.

Question 3

Defined benefit (or final salary) schemes criteria for income

Answer 3

benefits that a defined benefit scheme will provide will be based on the following three factors:
* pensionable service: this is usually the employee’s period of membership in the scheme;
* pensionable remuneration: this is the definition of salary that is used to calculate the member’s benefits; and
* the accrual rate: the rules of the scheme will determine the rate at which benefits accrue, e.g. 1/60th of pensionable remuneration for each year of pensionable service.