Chapter 10 - Retirement planning considerations Flashcards
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.
a.An index linked conventional lifetime annuity.
no real specific notes, just read the chapter
Chapter reference 10D1
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.
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
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.
c.Flexi-access drawdown
No real specific notes, just read the section
A “flexi-access drawdown” allows you to access your entire pension pot flexibly, taking withdrawals whenever you need, while a “phased flexi-access drawdown” means you gradually withdraw a portion of your pension pot over a set period, essentially taking smaller, planned withdrawals from your flexi-access drawdown option instead of accessing the whole amount at once; both options allow you to keep the remaining funds invested and growing, but phased drawdown provides a more structured approach to accessing your retirement income.
Chapter reference 10D1
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.
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
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.
d.The loan must not last for longer than three years and can only be rolled over once.
In addition loans must:
- be secured, as a first charge, on assets that initially have a value at least equal to the loan plus the interest;
– subsequent falls in the value of the security are permitted, provided they are not the result of actions taken by the employer or any connected persons; - carry a minimum interest rate of 1% over the average base rate of the six main clearing banks, rounded up to the higher 0.25% if the resulting figure is not a multiple of 0.25%,
Note: this does not mean that the interest rate charged must be 1% over the average base rate of the six main clearing banks – it means it must be at least this rate or higher; - 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;
- be repaid by equal annual instalments of capital and interest.
Chapter reference 10B6B
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.
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
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.
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
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.
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.
£780,000 - £130,000 = £650,000
50% £650,000 = £325,000
Chapter reference 10B6B
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.
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
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.
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
Outline eight factors that are likely to affect a client’s financial needs at and after retirement.
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.
Explain why cash deposits should be considered as part of a pension investment portfolio
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
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?
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.
Into what are the investments underpinning a with-profits fund traditionally invested?
The investments underpinning a with-profits fund are traditionally invested into all four asset classes, i.e. cash, fixed interest, equities and property.
Outline three potential drawbacks of using funds from a SIPP to invest in the unlisted shares of an employer.
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
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?
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.
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.
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.
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.
The answers are c a conventional lifetime annuity and d a scheme pension.
Multi-choice
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.
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.
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
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.
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.
Geoff believes that investing in his business makes more sense than investing in his pension. List three potential drawbacks to this approach
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.
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.
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
What are the rules surrounding loans to sponsoring employers from occupational schemes?
• 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
What are the benefits to the member of receiving an income from a scheme pension paid from a money purchase scheme?
• Guaranteed income for life
• Can be set to increase each year
• Does not normally trigger MPAA
What are the drawbacks to the member when choosing to take an income from a lifetime annuity?
• Set income unless flexible annuity chosen
• Early death and income stops unless survivor’s pension included
• Payment from flexible annuity triggers MPAA
Name two disadvantages of using a buy-to-let property as an alternative to a pension.
• Lack of diversification
• Void periods
• Maintenance costs
• 3% levy on SDLT
• CGT rates of 18% and 24%
• Value of property in estate for IHT
Name two disadvantages of reinvesting profits in a personal business rather than making pension contributions.
• Lack of diversification
• Sell business to retire - timing issues
• Could be better investment opportunities
Sam, age 42 and earning £50,000 per annum, is looking to take a lump sum from his pension. He is considering taking this as an uncrystallised funds pension lump sum (UFPLS). He should be aware that this may result in
(Tick all that apply.)
A. the reduction of his Personal Savings Allowance to £500.
B. his being subject to the High Income Child Benefit Tax Charge.
C. capital gains on his share portfolio being taxed at 28%.
D. his personal allowance being reduced or eliminated.
A. the reduction of his Personal Savings Allowance to £500.
B. his being subject to the High Income Child Benefit Tax Charge.
D. his personal allowance being reduced or eliminated.
An UFPLS is 75% taxable income. Therefore, depending on the size of the lump sum, it may result in the reduction of his PSA to £500 or even the elimination of it. If his income goes over £60,000 then he may become subject to the child benefit tax charge and if it exceeds £100,000 then it may reduce or eliminate his personal allowance. CGT rates for higher rate taxpayers are 20% (or 24% on property) rather than 28%.
Chapter reference 10F
A small, self-administered scheme (SSAS) is considering making a loan to its sponsoring employer. The scheme administrator should be aware that His Majesty’s Revenue & Customs (HMRC) require that the loan (Tick all that apply.)
