Chapter 10 - Retirement planning considerations

Question 1

Duncan has a low capacity for loss and wants to use his personal pension plan to provide him with a guaranteed, inflation proofed, income for life. Which of the following best meets his needs?

a.An index linked conventional lifetime annuity.

b.Phased annuity purchase.

c.A series of UFPLS payments.

d.A flexi-access drawdown pension.

Answer 1

a.An index linked conventional lifetime annuity.

no real specific notes, just read the chapter

Chapter reference 10D1

Question 2

A small self-administered scheme [SSAS] has assets of £1m and the trustees wish to invest some scheme assets in the sponsoring company’s own shares. If the company’s value is £100,000, the maximum value of shares the SSAS can hold is:

a.£19,999.99.

b.£4,999.99.

c.£99,999.99.

d.£49,999.99.

Answer 2

d.£49,999.99.

The total value of shareholdings in the sponsoring employer that an occupational scheme
(i.e. a SSAS) can hold is limited to:

• under 5% of scheme assets in any one sponsoring employer; and
• under 20% of scheme assets, where the shareholdings relate to more than one sponsoring employer.

However, the shares in any one sponsoring employer of the scheme must still be less
than 5%.

Chapter reference 10B6A

Question 3

Ruth will crystallise her pension fund and take the maximum pension commencement lump sum. She then needs an income that can be stopped and started as and when required. Which of the following best meets her needs?

a.Phased flexi-access drawdown.

b.Phased annuity purchase.

c.Flexi-access drawdown.

d.A unit linked annuity.

Answer 3

c.Flexi-access drawdown

No real specific notes, just read the section

Chapter reference 10D1

Question 4

What is a potential benefit of using pension funds to purchase a buy-to-let property?

a.If the pension funds are used in conjunction with a mortgage the investment will be leveraged, which may increase the returns achieved.

b.When the property is sold there will be no liability to Capital Gains Tax.

c.Tax relief on mortgage interest is paid at the investor’s highest marginal rate of Income Tax.

d.The property will be outside of the estate for Inheritance Tax purposes.

Answer 4

a.If the pension funds are used in conjunction with a mortgage the investment will be leveraged, which may increase the returns achieved.

• If the client’s pension fund is significant it may be possible to just use the tax-free PCLS to either buy the property outright or as a deposit on the property. This would not result in any income tax liability (in respect of accessing their pension) for the client.
• Using the PCLS as a deposit and taking out a buy-to-let mortgage may make sense for someone in good health who expects to live for many years. The big attraction is that the investment will be leveraged – i.e. the returns on the geared investment could be significantly higher than the cost of the mortgage leading to higher returns overall.
• Once the property has been bought, the ongoing rental income plus the capital value of the property may protect against the risk of running out of cash during the client’s lifetime.

Chapter reference 10F2A

Question 5

What is NOT a condition that must be met if a small self-administered scheme makes a loan to its sponsoring employer?

a.The interest rate charged must be no lower than 1% above the average base rate of the six main clearing banks.

b.The loan must be repaid in equal annual instalments of capital and interest.

c.The loan must be secured as a first charge on assets that initially have a value at least equal to the loan plus the interest.

d.The loan must not last for longer than three years and can only be rolled over once.

Answer 5

d.The loan must not last for longer than three years and can only be rolled over once.

They should not last for longer than five years, although at the end of the original term it is possible to roll over loans for one further period of no more than five years (without replacing the existing security), if the employer is having difficulties in meeting payments due

Chapter reference 10B6B

Question 6

Archie is aged 25 and is a member of his employer’s workplace pension scheme. The scheme has a normal pension age of 65 and Archie is invested in a medium risk lifestyle fund. It is most likely that the de-risking process will start:

a.no sooner than 35 years’ time.

b.in 25 - 30 years’ time.

c.in 30 - 35 years’ time.

d.in 25 - 35 years’ time.

Answer 6

c.in 30 - 35 years’ time.

