Chapter 1 - Context of Pensions Planning

Question 1

The Government has put in place pension legislation that has led to:

Answer 1

• Better protection for occupational scheme members through the minimum funding requirement, compulsory increases to pensions in payment, the mandatory real time reporting of pension deficits and surpluses and the Pension Protection Fund
• A guaranteed minimum level of income in retirement for all, initially via the Minimum Income Guarantee, now the State Pension Credit
• Pension Simplification (all types of registered pensions schemes came under one tax regime on 6/4/2006 - commonly known as “A-Day”)
• Incentives to save for retirement such as stakeholder pensions and automatic enrollment.
• Several reductions to the lifetime allowance and various transitional protections
• Pension flexibility
• Simplification of the State Pension and increases to the state pension age
• The Money Purchase Annual Allowance and Tapered Annual Allowance

Question 2

Incentives to Pension Saving

Answer 2

• Tax relief on contributions for both individuals and employers
• Pension fund exempt from both income and capital gains tax
• Proportion of fund proceeds tax free
• Flexibility of retirement options for money purchase members
• Money purchase members may be able to pass death benefits on tax free if death is before age 75
• Auto-enrolment
• Employer can meet some pension advice costs in some circumstances and this is not treated as a benefit in kind.
• Money Purchase members have a pension advice allowance - take out up to £500 from their fund three times in their life time
• Salary Sacrifice arrangements can save NI for both employees and employers
• Non-taxpayers still qualify for 20% relief at source, effectively providing them with a 20% uplift on their contribution
• Pensions are generally considered outside the indiviual’s estate for Inheritance Tax Purposes

Question 3

Disincentives to Pension Saving

Answer 3

• Tax relief is limited for all, but especially for higher earners. Low earners on net pay arrangements may also lose out on tax relief if they are non taxpayers
• Cannot take benefits until 55
• Many view pensions as complicated
• Flexibility not available to DB scheme members unless they transfer out
• Pensions deemed expensive
• Some do not trust pension providers
• Majority of pension income taxed as earned income
• Pensions cannot hold certain assets tax efficiently, such as residential property
• Regularly reducing lifetime and annual allowances
• Bad press due to pension liberation scandals and unsuitable transfer advice

Question 4

Main types of pension schemes

Answer 4

There are three main types of pension schemes:

• State Pensions
• Final Salary (defined benefit) Pensions
• Money Purchase (defined contribution) Pensions

Question 5

Maximum State Pension amount

Answer 5

-Someone reaching state pension age in the 2020/21 tax year with at least 35 years of NI credits will receive the new state Pension of £175.20 per week

Question 6

Triple Lock Guarantee

Answer 6

• The greater of CPI, NAE or 2.5% and is guaranteed

Question 7

Minimum State Pension Entitlement

Answer 7

• 10 years of NIC credits

Question 8

State Pension pre 6/4/2016

Answer 8

• Up until 6/4/2016, the State Pension was made up of:
• The basic State Pension
• Additional earnings related schemes for employees:
• The first earnings related scheme was the State Graduated Pension scheme, which existed between April 1961 and April 1975
• The State Earnings Related Pension Scheme (SERPS) replaced the State Graduated Pension Scheme in 1978
• The State Second Pension (S2P) replaced SERPS on 6/4/2002
• The Pension Credit, introduced in October 2003

Question 9

Basic State Pension

Answer 9

• £134.25 per week, if had at least 30 years of NICs or credits accrued.
• Once in payment, the BSP is also increased in payment each year under the Triple Lock Guarantee

Question 10

State Pension Age (SPA)

Answer 10

• Currently 66
• Increased to 66 for both men and women between In October 2020
• Increases to 67 between 2026 and 2028
• Increases to 68 between 2037 and 2039

Question 11

Defined Benefit Schemes

Answer 11

• Members of DB Schemes are typically guaranteed a proportion of their final salary on retirement. The proportion will be based on three factors:
• Pensionable Service (How long they have been a scheme member)
• Pensionable Renumeration (eg basic salary + bonuses/overtime)
• Accrual Rate (this establishes the proportion that builds up each year)

Question 12

Money Purchase Schemes

Answer 12

When a member is ready to take benefits after the PCLS is paid out, this can include:

• A lifetime annuity
• A scheme Pension
• Flexi Access Drawdown
• UFPLS

Question 13

Dependant

Answer 13

• HMRC define a dependant as the:
• Member’s surviving widow/civil partner
• A child under 23
• A child dependant due to a mental/physical impairment
• Any other person who was financially dependant on the the member, was mutually financially dependant with the member or was dependent on them due to a mental/physical impairment