Chapter 1 - Context Of Pensions Planning Flashcards
Role of Government - Developments
- Protection for member of occ schemes - Pensions Act 95 set up… + in particular (2), FRS17 (accounting rules), PA 04 - what did it introduce.
- Support for poorest pensioners - Gov did…? & how achieved (2)
- Intro of single pension tax regime - 04/06 known as and intro’d (3) and 04/16 intro’d (1)
- Encouraging Private pension provision - what intro’d (3)
Greater protection for occ scheme members - Pensions Act 1995 set up regulatory and compensation schemes to ensure greater protection. Schemes have minimum funding requirements and increases to pensions in payment. FRS17 - companies have to report deficit or surplus when they occur. Pensions Act 2004 - introduced Pension Protection Fund for DB schemes defaulting.
Support for poorest - various measures in place so they receive minimum level of income. Minimum income guarantee (1999) & State Pension Credit (2003) that tops up income.
3- 04/06 (A-day) single tax regime introduced. Intro’d lifetime allowance and annual allowance. 04/16 tapered annual allowance introduced.
4- stakeholder pensions introduced and employers had to offer access to one, Auto-enrolment introduced 10/12 & those without access to workplace scheme are automatically enrolled into qualifying pension scheme that has minimum contribution level each year.
Role of Government - Developments cont…
- Pension flexibilities (3)
- Changes to State Pension and age (3)
Pension flexibilities - 04/15 - changes into way pensions can be taken, need to seek independent advice before transferring DB scheme & Pension Wise introduced.
- 04/16 new state pension introduced, contracting out abolished and increases to state pension age
Role of Government - Challenges
Living longer - common sense
Amount of savings - study found (4), post auto enrolment (2)
People living longer - portion of people paying tax is decreasing which leaves deficit when paying for state pension.
Amount - Study found that over 50;
- 21% do not have private pensions
- 79% have average pension pot of £146k
- need savings of £282k for comfortable retirement therefore considerable shortfall.
- 9% are confident they have enough
Since auto-enrolment however, another study found;
- 75% workers are contributing to pension
- of those, 59% are saving at least 12% of income.
Role of Gov - Challenges
- Changing type of scheme - study shows (think DC and DB)
- Pension scandals (3)
- Falling stock markets, gilt yields and annuity rates - combo =, fluctuation + example.
- Pensions are complex
Type of scheme - many companies closing DB schemes and replacing with DC schemes. Study shows that number of private sector DB schemes decreased and less open to new members whilst private DC schemes have increased dramatically.
Pension scandals - people wrongly advised to move from occupational pension schemes into personal pensions, illegal use of pension funds and not fulfilling promises.
3- falling stock markets and gilt yield have decimated annuity rates which are based on gilt yields.Annuity rates do fluctuate with gilt yields being extremely volatile due to coronavirus and oil price.
4- self explanatory and people rely too much on state pension. Need for financial advice.
Demographic trends - cost of pensions (2), three points (65, 85, 100)
Impact of demographic trends on pension provision -
Impact on annuities - rate decreases and purchasing rate
Impact of pension flexibility - longevity
UK’s ageing population will have a huge impact on cost of providing pensions + people living longer.
- projected by 2038 one in four people will be over the age of 65.
- fastest increase in people aged 85+ and will double by 2041.
- larger amount of people living beyond 100.
Impact on annuities - At the start of 90s could get an annuity rate of 15% however this has significantly decreased and is now around 4.8%. Number of people purchasing annuities has fallen. Increased life expectancy is cause of this.
Impact of pension flex - more people choosing more flexible DC option therefore longevity becomes an issue as they may run out of money if performance is not good.
Corporate environment factors - when auto enrol?, 04/16 (2), why else could even more DB schemes close?, when DB schemes close & employment trends and they’re affect on ones pension.
October 2012 = auto enrol which has increased pension saving.
04/16 new state pension introduced and contracting out abolished and DB scheme members now need to pay increased NI contributions which could lead to even more being closed.
When DB schemes closed they are replaced by DC schemes which places all burden on policyholder due to loss of guarantees and investment risk. Poor fund performance or annuity rate falls could cause in significant decrease in pension income.
Employment trends affects level of pension savings as people now work for more than one company therefore have paid up plans which is likely that the separate sums will be lower than if they were a member of a single pension scheme for entire working life.
Incentives for saving to retirement - Gov incentives (6), employers and financial advice (not benefit of kind as long as… 2), exempt, pension advice allowance
Government offers the following incentives;
- tax relief on contributions made by individuals.
