Chapter 4 Flashcards
SPPs were introduced by the government to encourage people to save, with lower charges and lower minimum premiums. What are the charges and minimum premiums in a Stakeholder Personal Pension?
Maximum 1.5% for the first 10 years, then 1% thereafter.
Premiums set at no more that £20 a month.
What is the difference between a Personal Pension Plan (PPP) and a Self Invested Personal Plan (SIPP)?
Same rules (money purchase, anyone under 75 can contribute, automatic 20% tax relief) BUT
- can invest directly, e.g. Lloyds (rather than use the funds)
- can invest into commercial property
- Higher costs
What is the minimum retirement age?
55
What are TRUST-BASED SCHEMES?
They are
- set up by an employer
- run by a board of trustees
- employer and employee contribute
- contributions are deducted from the employee’s salary
- no guarantees
What is an SMPI?
A Statutory Money Purchase Illustration (SMPI) is an annual statement in a Trust-Based Scheme.
What are the differences between Defined Benefit and Defined Contribution pension schemes?
DEFINED BENEFIT - provided by an employer. The pension the worker receives at retirement will depend on how long they were a member of the pension scheme and how much their salary was when they retired. Generally the worker will know how much pension they can expect to receive at retirement and this amount is, more or less, guaranteed.
DEFINED CONTRIBUTION - Can be provided by an employer, or the individual can take it out for themselves from a life and pensions provider. The pension an individual receives will depend on the amount of money built up in their pension pot when they retire. There is, therefore, no guarantee as to how much their pension will be.
What is NEST?
The NATIONAL EMPLOYMENT SAVINGS TRUST (NEST) is a pension scheme introduced by the government to help employers meet the pension requirements. It complies with auto-enrolment rules and any employer can join it.
What are the AUTOMATIC ENROLMENT rules for a) Defined Benefit and b) Defined Contribution schemes?
DB - Must provide a minimum level of benefits at retirement.
DC - A minimum level of contribution must be paid into the worker’s pension pot.
What are the encashment options for an individual on a DEFINED BENEFIT scheme?
Either:
- a taxable scheme pension of whatever the value of the pension is, payable for life, OR
- an immediate tax-free lump sum of up to 25% of the value of the scheme pension, and then a smaller scheme pension per year payable for life.
What are the encashment options for an individual on a DEFINED CONTRIBUTION scheme?
- A scheme pension
- A lifetime annuity
- Flexible access
Describe LIFETIME ANNUITY
A LIFETIME ANNUITY is bought with the money from the member’s pension pot. Usually, the member takes 25% of the value of their pension pot as a tax-free lump sum and then uses the rest of the money to buy the annuity.
Describe FLEXIBLE ACCESS
An option open to an individual on a DEFINED CONTRIBUTION scheme. The member’s pension pot remains invested and the member takes the money they require to meet their financial needs directly from the pot as and when they need it.
Describe the two main ways in which a pension member can access their pension flexibly.
FLEXI-ACCESS DRAWDOWN - once the scheme member has taken their 25% tax-free cash, the remainder of their pension pot is invested in a pension drawdown fund of the member’s choosing. The member can then either arrange for a regular income to be paid out to them from their fund, take lump sums as and when they need to, or do both.
UNCRYSTALLISED FUNDS PENSION LUMP SUM (UFPLS) - Like Flexi-access drawdown, the scheme member’s pension pot remains invested in a fund suited to their attitude to investment risk. Each time the member wants to take out a lump sum it is made up of two parts:
25% of the payment will be tax free, representing the tax-free cash allowed, and
75% will be taxable as pension income (even though it is being taken as a lump sum).
What is the tax charge for a lump sum from a lump-sum death benefit, value protection or value of pension pot, on a defined contribution scheme for a person over the age of 75?
45%
What is the income tax payable on a lump sum from a guaranteed period, dependant’s pension, survivor’s pension or a flexi-access drawdown pension, on a defined contribution scheme for a person over the age of 75 (or a defined benefit scheme)?
Received after tax at the recipient’s rate has been deducted.