A. is no more than 50% of the net value of the scheme assets, excluding any monies transferred in to the SSAS from previous pension arrangements.
B.is secured as a first charge.
C. is repaid in equal instalments over a five-year period.
D. can be rolled over for a further period (not exceeding five years) if the sponsoring employer has financial difficulties.
B.is secured as a first charge.
C. is repaid in equal instalments over a five-year period.
D. can be rolled over for a further period (not exceeding five years) if the sponsoring employer has financial difficulties.
Where a SSAS makes a loan to the sponsoring employer, HMRC rules dictate that it is secured as a first charge, repaid over 5 years (although it may be rolled over for a further 5 years if the employer is experiencing financial difficulties), and it must be paid off in equal instalments. The loan can be no more than 50% of the net assets, and this would include any monies transferred into the scheme from previous pensions.
Chapter reference 10B6B
Crazyideas Ltd has a SSAS in force for the benefit of its 3 directors. The current value of the SSAS is E1.2 million and the major assets comprise holdings of three commercial properties. These properties are currently worth £800,000 and there are outstanding loans totalling E400,000.
The Directors are considering purchasing another property and would like to know how much more the scheme may borrow towards this.
Calculate the maximum additional loan that may be taken by the SSAS, assuming that no further contributions are paid.
Answer
No further loans would be permitted
Detailed explanation
Scheme value £1,200,000
Existing borrowing £400,000
Net scheme assets £800,000
Maximum loan is 50% of net scheme assets:
£800,000 x 50% = £400,000
The existing loan is already at this level so no further borrowing would be permitted
NB. The maximum permitted borrowing is assessed as 50% of the net scheme assets.
However, the resulting figure is the total amount, including all existing borrowing
CII R04 Study Text Chaptea 10, Section B6C Leaming Outcome 6
Morris runs his own business as a limited company and has a SIPP in force for his own benefit. The plan has a current value of £1,567,000 and primary protection was applied for on A-Day.
Morris currently owns the factory that is used by the business and has recently had it valued at £1,850,000.
He plans to arrange for the factory to be purchased by the SIPP and wants to know how much the SIPP would be permitted to borrow to facilitate the purchase.
Calculate the maximum available loan assuming that no additional contributions are made into the SIPP in the current year and that there are no existing loans in place.
Answer
Maximum loan is £783,500
Detailed explanation
Scheme value £1,567,000
Maximum loan is 50% of scheme assets:
£1,567,000 x 50% = £783,500
Because there is no existing borrowing in place the scheme may borrow up to the full 50% of scheme assets
CII R04 Study Text Chapter 10, Section B6C
Jimmy, aged 48, is in the accumulation stage of his pension provision and aims to retire at the age of 60. His attitude to risk would normally be influenced by (Tick all that apply.)
A. his timescale to retirement.
B. the security of his pension provider.
C. his investment knowledge and experience.
D. his overall wealth and other investments.
A. his timescale to retirement.
C. his investment knowledge and experience.
D. his overall wealth and other investments.
All of these would be factors which would influence attitude to risk except the security of the provider. Whilst this may impact whether Jimmy’s adviser recommends that he remain with them, it would not have a direct bearing on his own view of the risk involved with his investments. - Chapter 10, Section B1, Learning Outcome 8
Richard is aged 60 and married to Harriet, aged 50. They have no children. He is in the process of nominating beneficiaries for his pension. He should be aware that(Tick all that apply.)
A. if he dies before doing so, the administrator can pay a continuing income to anyone it chooses.
B. the nomination form cannot be binding otherwise the benefits will fall within the estate.
C. Harriet will not be able to access the benefits until she reaches minimum pension age.
D. if Harriet predeceases him and he has not completed a nomination form, the administrator may nominate anyone it chooses.
B. the nomination form cannot be binding otherwise the benefits will fall within the estate.
D. if Harriet predeceases him and he has not completed a nomination form, the administrator may nominate anyone it chooses.
Where a scheme member dies without making a death benefit nomination and the member has surviving dependents, the administrator can only pay an ongoing income to a dependent. Where there are no dependents then the administrator may choose the recipient. The nomination form cannot be binding otherwise the benefits will fall within the estate. Death benefits may be accessed regardless of the age of the recipient. - Chapter 10, Section E3A, Learning Outcome 8
Steven is interested in using his trust-based SIPP for investing in shares in his employer. The company is unlisted. As his adviser, you should be aware of the possible dangers, that include which of the following? (Tick all that apply.)