- contributions made by employers are treated as business expense for corporate tax or income tax.
- investment profits are exempt from income tax and CGT.
- Tax-free cash lump sum (PCLS)
- DC schemes allow for flexible taking of income.
- ability to pass DC funds to beneficiary and more favourable treatment of death benefits.
Employers may be prepared to pay financial adviser for employees. Not treated as benefit in kind as long as;
- similar advice offered to all employees or specific group
- advice only covers their pension and general advice on pension funds.
Exemption for income tax and NI is £500, anything above subject to this.
Member of DC scheme can take a tax-free pension advice allowance of £500 to cover cost of financial advice and can be done max three times. Advice is not limited to the arrangement the £500 has come from and must be paid straight to the adviser.
Disincentives to saving - 6
- Limit to tax free cash amount
- No limit on amount saved in a registered pension scheme but limit on contributions eligible for tax relief.
- Benefits cannot be taken before minimum age of 55 unless ill-health.
- People find pensions complex and opt for simpler savings accounts.
- People feel that pensions are expensive due to charges and advice costs.
- Mistrust of pensions due to past scandals and bad press.
Attitudes to saving - lack of pension provision can be down to (3)
Lack of pension provision can be down to attitudes towards savings;
- Affordability due to other demands on income e.g. dependants, mortgage etc.
- Many people believe that State Pension will give them adequate standard of living in retirement.
- Pension provision feels low priority
Main Pension scheme types - State Pension - pre 04/16 structure & post 04/16 SP + old benefits
People who reached SPA before 04/16 receive benefits based on rules prior which could be mixture of;
Basic State Pension - provided with adequate NIC record plus any of the following;
- State Graduated Pension Scheme - 1961-1975 - provided additional earnings related pension.
- SERPS - 1978-2002 - earnings related part of SP.
- S2P - replaced above in 2002 - applies to employed, carers and disabilities.
Retiring after 04/16 - New State Pension - not entitled to the above but existing benefits and contracting out will be taken into account when calculating entitlement.
DB Schemes - what is it, main advantage, retirement age, provided benefits (3+explanation) and tax free cash.
Provides benefits that are guaranteed to be a proportion of final salary at retirement or on death.
Main advantage is guaranteed benefits. Scheme sets retirement age whereby they will stop paying in and member retires. Benefits that it will provide will be based on three factors;
- Pensionable service - period of membership in the scheme.
- Pensionable Renumeration - definition of salary used to calculate members benefits.
- Accrual rate - rules of scheme that determine rate benefits accrue (1/60th).
They also provide tax free cash lump sum known as pension commencement lump sum (PCLS). Amount is determined by rules of the scheme.
Defined Contribution Schemes - what is it, annuity rates, tax free amount, hybrid scheme goals and how they can take income.
Does not provide guaranteed benefits but instead fund builds up and benefits are decided on size of the fund at the time. If they choose to buy an annuity it will depend on annuity rates at the time.
PCLS amount of 25% of fund size at the time.
Can get hybrid schemes which is funded to provide specific amount of benefits at retirement.
Since 04/15 an individual can take as much or as little as they want from their arrangement once they reach pension age.
DC Schemes - how to take benefits
- Lifetime annuity - how purchased + what, dependant on and flexible
- Scheme Pension - what is it
- Drawdown - capped and flexi access
- Uncrystallised Funds Pension Lump Sum - what
Lifetime annuity - fund is used to purchase a contract from an insurance company and provides member with income for life. This is dependant on size of fund and annuity rates available. Flexible annuity is one where annual rate of income can be reduced each year by any amount.
Scheme Pension - scheme admin uses balance of fund to secure income for life - similar to lifetime annuity with regards to amount based on fund size and rates.
Drawdown - Capped drawdown - amount of income that can be drawn each year is subject to limit set by GAD. No longer available.
- Flexi-access drawdown - no restrictions that can be drawn each year.
UFPLS - Lump sum can be taken directly from DC scheme tax free. Flexible with amounts they want to take as UFPLS.
Death benefits - dependant (4), nominee and successor.
May be payable to a dependant, nominee or successor.
Dependant - someone who meets the following;
- widower or civil partner at the time of death.
- child of the member who is aged under 23.
- child dependant due to mental or physical disability
- financially dependant of member, financial relationship of mutual dependence and mental or physical disability.
Nominee
- Nominated by individual to receive benefits on their death. If no nominee or dependants then scheme admin can make nomination on members behalf.
Successor
- individual nominated by dependant or nominee to continue to receive their drawdown. Scheme admin can nominate if they fail to name successor.
