Chapter 1 - Context of pensions planning Flashcards
What is the main reason that individuals do not save enough into their pension?
a.Preference for other savings vehicles.
b.Distrust of the pensions industry.
c.Lack of affordability.
d.Poor investment returns.
c.Lack of affordability.
Affordability is often cited as the main reason for not saving enough for retirement. People
have many demands on their income and other needs may take priority
Chapter reference 1D1
An employer has arranged for his employees to receive pensions advice from a financial adviser at a cost to the company of £700 for each employee. What is the employees’ tax position in relation to these advice costs?
a.Each employee will incur a taxable benefit in kind of £700.
b.Each employee will incur a taxable benefit in kind of £200.
c.Each employee will incur a taxable benefit in kind of £500.
d.The employees will not incur a tax charge for this advice.
b.Each employee will incur a taxable benefit in kind of £200.
An employer may be
prepared to pay a financial adviser to give their employees,Under HMRC rules such advice costs are not treated as a benefit in kind for the employee. The exemption for income tax and National Insurance purposes is £500 per tax year
Chapter reference 1D
Under current legislation, a 52 year old employee is most likely to receive his State Pension:
a.at the age of 68.
b.at the age of 66.
c.at the age of 67.
d.after the age of 68.
c.at the age of 67.
legislation has been implemented to increase the SPA to age 67 for
both men and women by 2028. In addition, the SPA must be reviewed in each parliament.
Until April 2010 the State Pension age (SPA) was 65 for men and 60 for women, but women’s SPA was gradually increased from 60 to 65 over eight years
Chapter reference 1A1
How many years of National Insurance Contributions must an individual have paid or been credited with to be eligible for a full new State Pension?
a.35.
b.40.
c.30.
d.45.
a.35.
To be eligible to receive the full new State Pension an individual must pay (or be credited with) National Insurance contributions (NICs) for 35 years
Chapter reference 1A1
When death benefits are paid from a defined contribution pension plan, a nominee is defined as any individual:
a.nominated by a successor to receive the death benefits.
b.nominated by a dependant to receive the death benefits.
c.other than a dependant, nominated by a member to receive the death benefits.
d.other than a successor, nominated by a member to receive the death benefits.
c.other than a dependant, nominated by a member to receive the death benefits.
A nominee is any individual, other than a dependant, nominated by the member to
receive the benefits from a pension plan upon the member’s death.
Chapter reference 1E3A
Hideki is a sole trader who employs one member of staff. If he makes a contribution to his employee’s personal pension plan, this will be treated as:
a.an employee contribution, which will be awarded tax relief at the employee’s marginal rate of income tax.
b.salary sacrifice, which will reduce the employee’s salary for income tax and national insurance purposes.
c.a business expense, which will be offset against Hideki’s income tax liability.
d.a business expense, which will be offset against Hideki’s corporation tax liability.
c.a business expense, which will be offset against Hideki’s income tax liability.
contributions made by employers are treated as a business expense for corporation tax
or income tax purposes
As Hideki is a sole trader, he doesn’t pay corporation tax, leaving income tax the only relivable tax.
Chapter reference 1D
What has been the primary reason for the reduction in the number of defined benefit schemes available to employees?
a.Increasing annuity rates.
b.Reduction in longevity.
c.Increasing costs.
d.Removal of tax relief.
c.Increasing costs.
The decline of the defined benefit scheme. This has largely been due to their growing cost, mainly as a result of increased longevity and falling annuity rates.
Chapter reference 1C
Which factor will NOT affect the level of income a member will receive from a defined benefit pension scheme?
a.Pensionable service.
b.Accrual rate.
c.Pensionable remuneration.
d.Investment returns.
d.Investment returns.
The 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 -
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.
Chapter reference 1E2
Aditya only has an uncrystallised personal pension. If he wishes to access his benefits flexibly, he can take them in the form of a:
a.flexi-access drawdown or capped drawdown.
b.capped drawdown or UFPLS.
c.flexi-access drawdown or UFPLS.
d.flexi-access drawdown, capped drawdown or UFPLS.
c.flexi-access drawdown or UFPLS.