A. Steven’s employment and retirement income would be largely dependent on the fortunes of one company.
B. Steven would be restricted to investing no more than 15% of the value of his SIPP in his employer.
C. As his employer is an unlisted company, the shares may be difficult to sell at his time of choosing.
D. Steven would be forced to sell the shares in the event of his leaving the company.
A. Steven’s employment and retirement income would be largely dependent on the fortunes of one company.
C. As his employer is an unlisted company, the shares may be difficult to sell at his time of choosing.
If Steven uses his trust-based SIPP fund to invest in his company’s shares, his employment and pension income would be heavily dependent on the fortunes of one company, and the shares may be difficult to sell. However, he would not have to sell the shares if he left the company. - Chapter 10, Section B6A, Learning Outcome 8
A financial adviser is considering the inclusion of fixed interest securities in a client’s retirement portfolio. She should be aware that (Tick all that apply.)
A. the fixed redemption value is known as the par value.
B. the coupon represents the fixed rate of interest given.
C. they all have a set redemption date.
D. they represent loans to various institutions.
A. the fixed redemption value is known as the par value.
B. the coupon represents the fixed rate of interest given.
D. they represent loans to various institutions.
Fixed Interest securities are loans issued to governments, companies, and other official bodies; they have a fixed redemption (or par) value, and the coupon is the fixed rate of interest they pay. Not all fixed interest securities have a redemption date (the date the loan is due to be repaid); some are undated. - Chapter 10, Section B3B, Learning Outcome 8
Sybil’s cousin has invested directly in commercial property through her self-invested personal pension (SIPP). When considering whether to do the same, Sybil should be aware that (Tick all that apply).
A. property is useful for diversification as this asset class often moves in a different direction to equities.
B. Sybil would not be able to invest in commercial property for the benefit of her own business.
C. property has the potential to produce a positive real return over the longer term.
D. the rental payments could provide Sybil with an income from the investment.
E. Sybil should be prepared for the investment to take some time to complete.
A. property is useful for diversification as this asset class often moves in a different direction to equities.
C. property has the potential to produce a positive real return over the longer term.
D. the rental payments could provide Sybil with an income from the investment.
E. Sybil should be prepared for the investment to take some time to complete.
Property investment offers diversification in a portfolio, particularly as the value of property tends to move in a different direction to equities and, like equities, it offers the potential of a positive real return over the longer term. Income from property is in the form of rent from the tenant; this could be used as a source of income when in FAD. One of the downsides of commercial property investment is the length of time it may take to sell (or purchase).
Sybil could invest in commercial property for the benefit of her own business; therefore, only answer b) is incorrect. - Chapter 10, Section B3D, Learning Outcome 8
Emsie is fast approaching her retirement date. She should be made aware that it is usually the case that expenditure will (Tick all that apply.)
A. continue for National Insurance contributions.
B. cease for on-going pension contributions.
C. cease for income protection insurance.
D. be directed more towards savings.
B. cease for on-going pension contributions.
C. cease for income protection insurance.
After retirement, it is likely that a client will no longer make pension or National Insurance contributions and will no longer have a need for income protection or a need to accumulate more savings. - Chapter 10, Section A2B, Learning Outcome 8``
John’s pension fund is invested in with profits. John should be aware that (Tick all that apply.)
A. a terminal bonus is guaranteed to be paid on crystallisation or earlier death.
B. once added, annual bonuses cannot be taken away.
C. the fund will only invest in cautious/low risk investment areas.
D. annual bonuses are aimed at “smoothing” returns over the term.
B. once added, annual bonuses cannot be taken away.
D. annual bonuses are aimed at “smoothing” returns over the term.
A with-profit fund is invested in a mix of assets, including equities, property, bonds and cash; however, unlike direct investment into these asset classes, the with-profit fund aims for a smoothing affect by adding annual (reversionary) bonuses set at a rate that the provider believes they can achieve from the investments over the longer term. Once added, these bonuses cannot be taken away. A terminal bonus may also be payable on crystallisation or earlier death, but this is not guaranteed. - Chapter 10, Section B4A, Learning Outcome 8
John, aged 45, has no relevant earnings. His wife Abby, a higher rate taxpayer, wants to invest £10,000 towards his retirement. If she pays the maximum net contribution that is eligible for tax relief into a personal pension for John, how much of the £10,000 would be available to invest into an ISA for him?
a. £7,120.
b. £10,000.
c. £7,840.
d. £6,400.
a. £7,120.
as John is a non earner his max pension contributions are £3,600 PA
£3,600 x 0.8 to gross up the amount = £2,880
£10,000 - £2,880 = £7,120.