To deal with this situation some pension providers offer a lifestyling option. With this option
the investment mix of the pension fund is automatically moved away from equities and into
fixed interest investments and cash as retirement approaches.

the switching begins between five and ten years before the individual’s selected retirement age

Chapter reference 10B5A

Question 7

If a client wants a high proportion of their pension fund to be held in cash, with the balance held in funds where there may be a limited degree of fluctuation in value, they are most likely to be categorised as having a:

a.high attitude to risk.

b.medium attitude to risk.

c.medium to high attitude to risk.

d.low attitude to risk.

Answer 7

d.low attitude to risk.

Low risk is

The client is a cautious investor and wants a high proportion of pension funds to be in
cash or other guaranteed investments. Some pension investments could be in funds where there may be a limited degree of fluctuation of values in return for prospects of modest
long-term growth.

Chapter reference 10B1

Question 8

The OJH Ltd small self-administered scheme [SSAS] has assets valued at £780,000 and outstanding borrowing of £130,000. As a result the maximum loan the trustees can make from the scheme to OJH Ltd will be:

a.£325,000.

b.£390,000.

c.£260,000.

d.£195,000.

Answer 8

a.£325,000.

Loans from an occupational scheme to the sponsoring employer must not exceed
50% of the net value of the scheme’s assets at the date the loan is granted.

IDK why they arent including the value of the assets already borrowed as it says they should in the book, probably due to the word ‘maximum’ in the question so dumb wording

Chapter reference 10B6B

Question 9

Penny has earned income of £60,000 in 2024/25. If she withdraws £25,000 from her ISA and £25,000 from her flexi-access drawdown fund, how much income tax will she pay on these withdrawals?

a.£5,000.

b.£20,000.

c.£10,000.

d.£7,500.

Answer 9

c.£10,000.

Flexi-access generally uses all the PCLS so the client is paying income tax on the income from this.

ISA withdrawals are tax free

Chapter reference 10D1C/10F1

Question 10

Why might a 68 year old with an uncrystallised pension valued at £80,000 and a mortgage-free house worth £680,000, use equity release to provide a £30,000 lump sum instead of taking capital from the pension?

a.The costs associated with equity release are likely to be lower than those associated with taking the lump sum from the pension fund.

b.They will not be able to take £30,000 out of the pension as a lump sum.

c.The rate of interest associated with the equity release is likely to be very low.

d.Equity release will reduce the value of the estate for inheritance tax purposes leaving the pension fund untouched, which will be outside of their estate.

Answer 10

d.Equity release will reduce the value of the estate for inheritance tax purposes leaving the pension fund untouched, which will be outside of their estate.

When deciding whether to use equity release rather than take an income from a pension
there are a number of considerations:

* equity release will reduce the value of the client’s estate for IHT purposes and may allow
them to leave the more IHT efficient pension untouched
* if the value of the house is less than the available nil rate band, the costs associated with taking an income from the pension tend to be less than those associated with equity release (e.g. equity release costs can include valuation, arrangement and legal fees)
* the rate of interest associated with the equity release can be very high, so individuals may prefer to access their pension initially and then release equity from their house later in retirement
* the release of capital may affect the homeowner’s tax position and entitlement to State benefits.

Chapter reference 10F2B

Question 11

Outline eight factors that are likely to affect a client’s financial needs at and after retirement.

Answer 11

Any eight from the following:

• when the client would like to retire;
• the amount and pattern of income and capital needed to support the client’s desired lifestyle, both in the early years of retirement and their longer-term needs;
• whether they prefer their retirement income to be guaranteed or not;
• how they intend to use their pension funds to provide an income in retirement (e.g. do they intend to take the full pension commencement lump sum (PCLS) followed by income from a flexi-access drawdown (FAD) or a series of uncrystallised funds pension lump sums (UFPLS));
• any non-pension assets that are available to provide an income in retirement;
• any specific needs the client has for large capital outlays at or after retirement;
• any specific liabilities that will need to be repaid at or after retirement;
• the client’s requirements for income or capital to be available for beneficiaries on
  their death
• other specific requirements, such as provision for long-term care, income tax or estate planning aims.

