Chapter 3 - Retirement Planning (Part 2)

Question 1

What are the 3 roles of the FCA with regard to pensions?

Answer 1

In respect of pension schemes, the FCA is responsible for the:

• regulation of the sales, promotion and any marketing of pension plans (except occupational trustbased schemes)
• authorisation of investment firms that run investment plans for pension schemes, and
• authorisation of advisers that provide advice on pension plans.

Question 2

What are the regulations with regard to advising on pension transfers?

Answer 2

• if the pension fund is worth more than £30,000, then the member must take appropriate financial advice from an authorised independent adviser
• the adviser must have the necessary permissions to carry on a regulated activity, which means that they must be a pension transfer specialist (or the person checking the advice must be a pension transfer specialist)
• to be a pension transfer specialist the adviser must have the appropriate qualification such as the Certificate in Pension Transfers and Planning Advice
• since October 2020, new rules require that a pension transfer specialist must undertake a minimum of 15 hours of structured CPD which is specific to that activity in addition to their standard CPD requirements, and
• record-keeping rules mean that records must be kept indefinitely for a pension transfer specialist.

Question 3

What is auto-enrollment and what happens if a person opts out?

Answer 3

• Employers had to automatically enrol their employees into a qualifying workplace pension by 2018.
• Employees can opt out but must be re-enrolled every three years.

Question 4

What is Pension Offsetting when divorcing?

Answer 4

Offsetting involves valuing pension benefits at the date of divorce; these are then offset against other assets. The individual who has the pension rights retains those rights, while the spouse is given ownership of other assets, eg, the matrimonial home.

Question 4

What is Pension Sharing when divorcing and who are the debit and credit members?

Answer 4

With this method two distinct entitlements are ascertained, to separate the ex-spouse’s entitlement (specified by the court order) from that of the scheme member.

The advantage of this method is that there is now a clean break between the couple.

A pension sharing order creates:

• a pension credit member (who is the ex-spouse), and
• a pension debit member (who is the member).

Question 5

What is a Pension Attachment Order when divorcing?

Answer 5

With this method, the pension scheme trustees, instructed by the courts, will pay the ex-spouse a percentage of the member’s future pension entitlement.

Question 5

What are the PPF levels of compensation?

Answer 5

• 100% of pension entitlement for members who have reached the scheme’s normal pension age, are in receipt of survivor’s benefits, or are in receipt of an ill health pension.
• Payments for service after 5 April 1997 rise in line with inflation subject to a maximum of 2.5% pa (payments relating to service before that date do not increase).
• 90% of pension entitlement for members who have not yet reached the scheme’s normal pension age.
• Once compensation is paid, payments from 5 April 1997 rise in line with inflation subject to a maximum of 2.5% (payments relating to service before that date do not increase).
• A spouse’s pension of 50% of the member’s PPF compensation amount.

Question 6

What is the relief at source method for trust based schemes and contract based schemes?

Answer 6

• Trust-based schemes typically operate on a ‘net pay’ arrangement, which means that an employee has their contribution deducted from their pay before tax is applied. They receive full tax relief immediately.
• Contract-based schemes must receive contributions from pay after tax and NICs have been deducted. The contribution is treated as being paid net of basic-rate tax and is ‘grossed up’ by the scheme. The member must then claim any higher-rate or additional-rate tax they are entitled to via self-assessment.

Question 7

What are the rules for eligibilty of employees for auto-enrollment?

Answer 7

• those aged 22 and above
• under SPA, and
• earning over £10,000 pa.

Question 8

What are the required minimum contributions for scheme pensions?

Answer 8

As of April 2019, the required minimum was 8%, with at least 3% being paid by the employer.

Question 9

What fees does the The National Employment Savings Trust (NEST) charge?

Answer 9

NEST charges are 0.3% pa plus 1.8% on contributions

Question 10

What are the 2 types of AVC?

Answer 10

• On an Added-Years Basis - it is possible to use AVCs to buy added years of service in the main scheme.
• AVCs on a Defined Contribution Basis - The member’s AVC will be paid into a fund that is invested until retirement when it is then used to pay an additional pension for the member.

Question 11

What is a Transfer Value Comparitor?

Answer 11

It highlights the value of the benefits the client is giving up. It calculates the capital sum which would be needed to purchase benefits of the equivalent value at the scheme’s normal retirement date

Question 12

What is the critical yield?

Answer 12

The annualised return after deduction of charges which would be required in order to generate a lump sum sufficient to purchase benefits matching the scheme ones.

Question 13

What are the annual management charges for Stakeholder Plans?

Answer 13

• Prior to 6 April 2005 – maximum charge is 1% of the fund value.
• Post-5 April 2005 – maximum charge is 1.5% for the first ten years and 1% thereafter.

Question 14

What are the main features of a SIPP?

Answer 14

• wider investment opportunities, which is useful for those who wish to manage their own fund and investments.
• To facilitate wider investment opportunities, a SIPP can borrow up to 50% of the net scheme assets

Question 15

What is a Small Self-Administered Schemes (SSASs) and what are its features?

Answer 15

• A SSAS is defined as being a scheme with less than 12 members. All members have to be trustees with an equal say in the running of the SSAS.
• SSASs can borrow up to 50% of the net scheme assets
• SSASs can also lend money from the scheme to the sponsoring employer without tax penalties. There are certain conditions which must be met, including:
• no more than 50% of the scheme assets can be lent
• the SSAS must charge interest at a minimum rate of 1% over the average base rate, and
• the maximum term of the loan is five years, which may be rolled over only once.

Question 16

What are the taxation treatment of Lump Sums on Death?

Answer 16

Before 75 - A member can nominate any individual and payments to that individual will be made free of tax, whether taken as a lump sum or accessed through drawdown, providing that the funds are designated within a two-year period.

75 or over - taxed at the beneficiary’s marginal rate

Question 17

What are the Small Pot Payment rules?

Answer 17

Up to three small non-occupational pensions (such as personal pension plans) can be commuted under small pots payments, but there is no limit on the number of occupational pensions that can be taken under small pots. The following conditions need to be fulfilled to allow the payment to be commuted as a small pot:

• The member has reached the minimum retirement age of 55 (or satisfies the ill health rules).
• Each payment does not exceed £10,000 at the time that it is paid to the client.
• The payment extinguishes all member benefit entitlement under the arrangement.

Question 18

What are the benefits of deferring the state pension (since 2016)

Answer 18

• A state pension increase of 1% of pension for every nine weeks’ deferral.
• 12 months deferral equates to just under 5.8%.
• The deferred amount is paid with the normal state pension payment.
• There is no longer the option to take the deferred amount as a lump sum.
• It is not possible for a spouse or civil partner to inherit deferred benefits

Question 19

What is the mortality cross subsidy for an annuity?

Answer 19

the rate is calculated on the assumption that a certain number will die early

Question 20

What is mortality drag for a FAD?

Answer 20

the additional annual percentage rate by which the fund growth has to exceed the interest rate used in the annuity

Question 21

Which type of annuity gives smoother returns? With-profits or Unit linked?

Answer 21

With-profits

Question 22

What are flexible annuities and their implications re:- triggering MPAA rules

Answer 22

They decrease by an amount agreed in the contract

They trigger MPAA rules

Question 23

What is the maximum duration for a short-term annuity

Answer 23

5 years (can be used after 75)

Question 24

What is the difference between impaired and enhanced annuities?

Answer 24

Impaired = clients with professionally diagnosed medical conditions which are expected to result in a below-average life expectancy

Enhanced = clients who exhibit one or more lifestyle factors which have been proven to pose an increased risk of early death