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.£10,000.
b.£20,000.
c.£5,000.
d.£7,500.
a.£10,000.
All of the payments made in excess of the PCLS are taxable as the member’s pension income via PAYE.
Chapter reference 10D1C/10F1
Buy-to-Lets
people may consider purchasing a buy-to-let (BTL) using their pension income or PCLS as this can offer an income for life and subsequent capital on the sale of property which may also grow in value
benefits
- 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
- 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.
- 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
drawbacks
- usually a high amount of a clients capital is tried up in this investment, someone who is newly retired or nearing retirement will not have a regular salary to fall back on if the investment goes wrong, this also causes a lack of diversification encase the housing market collapses
- If a mortgage has been taken out, interest rate increases will reduce the overall rental yield.
- A buy-to let property needs ongoing maintenance and management. Is this something that someone would want to deal with on an ongoing basis in their retirement? Part of the rental income will need to be used to cover repairs, maintenance, buildings insurance etc. The actual maintenance and management could be handled by a letting agency, but this will incur a management fee, which will reduce the rental yield further + refurbishment work
- There may be periods when no tenant can be found and there will be no income for these periods.
- On sale, any gain made on a residential buy-to-let property in excess of the annual exemption is subject to CGT at 18% and/or 24%. Any gains within the pension fund are not subject to CGT.
SIPP V SASS loans, borrowing and scheme assets
A SSAS can loan no more than 50% of the scheme’s net assets (as at the date the loan is granted) to the sponsoring employer. A contract based SIPP cannot loan money in this way.
A SSAS can only invest under 5% of scheme assets in any one sponsoring employer, although this could equate to 100% of the employer’s shares. This restriction does not apply to a SIPP.
SIPPs and SSASs can borrow to finance an investment but not more than 50% of the scheme’s net assets (i.e. any existing borrowing must be deducted from the fund before the maximum borrowing is calculated).
Joan, aged 70, retired five years ago and now considers herself to have a more cautious risk approach. She is in receipt of the new State Pension at full rate and a small defined benefit pension valued at £5,000 per annum. Her expenditure is typically £30,000 per annum and she draws the balance from a flexi-access drawdown pot valued at £200,000, which is invested into a global equity fund. Joan’s adviser ought to make her aware that (Tick all that apply.)
A. her fund choice may not be appropriate for her risk profile.
B. her current level of withdrawals may not prove sustainable.
C. she may be exposed to pound-cost ravaging in the event of a market downturn.
D. if she elects to purchase an annuity later in life, she may benefit from mortality gain.
A. her fund choice may not be appropriate for her risk profile.
B. her current level of withdrawals may not prove sustainable.
C. she may be exposed to pound-cost ravaging in the event of a market downturn.
A high-risk global equity fund would be unlikely to remain appropriate for a retiree with a cautious outlook, particularly where capacity for loss is also an issue. Withdrawals of 7.5% of portfolio value exceed what is generally recognised as a sustainable withdrawal rate and a significant fall could expose her to reverse pound-cost averaging (also known as pound-cost ravaging). Deciding to purchase an annuity with the funds later in life may result in her being subject to mortality drag as a lack of the cross-subsidy which earlier stage annuitants benefit from. - Chapter 10, Section C, Learning Outcome 8
In relation to a small self-administered scheme (SSAS) loan to an employer, the scheme trustees should be aware that (Tick all that apply.)
A. it cannot be greater than 50% of the scheme’s net assets.
B. it must be secured as a first or second charge on assets to at least the value of the loan.
C. the interest rate must be at least 2% above the average rate of the six main clearing banks, rounded up to the nearest 0.25%.
D. it must not last for more than five years but may be rolled over once if the employer is having difficulty meeting payments due.
A. it cannot be greater than 50% of the scheme’s net assets.
D. it must not last for more than five years but may be rolled over once if the employer is having difficulty meeting payments due.
A SSAS employer loan cannot be greater than 50% of net assets and may be rolled over once if the employer is having difficulty making payment. It must be secured as a first charge on assets to at least the value of the loan. The interest rate must be at least 1% above the average rate of the six main clearing banks, rounded up to the nearest 0.25% - Chapter 10, Section B6, Learning Outcome 8
