Chapter 5 - Defined benefit schemes Flashcards
When does current legislation permit a member of a defined benefit pension scheme to take their benefits from the scheme?
a.From age 50 but the member must retire.
b.From age 55 without retiring.
c.From age 55 but the member must retire.
d.From age 50 without retiring.
b.From age 55 without retiring.
It is possible to take benefits from the normal minimum pension age, currently 55
- benefits are accrued in the usual way up to the date of early retirement, e.g. 1/60th × final
pensionable remuneration for each year of service up to the date of early retirement; and - this is reduced by an early retirement factor, e.g. the pension is reduced by ½% in respect
of every month between the date of early retirement and the date of normal retirement
Chapter reference 5C2
A higher rate taxpayer was a member of her employer’s defined benefit scheme for 18 months before leaving having made personal contributions of £28,000. What net payment will she receive if she takes a refund of contributions?
a.£20,800.
b.£16,800.
c.£22,400.
d.£20,000.
d.£20,000.
The first £20,000 of the refund is taxed at 20% and the excess is taxed at 50%.
Therefore, client will receive:
£20,000 less 20% + £8,000 less 50% = £16,000 + £4,000 = £20,000.
Chapter reference 5F1
If a defined benefit scheme has 600 members and the scheme has six trustees, how many of the trustees must be member nominated?
a.Four.
b.Three.
c.Two.
d.One.
c.Two.
At least one-third of trustees (or at least one-third of the directors of a trustee company) of an occupational pension scheme must be member nominated.
Chapter reference 5E1C
What does the Transfer Club allow members of public sector schemes to do?
a.Transfer their benefits to any other type of defined benefit or defined contribution scheme on an enhanced basis.
b.Transfer their benefits to any other defined benefit scheme without loss.
c.Transfer their benefits to any type of defined contribution scheme on an enhanced basis.
d.Transfer their benefits to another member of the Transfer Club on special terms so they receive a broadly equivalent service credit.
d.Transfer their benefits to another member of the Transfer Club on special terms so they receive a broadly equivalent service credit.
The Transfer Club allows pension
benefits to be transferred between Club schemes on special terms. This means that when a member transfers to another Club scheme, they will receive a broadly equivalent service credit in the new scheme, regardless of any increase in salary on moving.
Chapter reference 5H2A
COBS 19.1.6G states that a transfer of safeguarded benefits from a defined benefit scheme should only be recommended if it is:
a.likely to be in the client’s best interests, and the starting point is that the transfer will be suitable.
b.in the client’s best interests, and the starting point is that the transfer may or may not be suitable.
c.in the client’s best interests, and the starting point is that the transfer will not be suitable.
d.likely to be in the client’s best interests, and the starting point is that the transfer may or may not be suitable.
c.in the client’s best interests, and the starting point is that the transfer will not be suitable.
Under the rules a transfer should only be recommended if it is in the client’s best interests.
The firm should start from the assumption that the transfer will not be suitable. The rule requiring firms to make a personal recommendation when advising on the transfer of safeguarded benefits is found in COBS 19.1.1C
Chapter reference 5G1
Which change to the assumptions used to calculate a cash equivalent transfer value would cause it to REDUCE?
a.A decision by the trustees to ignore scheme underfunding.
b.A reduction in the discount rate.
c.An increase in the annuity rate.
d.An increase in the revaluation rate.
c.An increase in the annuity rate.
The calculation of a CETV is very sensitive to the assumptions used. the lower the annuity rate or the discount factor, the higher the transfer value.
Conversely, the higher the annuity rate or the discount factor, the lower the transfer value.
When we consider the revaluation rate the opposite is true, so the lower the revaluation rate the lower the transfer value and the higher the revaluation rate the higher the transfer value.
Chapter reference 5F3
Pension increase exchange is where a member of a defined benefit scheme gives up:
a.their new State pension entitlement in return for a higher initial occupational pension.
b.their basic State pension entitlement in return for a higher initial occupational pension.
c.both non-statutory and statutory increases to their pension in return for a higher initial pension.
d.non-statutory increases to their pension in return for a higher initial pension.
d.non-statutory increases to their pension in return for a higher initial pension.
Many defined benefit schemes now offer a pension increase exchange (PIE) where the member is offered the option of giving up future guaranteed increases to their pension in return for a higher initial pension with no future increases other than statutory increases.
Chapter reference 5C1B
Maja was a member of a defined benefit scheme between January 1998 and November 2004. The scheme pays the statutory minimum level of escalation once benefits come into payment. When Maja retires in August 2024, she can expect her pension to:
a.increase in line with CPI to a maximum of 2.5%.
b.increase in line with CPI to a maximum of 5%.
c.remain level in payment.
d.increase fully in line with CPI.
b.increase in line with CPI to a maximum of 5%.