Flexi-access: There are no restrictions on the amount of income that can be
drawn each year.
UFPLS: Up to 25% of the UFPLS will be tax-free,with the balance taxable as the member’s pension income via PAYE. The member can take as much or as little as they like from the fund as an UFPLS.
Capped-Drawdown: it is no longer possible to set up a new capped drawdown plan, though individuals who have already designated funds into one can continue in it. They have the
option of changing to flexi-access drawdown.
Chapter reference 1E3A
Which Government initiative is intended to encourage people to save towards their retirement?
a.The end of contracting out via defined benefit pension schemes.
b.The introduction of compulsory membership of occupational pension schemes.
c.The introduction of the new State Pension.
d.The introduction of full flexibility in how pension benefits can be taken at retirement.
d.The introduction of full flexibility in how pension benefits can be taken at retirement.
the introduction of auto-enrolment
has increased the amount that people are saving towards their retirement. The introduction
of pension flexibility for defined contribution schemes may also help
SILLY QUESTION WORDING, B states the pensions are COMPULSORY which they are not, they are auto-enrol
Chapter reference 1C
As well as life expectancy, annuity rates are based on expected returns from which type of underlying investment?
Annuity rates are based on life expectancy and expected returns from gilts.
Chapter reference 1A2
State Pensions are funded on a ‘pay as you go’ basis. What does this mean?
‘Pay as you go’ means that the National Insurance contributions of the current working population pay for today’s pensioners’ State Pensions.
Chapter reference 1A2
Outline four taxation incentives associated with a pension scheme.
In order to encourage saving via a pension, the following incentives are offered:
- income tax relief on contributions made by individuals
- contributions made by employers are treated as a business expense for corporation tax or income tax purposes
- the investment profits of the fund are exempt from income tax and capital gains tax
- the ability to take part of the proceeds as a tax-free cash lump sum, known as the pension commencement lump sum
Chapter reference 1D
In recent years, the fastest population increase has been in the number of
people aged:
a. Under 16.
b. Under 35.
c. 65 to 75.
d. 85 and over
d. 85 and over
The fastest population increase has been in the number of
people aged 85 and over
Chapter reference 1B
Paul reached his State Pension age in March 2016. He had always been self-employed. Which State Pensions, if any, did Paul build up an entitlement to?
a. No State Pension.
b. Basic State Pension only.
c. Basic State Pension and SERPS only.
d. Basic State Pension, SERPS and the S2P.
b. Basic State Pension only.
Since Paul has always been self-employed, and retired before April
2016, he has only built up an entitlement to the Basic State Pension.
Chapter reference 1E1
Millicent is about to retire and take benefits from her company’s group personal pension plan. Which of the following factors will be used to determine the level of
pension she receives in retirement?
a. The size of her fund.
b. Her final pensionable remuneration.
c. Her pensionable service with the company.
d. The scheme’s accrual rate
a. The size of her fund.
A group personal pension plan is a defined contribution arrangement
and the size of her fund will determine (to some extent) the amount of income she receives in retirement. If she chooses to purchase a lifetime annuity, then current annuity rates will also have an impact.
Chapter reference 1E3
Albert, who reached State Pension age in November 2015, was employed for his entire working life since the age of 16. He was never a member of a contracted out pension scheme. Which State Pensions are being paid to Albert?
