Chapter 3: Unsecured Income Options Flashcards
What is the max amount of income allowed to be drawn from a capped drawdown pot and what happens if they exceed this level?
150% of the GAD rate.
Plan is converted to FAD.
if income is then taken from the FAD the MPAA is triggered
Can you contribute to a capped drawdown plan?
Yes as long as you are in with AA Threshold income etc.
How do you calculate an individual’s max GAD withdrawal?
- Age in complete years
- Gilt Yield from 15th of last month
- Round % down to nearest 0.25% (if not exact multiple)
- Age and Yield to establish GAD rate
- Calculate 150% GAD withdrawal using DC fund value
Sam is single aged 65. She has DC fund value of £425,000. What is her maximum withdrawal if her GAD rate is £54 per £1,000 of fund
54/1000 x 425,000 = £22,950
£22,950 x 1.5 (150%) = £34,425
Outline the additional information you will require when advising Aarav on whether or not he should convert his capped drawdown plan to a flexi-access drawdown plan
- Health/longevity.
- Age he plans to stop working.
- Additional income required/income required/expenditure.
- Maximum income available/Governments Actuary’s Department (GAD) rate.
- Value of the uncrystallised/crystallised pension fund.
- Any need for capital lump sum.
- Other assets/pension funds/inheritances/plans to downsize/State Pension/capacity for loss (CFL).
- How much employer contributing/how long will employer contribute for.
- Will provider allow further funds to be designated to drawdown/will provider allow FAD conversion.
Explain briefly the benefits of transferring into a new capped drawdown arrangement rather than converting it into a flexi-access drawdown arrangement
- Retains ability to take an income from capped drawdown (within limits) and not trigger money purchase annual allowance (MPAA)/if she converts to flexi-access drawdown (FAD) and then takes any income from the plan she will trigger the MPAA.
- Will not impact on her current pension contributions/will reduce her ability to fund her pension in the future as planned.
- She will be able to designate additional uncrystallised funds to her new capped drawdown (assuming allowed by the arrangement).
*Income can be taken from capped drawdown plan up to max limit.
Explain briefly the criteria that must be met in order to transfer from an existing capped drawdown arrangement to a new capped drawdown arrangement.
- The transfer must be made to a new arrangement.
- On a like-for-like basis/must retain current maximum income limit/review cycle.
- All of the current plan assets must be transferred.
- The funds transferred must be kept separate from any other funds.
When must the maximum income level be reviewed for capped drawdown plans
Under 75:
Review every 3 years, starting from the date when funds were designated, known as reference period
Over 75:
Review occurs annually, income is recalculated at start of each pension year, so first review is the start of the pension year once 75 is attained.
Nigel has £1m SIPP, he is a HRT and requires £20,000 net income each year, how much of his SIPP will he need to crystalise to provide the net income target
Base the % on £100 of pension fund
*£25 tax free, £75 taxable
*£75 x 0.6 = £45 net
*£45 + £25 = £70 net income per £100
*£20,000 / 0.7 = £28,571.42
Define Dependant, Nominee, Successor
Dependant - as specified by HMRC guidelines
Nominee - does not satisfy dependant rules but is chosen my member to receive benefits
Successor - not chosen by original member, chosen by dependant or nominee to receive death benefits
- Section 9.4 of the Financial Conduct Authority’s Conduct of Business Sourcebook (COBS) outlines the relevant risk factors that should be included in a suitability report, when a firm is making a personal recommendation to a client regarding income withdrawals.
- The capital value of the fund may be eroded.
- The investment returns may be less than those shown in the illustrations.
- Annuity or scheme pension rates may be at a worse level in the future.
- The levels of income provided may not be sustainable.
- There may be tax implications.
When can an UFPLS not be taken?
*Member has primary/enhanced protection where TFC is > £375k
*Scheme-specific TFC
*Lifetime allowance enhancement factor such as pension credit received on divorce
Selina and Dominic are married, both have adult children from previous marriages. Selina has a significant pension fund. On her death she would like this fund to provide for Dominic but ultimately ensure that, on his death, the residual value will pass to her children.
Explain why nominating the death benefits to a spousal bypass trust would be suitable in these circumstances.
- Dominic can receive income/loans;
- subject to Selina ‘s wishes/may avoid conflict/Selina chooses the trustees.
- Loans are repayable on death/reducing Dominic’s estate;
- Her children can be potential beneficiaries/remaindermen.
- Ensures the children are likely to receive the residual funds.
- Outside estates for bankruptcy/divorce/remarriage.
Siobhan and Harvey have recently married. Siobhan has a non-dependant adult daughter from a previous relationship. On her death Siobhan would like to ensure that her pension fund is available to provide for Harvey as he has little pension provision of his own. However, she would also like to ensure that, on Harvey’s death, the residual fund will pass to her daughter.
Explain why nominating the death benefits to a spousal bypass trust would be suitable in these circumstances.
- Prevents Harvey accessing the full fund.
- Harvey can receive income/loans.
- Loans are repayable on death/will reduce Harvey’s estate.
- Her daughter can be a trustee;
- which provides her with control/ensures that Siobhan’s wishes are fulfilled.
- Any new spouse or children for Harvey will not be able to benefit from the trust fund/ensures her daughter is likely to receive the residual funds/her daughter is the ultimate beneficiary.
- Outside estates for bankruptcy/divorce/remarriage.
Tax implications of using Spousal Bypass Trust
- Death before 75, lump sum transfer into trust is tax-free, provided member has enough LSDBA available.
- Value above LSDBA is taxed at 45%
*Death over 75 then there is a flat rate of 45% on transfer into trust.
*Also possibility of periodic and exit charges