Statutory escalation of benefits in payment: member
reaches SPA on or after 6 April 2016
Pension for service after 5 April 1997 but before 6 April 2005 - Must escalate in payment in line with CPI to a maximum of 5% p.a
Chapter reference 5C1A
Stuart was a member of a defined benefit scheme between 1985 and 1995 but only accrued Guaranteed Minimum Pension [GMP] benefits. If he started drawing his pension at the scheme’s normal pension age of 65 in September 2015, what increases to his pension is the scheme responsible for paying?
a.CPI increases to a maximum of 3% on all of his GMP benefits.
b.CPI increases to a maximum of 3% on the GMP accrued between 6 April 1988 and his date of leaving.
c.CPI increases to a maximum of 3% on the GMP accrued prior to 6 April 1988.
d.Full CPI increases on all his GMP benefits.
b.CPI increases to a maximum of 3% on the GMP accrued between 6 April 1988 and his date of leaving.
Statutory escalation of benefits in payment: member reached SPA before 6 April 2016
GMP accrued between 1988 and 1997 - The scheme is responsible for paying increases to the GMP in line with increases in the CPI to a maximum of 3% p.a. Where CPI exceeds 3% in any year the additional escalation up to full CPI escalation is paid by the State.
Non-GMP accrual prior to 6 April 1997 - No requirement for any statutory increases.
Chapter reference 5C1A
A member joined a defined benefit scheme in 1999. If the scheme provides statutory increases to pensions in payment, these will increase in line with:
a.RPI to a maximum of 5% p.a. in respect of pre 6 April 2009 accrual and 2.5% p.a. thereafter.
b.RPI to a maximum of 5% p.a. in respect of pre 6 April 2005 accrual and 2.5% p.a. thereafter.
c.CPI to a maximum of 5% p.a. in respect of pre 6 April 2009 accrual and 2.5% p.a. thereafter.
d.CPI to a maximum of 5% p.a. in respect of pre 6 April 2005 accrual and 2.5% p.a. thereafter.
d.CPI to a maximum of 5% p.a. in respect of pre 6 April 2005 accrual and 2.5% p.a. thereafter.
No matter when you reach SPA, this will be true:
Pension for service after 5 April 1997 but before 6
April 2005 - Must escalate in payment in line with CPI to a maximum of 5% p.a.
Pension for service after 5 April 2005 - Must escalate in payment in line with CPI to a maximum of 2.5% p.a.
Chapter reference 5C1A
Describe how tax relief is awarded on employees’ contributions to a defined benefit scheme under the:
a. Net pay method.
b. Relief at source method
a. The net pay method: contributions are deducted from the employee’s salary before tax is deducted. Hence tax relief will be obtained at source at the employee’s marginal rate.
b. The relief at source method: contributions are paid net of basic rate tax. Members will have to reclaim any higher or additional rate relief via selfassessment or adjustment to their tax code
State five factors that influence the cost of providing the benefits under a defined benefit scheme.
The cost of benefits under a defined benefit scheme is influenced by the (any five of):
- level of the members’ final pensionable remuneration in future;
- investment returns achieved by the underlying pension fund;
- annuity rates available at retirement;
- cost of providing guaranteed benefits to members who leave the scheme before the normal pension age;
- number of deaths before the scheme’s normal pension age; and
- profile of the scheme membership, e.g. the age and marital status.
Sarah is about to retire at the age of 65, which is the normal pension age of her company’s defined benefit pension scheme. Sarah has pensionable service of 26 years. The scheme has an accrual rate of 1/60ths for pension and Sarah’s final pensionable remuneration is £45,000.
Calculate Sarah’s pension entitlement at the scheme’s normal pension age.
(1/60) x years in the scheme x final pensionable remuneration
Sarah’s pension entitlement will be:
26/60ths × £45,000 = £19,500 p.a
Fred joined his company’s defined benefit scheme in 1980. Prior to 6 April 2016, the scheme was contracted out. He is about to retire at the scheme’s normal pension age of 65. The scheme provides statutory escalation to the pension once in payment.
Explain how the scheme must increase the benefits once they are in payment.
The different elements of Fred’s final salary scheme benefits must escalate in payment as follows:
- the scheme does not have to provide any escalation in respect of the pre-1988 GMP;
- in respect of the post-1988 GMP, the scheme is responsible for increasing the pension in payment in line with CPI to a maximum of 3% p.a.
- there is no statutory requirement for the excess benefits accrued before 6 April 1997 to escalate in payment;
- benefits accrued in respect of service after 5 April 1997 but before 5 April 2005 will escalate in payment in line with CPI to a maximum of 5% p.a. The scheme is
responsible for providing these increases - benefits accrued in respect of service after 5 April 2005 will escalate in payment in line with CPI to a maximum of 2.5% p.a.
Philip started working for his current company on 1 November 2002. He joined the defined benefit scheme on 1 November 2004. The scheme provides benefits on a 1/80ths basis. Philip will reach the scheme’s normal pension age on 1 November 2024, with final pensionable remuneration of £90,000. Calculate Philip’s pension entitlement from the scheme at the scheme’s normal pension age.
Philip’s pension from the scheme at the scheme’s normal pension age will be:
20/80ths × £90,000 = £22,500.