Albert reached the age of 65 in November 2015 and therefore was employed since 1966. He will have built up an entitlement to the Basic State Pension as well as the three earnings related State schemes, i.e. the Graduated pension scheme, SERPS and the S2P
Chapter reference 1E1
Name three challenges of providing an adequate retirement income in the UK
- Ageing population
- Insufficient pension savings
- Closure of defined benefit schemes
- Scandals I.E opting out of DB schemes/Robert Maxwell/Equitable life
- Falling stock markets and annuity rates
- complexity of pensions
Name three incentives the government offers to encourage pension savings
- Income tax relief on contributions
- Employer contributions are a business expense
- Find exempt from income tax and CGT
- Tax free PCLS
- Drawdown flexibilty
- Can pass DC funds to anyone
- More favourable tax treatment of death benefits before age 75
- Income tax/NICs exemption covers first £500 of pensions advice provided by an employer to an employee
- DC members can withdrawal £500 in a tax year, ‘Pensions advice allowance’, tax free (Max three times)
Name two disincentives for saving into a pension
- Tax free cash limited
- Limited tax relief on contributions
- Benefits cannot be taken before minimum pension age, currently 55
- Complex
- Viewed as expensive
- General mistrust of pensions
The benefits from a DB scheme depend on what three factors
- Pensionable service
- Pensionable remuneration
- Accrual rate
The benefits from a DC scheme depend on what two factors, assuming an annuity is bought
- Size of fund
- Annuity rates
What is the State Graduated Pension Scheme, and who received it
Available between 1961 and 1975, this was the first State pension scheme to provide employees with an additional earnings related pension on top of the Basic State Pension.
What is the State Earnings Related Pension Scheme (SERPS), and who received it
This is the earnings related part of the State pension that applied to employees between 1978 and 2002.
What is the State Second Pension (S2P), and who received it
Replaced SERPS in 2002 and applies to the employed, carers and some people with long-term disabilities who have broken work records. until April 6, 2016
What is the basic state pension
Basic State Pension Provided to any individual with an
adequate National Insurance contribution record.
came in on April 2016
this means that self employed people would also be entitled through their NICs, which was not the case with the additional pension types I.E SERPs S2P and Graduated state pension.
When did the new state pension come into action
6th April 2016,
Saving for retirement through the use of a registered pension scheme provides your client with which of the following incentives?
A. Half of the fund may be taken as a tax-free cash lump sum.
B. Benefits available from age 50.
C. Simplicity and ease of understanding.
D. Tax relief for the member and any employer.
D. Tax relief for the member and any employer.
Saving through a registered pension scheme gives a client the incentive of receiving tax relief on their contributions. Individuals receive tax relief at up to their highest rate of tax, and firms can treat the contributions as a business expense. The other answers are incorrect as benefits are usually available from age 55 (not 50), 25% of the fund can usually be taken as a tax-free cash lump sum and pensions are often deemed difficult for clients to understand.
Chapter reference 1D
The factors causing the pension savings shortfall would NOT include
A. the failure of auto-enrolment to increase savings rates.
B. general mistrust of pensions following several scandals.
C. a shift away from employers offering defined benefit schemes.
D. a general increase in life expectancy over recent decades.
A. the failure of auto-enrolment to increase savings rates.
Auto enrolment has increased the number of people saving into pensions. However, general mistrust of pensions following a number of scandals, increasing life expectancy which makes running out of funds more likely and a decline in defined benefit schemes in favour of more risky, to the member, defined contribution schemes are all factors. - Chapter 1, Section A2, Learning Outcome 1
Under HM Revenue & Customs (HMRC) rules pension advice provided to employees by their employers is NOT treated as a benefit in kind provided the cost is no more than how much per employee per tax year?
A. £50
B. £75
C. £150
D. £500
D. £500
Under HMRC rules, any pension advice paid for by the employer is not treated as a benefit in kind as long as the cost is no more than £500. (Note: to qualify for this tax advantage, the advice must be available to all employees or to certain groups of employees, e.g., those in ill health) and must be limited to relevant pension advice. - Chapter 1, Section D, Learning Outcome 1
Hugo, an additional rate taxpayer aged 40, has been advised by his financial adviser that he should consider commencing savings towards a pension, having previously elected not to do so. Having looked into pensions and their advantages and incentives, he has commenced paying 10% of his salary into his group personal pension scheme. This is most likely to be because he
