Chapter 6 - Defined contribution schemes Flashcards
What default investment option must be offered under an employer’s group stakeholder pension scheme?
a.Cash fund.
b.Lifestyle fund.
c.With profits fund.
d.Fixed interest fund.
b.Lifestyle fund.
New customers must be offered a lifestyle arrangement for the default investment choice.
Lifestyling is an investment strategy that automatically moves the member’s funds away
from riskier investments
Chapter reference 6E
The pension income figure shown on a Statutory Money Purchase Illustration assumes that the pension income will be:
a.converted into today’s terms assuming inflation of 2.5% p.a. and future charges and expenses will be ignored.
b.converted into today’s terms assuming inflation of 2.5% p.a. and future charges and expenses will be taken into account.
c.shown in monetary terms assuming a growth rate of 7% p.a. and future charges and expenses will be taken into account.
d.shown in monetary terms assuming a growth rate of 7% p.a. and future charges and expenses will be ignored.
b.converted into today’s terms assuming inflation of 2.5% p.a. and future charges and expenses will be taken into account.
- The projection is converted into today’s terms assuming inflation of 2.5%p.a.
- The effect of future contributions is taken into account, where these are deemed to be part of a regular pre-determined series of contributions. Where they are earnings related, earnings are assumed to increase in line with inflation at 2.5%p.a.
- Future charges and expenses must be taken into account.
Chapter reference 6A4
Bill, who is 63, has an uncrystallised executive pension plan [EPP] that has a normal pension age of 65. Bill would like to transfer this fund to his personal pension plan and should be aware that he has the right to a transfer value:
a.up to the date that the benefits are crystallised.
b.until the age of 75, even if the EPP benefits have been crystallised.
c.until he reaches the age of 64.
d.until he reaches the age of 65.
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a. up to the date that the benefits are crystallised.
Benefit categories within a scheme are defined as either flexible or safeguarded. Flexible benefits are defined contribution benefits, cash balance benefits and any benefit that is calculated by reference to a fund.
A deferred member of an occupational defined contribution scheme with flexible benefits has
the right to a transfer value up to the date of crystallisation of benefits, even after they have
reached the scheme’s normal pension age.
Chapter reference 6D2
Sarah, aged 38, joined her employer’s occupational defined contribution scheme in March 2022 and left the scheme in May 2024. At that time her fund was valued at £28,000. What early leaver options must Sarah be offered?
a.A transfer value only.
b.A preserved [paid up] fund and a transfer value only.
c.A preserved [paid up] fund, a transfer value and a refund of member contributions.
d.A preserved [paid up] fund only.
b.A preserved [paid up] fund and a transfer value only.
An employee who has at least three months’ service has the option of taking a transfer value
to another scheme.
Preserved benefits must be offered. The member may, at any time, choose to transfer
this to an individual pension arrangement or to the occupational pension scheme of a new employer.
A member leaving a defined contribution occupational scheme is only entitled to a short
service refund if they leave the scheme with less than 30 days’ qualifying service.
Chapter reference 6D1
Saba is a member of her employer’s contributory group personal pension and will shortly reach the scheme’s selected pension age [SPA] of 65. If she intends to continue working for at least another three years and she wishes to remain a member of the scheme, her employer:
a.can demand that she takes her benefits when she reaches the scheme’s SPA.
b.must allow her to remain a member of the scheme and they must also continue to make employer contributions on her behalf.
c.must allow her to remain a member of the scheme but can cease making employer contributions and can also refuse to accept any further contributions from Saba.
d.must allow her to continue to contribute to the scheme but can cease making employer contributions once she reaches the scheme’s SPA.
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b.must allow her to remain a member of the scheme and they must also continue to make employer contributions on her behalf.
If the scheme is an employer sponsored arrangement, e.g. a group personal pension plan,
a selected pension age may be set for the scheme as a whole, but the employer cannot demand that benefits are taken at this age. If employees continue to work beyond it, they are eligible to remain in the scheme. Thus an employer that contributes to the scheme must continue to do so while the member remains in employment, even if this is beyond the selected pension age.