Question 12

Explain why cash deposits should be considered as part of a pension investment portfolio

Answer 12

Cash deposits are suitable as part of a pension investment for the following reasons:

• cash deposits are readily realisable and so a holding in cash is suitable for providing the PCLS or an UFPLS at retirement;
• a cash holding is attractive when equities are falling in value;
• if interest rates are rising cash deposits are preferred to fixed interest investments, because the value of fixed interest investments falls as interest rates rise
• cash deposits are also useful for providing the income in the early years of a drawdown pension contract

Question 13

An investor with a fixed interest gilt holds the investment to redemption. What are the consequences of an increase in inflation over the term of the investment?

Answer 13

The coupon and the redemption value are fixed in value. Hence, if inflation
increases over the term of the investment the value of the income and the
redemption value will be reduced in real terms.

Question 14

Into what are the investments underpinning a with-profits fund traditionally invested?

Answer 14

The investments underpinning a with-profits fund are traditionally invested into all four asset classes, i.e. cash, fixed interest, equities and property.

Question 15

Outline three potential drawbacks of using funds from a SIPP to invest in the unlisted shares of an employer.

Answer 15

The reasons are:

• it is high risk, as employees will be depending upon their employer for their retirement income as well as their current earnings;
• shareholdings in an employing company can create conflicts of interest
• for unlisted companies, shareholdings will generally be highly illiquid

Question 16

In respect of member directed pension schemes, the definition of tangible moveable property covers personal chattels (e.g. antiques, art and cars) but excludes certain business assets valued at not more than what amount?

Answer 16

The list of ‘taxable property’ covers residential property and most forms of tangible
moveable property (i.e. antiques, art and cars) but excludes certain business assets valued at not more than £6,000.

Question 17

Four clients all have defined contribution pension funds of £200,000 and require an
income of £12,000 p.a. Assuming they all have a balanced attitude to investment risk and ignoring any non-financial factors, which of these clients is most likely to have
the lowest capacity for loss?

a. William, aged 62, who has a significant portfolio of rental properties.
b. Sarah, a widow who is 72 and in receipt of her Basic State Pension, but has no
other savings and investments.
c. Richard, who is 67 and in receipt of his State Pension and who also receives a
generous pension from his previous employer’s defined benefit scheme.
d. Janice, who is 58 and who will be able to reduce withdrawals from her defined contribution scheme when she reaches SPA, at which time her State Pension and company pension income will be adequate for her needs.

Answer 17

The answer is b. It is most likely that Sarah will have the lowest capacity for loss
because she is the most dependent upon the income from the defined contribution scheme.

William’s portfolio of properties will provide rental income and could be sold to provide capital if necessary.

Richard is in receipt of his State Pension and of a generous secure pension income, so he has more secure income than Sarah.

Janice only needs £12,000 a year for a few years so it is far less likely that her
pension fund will be depleted, even though she is younger than the other three clients.

Question 18

Audrey has a medium high attitude to risk and has no capacity for loss. She would
like an income that is guaranteed to keep pace with inflation for her lifetime. Which of the following options are likely to be suitable for her purposes?

a. UFPLS.
b. Flexi-access drawdown.
c. Conventional lifetime annuity.
d. Scheme pension.
e. Phased flexi-access drawdown.

Answer 18

The answers are c a conventional lifetime annuity and d a scheme pension.

Question 19

Darren, aged 35, has medium attitude to risk, and has chosen to invest his pension contributions via his provider’s lifestyle funding option. He has chosen a retirement age of 65 as that is when he intends to commence flexi-access drawdown.

Which of the following statements will apply to Darren?

a. Lifestyle funding is unsuitable for someone who intends to take an income via drawdown pension.
b. A lifestyling option suits his attitude to risk.
c. The switching from equities into fixed interest and cash will begin around his 50th birthday.
d. The switches will occur at set times without any account taken of prevailing
investment conditions.