A. has a wife and three children.
B. is an inexperienced investor.
C. considers them straightforward and accessible.
D. will benefit from tax relief on the contributions.
D. will benefit from tax relief on the contributions.
Lack of accessibility, complexity and mistrust/bad press have all been cited as factors discouraging pension saving. Tax relief on individual contributions can be up to 45% and is generally seen as an incentive towards saving. - Chapter 1, Section D, Learning Outcome 1
Bill is eligible to receive an element of the State Graduated Pension Scheme at retirement. This is because he
A. was contracted out of SERPS/S2P.
B. was self-employed throughout his working life.
C. retired before 1961.
D. was employed in 1971.
D. was employed in 1971.
The State Graduated Pension Scheme is one of the many state pension benefits a person may be entitled to. This scheme operated between 1961 and 1975 for employees (not the self-employed) who paid NICs. SERPS operated between 1978 and 2002, and S2P replaced SERPS in 2002. - Chapter 1, Section E1, Learning Outcome 1
In relation to the Pensions Advice Allowance, it is correct to say that
A. it may be used up to four times during a member’s lifetime.
B. a payment of up to £500 may be made in a tax year.
C. the payment must be made directly to the member.
D. the member must have reached the age of 50 to use the allowance.
B. a payment of up to £500 may be made in a tax year.
The Pensions Advice Allowance can be used up to three times in a lifetime, for a maximum of £500 on each occasion. The payment can be made at any age, however, must be made directly to the adviser. - Chapter 1, Section D, Learning Outcome 1
Denise had an uncrystallised defined contribution pension fund when she died in 2022. Denise had nominated her husband David and her daughter Molly to each receive half of her fund. If Molly was aged 30 when Denise died, she is considered to be a
A. dependant.
B. nominee.
C. successor.
D. beneficiary.
B. nominee.
David would be considered a dependant as he was married to Denise when she died. As Molly is aged 30 at the date of her mother’s death, she does not meet the criteria to be a dependant and is considered to be a nominee. She could take her share of the pension fund as a nominee’s flexi-access drawdown. - Chapter 1, Section E3A, Learning Outcome 1
HMCR definition of a dependant
Defined by HMRC as someone who meets one of the following:
* the member’s widow(er)/civil partner at the time of the member’s death; or
* a child of the member who is under the age of 23 at the date of the member’s death; or
* a child of the member who, in the opinion of the scheme administrator, was dependent on the member due to mental or physical impairment at the date of the member’s death; or
* a person who was not married to/in a civil partnership with the member at the date of the member’s death, but who, in the opinion of the scheme administrator, was;
– financially dependent on the member, or
– in a financial relationship of mutual dependence with the member, or
– dependent on the member because of their physical or mental impairment.
HMRC definition of a Nominee
A nominee is any individual, other than a dependant, nominated by the member to receive the benefits from a pension plan upon the member’s death.
If the member does not make a nomination prior to their death (either to an individual or a charity), and there are no dependants, a scheme administrator can make the nomination on behalf of the scheme member.
HMRC definition of Successor
A successor is an individual nominated by a dependant or a nominee to continue to receive the dependant’s or nominee’s flexi-access drawdown (which will then become a successor’s flexi-access drawdown).
A successor can also be someone nominated to continue to receive the income from a previous successor’s flexi-access drawdown.
If a nominee or successor fails to nominate someone to continue to receive the income from their flexi-access drawdown, then the scheme administrator can do so on their behalf.
Definition of a life time annuity
The fund is used to purchase a contract from an insurance company and this will provide the member with an income for life. The amount of income provided depends on the size of the fund and the annuity rates available.
A flexible lifetime annuity is one where the annual rate of income can be reduced
each year by any amount.
Definition of a scheme pension
The scheme administrator uses the balance of the fund to secure an income for life for the member. For a defined contribution scheme this is similar to a lifetime annuity in that the amount of income provided depends upon the size of the fund and scheme pension rates available.
define draw down pension and the generic types of draw-down
An income is drawn directly from a defined contribution fund. There are two different forms of drawdown:
Capped drawdown:
The amount of income that can be drawn each year is subject to limits set by the Government Actuary’s Department (GAD).
Note: it is no longer possible to set up a new capped drawdown plan, though individuals who have already designated funds into one can continue in it. They have the option of changing to flexi-access drawdown.
