Chapter 2E - Retirement Planning Flashcards
What percentage of members of occupational pension schemes retire on their maximum allowable pension?
1%
What percentage of pre-retirement income do most people retire on?
20-30%
What factors are increasing the uncertainty over the future reliability of State Pension payments?
-longer life expectancy, working population is falling and need to support a larger retired population
Which inadequate planning factors cause financial hardship in planning for retirement?
- contribute too little
- contribute too late
- ignore shortfalls from job changes or unemployment
Which five basic factors will affect a clients pension requirements?
- age
- income
- dependents
- previous and current pension arrangements
- State provision
What are the two main Age considerations when planning for pensions?
- how old are you now?
- at what age do you want to retire?
What is the current state pension age?
What proposed changes are planned, and when will they be actioned?
- 66
- 67 (2026-28); 68 (2037-39)
How does age affect the ability to save into a pension?
- young people may be better placed paying for protection
- 40s may have fees related to financial dependents
- 50s may be too late and require larger contributions
Annual Allowance
- base
- higher earners
- flexibly accessed benefits
- £40,000 or 100% of gross taxable earnings
- for every £2 over £240,000, £1 is taken from the allowance, to a minimum of £4,000
- Money Purchase Annual Allowance - £4,000
What are the benefits of assuming a client will retire tomorrow, when pension planning?
- allows cost expression in todays values
- level of required income can be expressed as a percentage of current earnings. Include monthly costs, any large one-off’s and remember that some costs (mortgage, commuting) may reduce
- inflation can then be applied to project inflation-linked figures to retirement age
- consider alternative scenarios such as retiring early or income failing to rise as expected
What is a major factor in determining clients priorities and the money available for contributions?
Dependents and their costs
What needs to be taken into account when identifying the amount of ongoing pension provision that can be made?
An income earning spouse giving up, or taking up, work to raise a family
True or False: with pensions, a partial contribution is better than no contribution at all
True
What other Dependent-based provisions may need to be taken into consideration?
- life cover
- dependents, especially their needs when the client retires
What are the three potential sources of existing pension provision?
- state pension benefits
- current membership of pensions
- retained benefits in old pension schemes
How do you calculate the pension payments a client needs when existing provisions are a factor?
Total amount required minus existing provisions divided by the months to retirement
Why are pensions such an effective means of saving for retirement?
- tax relief on contributions
- exemption from income and capital gains tax within the fund
How do ISAs compare to pensions when saving for retirement?
- contributions do not get tax relief
- fund grows free of income and capital gains tax, as with a pension
- proceeds are free of tax, where a pension is taxed as income
- whole fund can be taken tax-free at any time
- particularly attractive to lower rate taxpayers who would not get higher rate tax relief
What are the two names of popular annuity types?
- compulsory purchase annuity (CPA) (also known as a Lifetime Annuity); bought with proceeds from a pension fund
- purchased life annuity (PLA); bought with other capital
How are compulsory purchase annuities and purchased life annuities different in terms of taxation?
CPA taxed as income on the whole pot value; PLA separated into interest and capital, where the interest is taxed at usual rates, and the capital is offsetting the capital paid in. This interest can be offset against the personal savings allowance
Which annuity type will have the better comparable rate?
Purchased Life Annuity (PLA) as the market is not competitive
What options do clients have when claiming a pension but not taking and annuity?
- Flexi-access drawdown; tax-free sum and the regular or ad-hoc sums
- uncrystallised funds pension lump sum (UFPLS); taking partial sums with a tax-free and taxable portion
Lets talk about New State Pension…
- max payout per week
- NI contributions required; minimum
- who for?
- £175.20
- 35 years for full payout, 10 years minimum
- anyone retiring after 6 April 2016
Lets talk about Basic State Pension…
- max payout per week
- NI contributions required; minimum
- who for?
- £134.25
- proportionately lower payout if insufficient NI credits
- anyone retired before 6 April 2016
What are the 3 historic Additional State Pension schemes?
- State Graduated Pension
- State Earnings Related Pension Scheme (SERPS)
- State Second Pension (S2P)
State Graduated Pension…
- Started?
- Index-linked?
- 1959
- No
State Earnings Related Pension Scheme (SERPS)…
- Started?
- Index-linked?
- Rough expected pension percentage?
- 1978
- Yes
- around 50%
State Second Pension (S2P)…
- Started?
- Index-linked?
- Re-focused on…?
- 2002
- Yes
- Lower Earners
Who were private pensions traditionally beneficial for?
- self-employed
- high earners
- average earners with aspirations of higher retirement income
What incentive is placed on private pension provision, to encourage this over use of State pension?
Tax relief on contributions
What term was given when an individual opted out of the State earnings related scheme?
Contracting Out
When was contracting out abolished?
6 April 2016
What are the two main types of pension scheme in the UK?
- occupational
- personal
Occupational pension schemes are set up by an employer; who is appointed to oversee the pension on behalf of the members?
Trustee(s)
What are the two main types of occupational pensions?
- Defined benefit
- Defined contribution
What is the main benefit of setting a pension scheme up under trust?
separates the assets of the pension from those of the employer
When talking about a Defined Benefit pension, what is an accrual rate?
How quickly the pension builds up; often 1/60th or 1/80th of earnings for each year of pensionable service
True or False: Defined Benefit pensions factor in all bonuses and overtime
Usually false; unless the scheme rules dictate otherwise, it is often based on base-rate earnings
What are the two main factors that cause expense with defined benefit schemes?
- lower-than-expected investment returns
- scheme members living longer
What have some Defined Benefit policies changed into? How is it different?
Career Average Revalued Earnings (CARE) schemes; these average earnings over the persons whole career and generally leads to a lower payout
True or False: An employer is not required to ensure sufficient provisions to cover the pension promised
False
Define Pooled Fund
- all monies paid into one fund
- cant decipher the split per member
- actuary advises trustees how much needs to be paid in to pay the promised benefits
Why are defined contribution pensions preferable to employers trying to control costs?
they determine the contribution amount
What is the key difference between defined benefit and defined contribution schemes?
- DC has no promise of pension payment
- dependent on investment return and costs
Define an Earmarked Money Purchase Scheme
- each member has an identifiable ‘pot’
- contributions are added to ‘pot’ and invested