Answer 19

a. True. Lifestyling aims to have the fund entirely switched into cash and fixed interest at the selected retirement age (i.e. 65). Drawdown requires that a significant amount of the fund remains invested in equities. This is because equities provide potential for capital growth, which should help to sustain the value of the fund over the longer term once income withdrawals commence and cover the ongoing charges that will apply.

b. True. Lifestyling has a high equity content in the early years, which is suitable for
someone with a medium or higher attitude to risk.

c. False. The switching begins between five and ten years before the individual’s chosen retirement age (i.e. in this case between the age of 55 and 60).

d. True. The switching is automatic and takes no account of prevailing investment conditions.

Question 20

Multi-Choice

Sophie, aged 25, earns £30,000 p.a. She intends to invest regular monthly amounts plus one off lump sums with the aim of providing herself with an income in retirement and she anticipates she will pay in around £5,000 p.a. She has a medium/ high attitude to risk and intends to invest wholly in equity funds. In 2024/25 the advantages to her of using an equity ISA to fund for retirement as opposed to a personal pension plan can be said to include

(choose all that apply):

a. Tax free income
b. Increased savings discipline
c. She will receive tax relief on the whole contribution
d. Higher levels of contributions are possible.

Answer 20

a. True: the income taken from an ISA is not subject to tax.

b. False: the ISA funds are accessible at any time Sophie wishes to draw on them
as opposed to a pension where the funds are only available at normal minimum pension age (unless she qualifies earlier under ill-health provisions). It is their relative inaccessibility which causes pensions to be considered as promoting a
greater savings discipline.

c. False: she would receive tax relief on the whole contribution if it were paid into a personal pension, but the maximum she could pay into a Lifetime ISA and receive a ‘bonus’ of 25% from the Government (equivalent to the 20% tax relief she would receive from a pension contribution) is £4,000. Any contribution in excess of this cannot be paid into the Lifetime ISA and thus will not benefit from the Government bonus.

d. False: she is able to pay higher levels of contribution to her pension (up to her
relevant UK earnings and claim tax relief) whereas her contributions to the ISA are
limited to a maximum of £20,000 for the tax year 2024/25.

Question 21

Geoff believes that investing in his business makes more sense than investing in his
pension. List three potential drawbacks to this approach

Answer 21

The potential downsides if Geoff follows his proposed course of action are:

• lack of diversification: both current earnings and future retirement income will
  depend on the business;
• the date of retirement may not coincide with a good time to sell the business; and
• there may well be better investment opportunities available, which would yield a greater return.

Question 22

During the pension accumulation phase it is vital that the investments into which the pension contributions are being made are regularly reviewed and then contributions re-directed, or funds switched if required. Give three examples of when it may be necessary to make such changes.

Answer 22

Any three of the following:

• Annuity purchase date is approaching and funds need to start to be moved into
  cash and fixed interest.
• If a fund is performing poorly against a benchmark, future contributions can be
  redirected to a suitable alternative.
• If the client’s attitude to risk changes, the funds may need to be moved to
  investments that better meet their needs.
• New funds may become available that offer greater growth potential

Question 23

What are the rules surrounding loans to sponsoring employers from occupational schemes?

Answer 23

• Must not exceed 50% of net assets
• Secured as first charge
• Minimum interest rate 1% over the average base rate of the 6 main clearing banks
• Rounded up to higher 0.25%
• No longer than 5 years but can roll over once
• Payments must be equal instalments of capital and interest

Question 24

What are the benefits to the member of receiving an income from a scheme pension paid from a money purchase scheme?

Answer 24

• Guaranteed income for life
• Can be set to increase each year
• Does not normally trigger MPAA

Question 25

What are the drawbacks to the member when choosing to take an income from a lifetime annuity?

Answer 25

• Set income unless flexible annuity chosen
• Early death and income stops unless survivor’s pension included
• Payment from flexible annuity triggers MPAA

Question 26

Name two disadvantages of using a buy-to-let property as an alternative to a pension.

Answer 26

• Lack of diversification
• Void periods
• Maintenance costs
• 3% levy on SDLT
• CGT rates of 18% and 24%
• Value of property in estate for IHT

Question 27

Name two disadvantages of reinvesting profits in a personal business rather than making pension contributions.

Answer 27

• Lack of diversification
• Sell business to retire - timing issues
• Could be better investment opportunities