Flexi-access drawdown (FAD):
There are no restrictions on the amount of income that can be drawn each year.
define An uncrystallised funds
pension lump sum (UFPLS)
A lump sum taken from a defined contribution fund from which benefits are yet to be taken (known as an uncrystallised fund). Up to 25% of the UFPLS will be tax-free, with the balance taxable as the member’s pension income via PAYE.
The member can take as much or as little as they like from the fund as an UFPLS.
Joseph’s employer reached its staging date in October 2014. This meant that it was required to
A. offer a stakeholder pension for all workers.
B. make a minimum pension contribution of 10%.
C. auto-enrol qualifying workers into a workplace pension scheme.
D. review the funding of its pension scheme on an annual basis.
C. auto-enrol qualifying workers into a workplace pension scheme.
From a company’s staging date, all eligible jobholders who did not already have access to an adequate workplace pension were required to be auto-enrolled into a qualifying pension scheme. - Chapter 1, Section A1, Learning Outcome 1
The Pension Protection Fund (PPF) was created to
A. compensate scheme members who become victims of pension fraud.
B. protect defined benefit scheme members whose employer becomes insolvent.
C. provide redress for members wrongly advised to transfer out of their pension scheme.
D. deal with complaints regarding an occupational pension scheme.
B. protect defined benefit scheme members whose employer becomes insolvent.
The PPF was created by the Pensions Act 2004 and came into effect for schemes whose sponsoring employer suffered an insolvency event on or after 6 April 2005 this specifically relates to DB schemes, if this were in relation to DC schemes it would be the Financial services compensation scheme (FSCS) who take care of this.
. - Chapter 1, Section A1, Learning Outcome 1
Shakil has crystallised funds in a flexi-access drawdown (FAD) pension. In relation to potential death benefits, he should be aware that (Tick all that apply).
A. someone who isn’t a dependant can continue in FAD.
B. the fund can be returned tax-free where Shakil dies after age 75.
C. if there are no dependants the beneficiary can leave the fund on their death to charity.
D. the beneficiary can leave the FAD fund on their death to a successor.
A. someone who isn’t a dependant can continue in FAD.
C. if there are no dependants the beneficiary can leave the fund on their death to charity.
D. the beneficiary can leave the FAD fund on their death to a successor.
Under FAD, death benefits can be nominated to a survivor’s flexi-access drawdown (this does not have to be a dependant’s FAD, it can be a nominee’s FAD), funds can be taken as a lump sum (free of tax if Shakil dies before aged 75 or taxed at the beneficiary’s marginal rate if death occurs after aged 75). Answer c) is also true. - Chapter 8, Section B4, Learning Outcome 6
What is the purpose of the Financial Assistance Scheme?
A. To fully protect members of schemes that started winding up between 1st January 1997 and 5th April 2005
B. To provide limited compensation for members of schemes that started winding up after 5th April 2005
C. To fully protect members of schemes that started winding up after 5th April 2005
D. To provide limited compensation for members of schemes that started winding up between 1st January 1997 and 5th April 2005
D. To provide limited compensation for members of schemes that started winding up between 1st January 1997 and 5th April 2005
This was the forerunner to the Pension Protection Fund and provided limited assistance to members of such schemes. The benefits have subsequently been increased to be more in line (but not identical to) those from the PPF
The trustees of Ronson’s Ltd. pension scheme are treating Martin, an active scheme member, less favourably than Janice, a
colleague, on account of his age. What is this an example of?
A. Indirect discrimination
B. Objective discrimination
C. Objective justification
D. Direct discrimination
D. Direct discrimination
This is an example of direct discrimination
The Pension Protection Fund (PPF) can pay a trivial commutation lump sum if all of the following conditions are met EXCEPT:
A. The member must have reached age 55
B. The member must be under age 75
B. The member must have maximum total pension benefits of under £30.000
D. An 18-month window applies from the payment of the first trivial commutation benefit
D. An 18-month window applies from the payment of the first trivial commutation benefit
It is a 12-month, rather than 18-month window.
How long does a pensions scheme administrator have to provide a CETV for a possible earmarking order?