Chapter reference 6C1
Independent Governance Committees must have a minimum of how many members?
a.Four.
b.Three.
c.Six.
d.Five.
d.Five.
The Government requires contract-based workplace pension schemes to have Independent
Governance Committees (IGCs). IGCs must have a minimum of five members, the majority of whom should be independent. These rules apply to any workplace scheme, not just automatic enrolment schemes.
Chapter reference 6B3A
Jenny, who is a member of her company’s group personal pension plan [GPP] has been given permission to take early retirement at the age of 50 due to ill-health. Her condition isn’t immediately life threatening and the GPP offers all of the flexible benefit options. Which option will NOT be available to her?
a.Uncrystallised funds pension lump sum.
b.Serious ill-health commutation lump sum.
c.Drawdown pension.
d.Lifetime annuity.
b.Serious ill-health commutation lump sum.
If the member has a life expectancy of less than one year, it is possible to commute all their
arrangements for a ‘serious ill-health lump sum’. It can only be paid out of uncrystallised funds. This means that funds that have been crystallised, e.g. via a drawdown pension, cannot be taken as a serious ill-health lump sum. However, where only some of a member’s benefits have been crystallised, the remaining uncrystallised rights can be paid as a serious ill-health lump sum. Again, certain conditions must be satisfied.
If the member has a substantially reduced life expectancy, it may be possible to obtain favourable lifetime annuity rates from a life office specialising in impaired life annuities.
Chapter reference 6C3
An individual defined contribution pension was started in 1986 and offers a generous guaranteed annuity rate at age 65. What type of arrangement is this most likely to be?
a.A self-invested personal pension.
b.A Section 32.
c.An executive pension plan.
d.A retirement annuity contract.
d.A retirement annuity contract.
A retirement annuity contract is an individual defined contribution arrangement. It is similar to
a personal pension plan, though the benefits offered could differ in two ways:
- some offer a guaranteed annuity rate at retirement
- the benefits payable on death before retirement depend on the rules – the fund may be
returned as a lump sum on death, but in some circumstances, the death benefits are
more restrictive:
Chapter reference 6A1D
Michael joined a stakeholder pension on 20 January 2004. What is the maximum annual charge that can be applied to the value of his fund?
a.0.5%.
b.1.5%.
c.1.25%.
d.1%.
d.1%.
The maximum annual charge depends on when the individual joined the stakeholder scheme:
Those who joined before 6 April 2005, the maximum annual charge is 1% of the value of the fund
New members after 5 April 2005, the annual charge must be no more than 1.5% p.a. for the first ten years and after ten years must be reduced to a maximum of 1% p.a
Chapter reference 6E
Alice, who is a basic rate taxpayer, contributes £200 per month gross into her personal pension. She also pays a premium of £5 per month gross into a pension contribution insurance [PCI] contract. Her payments will be:
a.£4 per month into the PCI contract and in the event of a claim the insurer will pay £160 per month into her personal pension plan.
b.£5 per month into the PCI contract and in the event of a claim the insurer will pay £160 per month into her personal pension plan.
c.£4 per month into the PCI contract and in the event of a claim the insurer will pay £200 per month into her personal pension plan.
d.£5 per month into the PCI contract and in the event of a claim the insurer will pay £200 per month into her personal pension plan.
b.£5 per month into the PCI contract and in the event of a claim the insurer will pay £160 per month into her personal pension plan.
Pension contribution insurance (PCI)
PCI allows an individual’s and/or an employer’s contributions to be paid if the individual is unable to work due to ill-health or incapacity.
PCI premiums are paid into a separate insurance contract and are not eligible for tax relief.
The contribution made to the
personal or stakeholder contract is paid net, so tax relief is awarded on the contribution made.
Chapter reference 6C3A