A. 3 months
B. 2 months
C. 4 months
D. 1 month
A. 3 months
The scheme administrator has three months from the date of a request to provide a CETV to comply with such a request.
When a scheme becomes insolvent, the Pension Protection Fund (PPF) aims to complete the assessment for most schemes within what time frame
A. 6 months
B. 30 days
C. 2 years
D. 1 year
C. 2 years
It’s 2 years. During the assessment period, the trustees remain in day-to-day control of the scheme.
Matt receives a pension credit of £1,320,000 in a divorce settlement on October 6th this tax year. What annual allowance charge is
due?
A. £112,500
B. £O
C. £100,000
D. £137,500
B. £O
No annual allowance charge is due in respect of pension credits
According to the ONS, what is the probability of a 55 year old male living to age 92?
A. 75%
B. 25%
C. 90%
D. 50%
B. 25%
The answer is 25%
How does a s143 valuation differ from a s179 valuation?
A. s143 valuation has to be done less frequently
B. It doesn’t, the terms are interchangeable
C. A s179 valuation is done by an actuary
D. A s143 valuation is carried out where an insolvency event has occurred
D. A s143 valuation is carried out where an insolvency event has occurred
A s143 valuation is carried out to PPF benefit level in the event of insolvency of the sponsoring employer. A s179 valuation is also to PPF level, but assumes the company is a going concern.
The principal purpose of the National Employment Savings Trust (NEST) is to
A. comply with European pensions legislation.
B. enable smaller employers to meet the auto-enrolment obligations.
C. raise revenue for the Government.
D. reduce public sector borrowing
B. enable smaller employers to meet the auto-enrolment obligations.
In order to help employers meet these requirements the Government backed National
Employment Savings Trust (NEST) was introduced, although employers are free to use any
qualifying scheme to meet their requirements under the legislation. We will look at NEST
later in this section.
Chapter 1C
Employers must be prepared to make pension contributions to a qualifying scheme of what
minimum percentage of the qualifying earnings for eligible employees?
A. 1%
B. 2%
C. 3%
D. 4%
C. 3%
Qualifying earnings (2024/25) are all earnings between £6,240 and £50,270 received by the
worker as:
* salary or wages;
* overtime;
* commission;
* bonuses; and
* Statutory Sick Pay, Maternity Pay, Paternity Pay (ordinary or additional) or Adoption Pay.
The minimum levels of contributions that must be paid to the scheme are as follows.
* Employer minimum contribution: 3%.
* Total minimum contribution: 8%.
What is the currently projected State Pension age for a client who is now 30 years old?
A. 66 years old.
B. 67 years old.
C. 68 years old.
D. 70 years old.
C. 68 years old.
The Pensions Act 2014 introduced a requirement that a review of the SPA should be
undertaken in every Parliament. As well as life expectancy, the review will take into account
a range of factors relevant to setting the SPA including, for example, healthy life expectancy
and differences in life expectancy between socio-economic groups. After the review has
reported, the Government may then choose to bring forward changes to the SPA. It intends
to give individuals affected by changes to their SPA at least ten years’ notice and any
proposals to increase the SPA would have to go through Parliament before becoming law.
The first of these reviews proposed bringing forward the increase in SPA from 67 to 68
to between 2037 and 2039 (compared to 2044 and 2046 under the Pensions Act 2007).
However, at the time of writing (May 2024), no legislation had been introduced to make
this change.
The Government published it findings from the second review of the State Pension age
in March 2023. It concluded that the rise to age 67 should go ahead, but that it was not
possible to reach a decision about the proposed increase in SPA to age 68. This will be
looked at as part of the next review.
Mary, aged 64, is coming up to retirement age and is considering her pension entitlements. Mary started work straight from college and between June 1976 and December 1977 worked for an employer whose pension scheme was not contracted out. This means that during this employment she would have built up an entitlement to
no additional State Pension.
The Graduated State Pension was in existence between 1961 and 1975. There was then a three-year gap until SERPS was introduced in 1978. This was subsequently replaced by the State Second Pension in 2002. - Chapter 1, Section E1, Learning Outcome 1
