Chapter 7 - Secured pension options Flashcards
How will an annuity protection lump sum payment from a occupational defined contribution scheme pension be taxed if the member is aged 74 at date of death?
a.It will be taxed at 45%.
b.It will be taxed as the recipient’s pension income via PAYE.
c.It will be paid tax free.
d.It will be taxed at 55%.
c.It will be paid tax free.
An annuity protection lump sum is a RBCE, and so tested against the member’s LSDBA where the member dies before age 75.
Where the benefits are within the member’s remaining LSDBA they will be paid tax free. If they exceed the member’s remaining LSDBA then the excess will be taxed as the recipient’s pension income via PAYE.
Where the member has reached age 75 the whole lump sum will be taxed as the recipient’s pension income via PAYE.
Chapter reference 7C1E
Femi is in poor health and is eligible for an impaired life annuity. He will be offered an impaired life annuity on male rates rather than unisex rates if he is suffering from:
a.diabetes.
b.heart disease.
c.prostate cancer.
d.dementia.
c.prostate cancer.
There are two circumstances in which the requirement to use unisex annuity rates does
not apply:
- Some medical conditions are exclusively or primarily associated with one gender (i.e. breast cancer for women and prostate cancer for men). This may mean that in some
circumstances impaired life annuities can take gender into account when setting the rate offered. - Where the income is purchased for the member by the scheme, so where a defined benefit scheme purchases an income for the member (as it must be purchased/provided by the scheme). It could also occur where an occupational defined contribution scheme provides an income from scheme funds or buys a scheme pension from an annuity provider for the member. The types of schemes where this is most likely to occur would be a SSAS or a SIPP set up under trust (i.e. it is an occupational scheme rather than a personal scheme)
Chapter reference 7C2G
What is NOT a potential benefit for a defined benefit scheme that chooses to pay scheme pensions directly from the scheme assets?
a.If members [and/or their dependants] die sooner than expected the scheme will benefit from mortality gain.
b.The payments can be reduced if the funding position of the scheme worsens.
c.The scheme may choose to secure the income in future when annuity rates may have increased.
d.There is no immediate outflow of capital from the scheme.
b.The payments can be reduced if the funding position of the scheme worsens.
The potential benefits and drawbacks for a scheme of paying the scheme pension directly from scheme assets include the following.
Benefits
- There is no immediate outflow of capital from the scheme (i.e. they only have to pay out the monthly income rather than the capital cost of buying this income via an insurance company).
- The funds within the scheme remain invested and so benefit from any out-performance of
these assets. - The scheme has the option to secure the income at a later date if desired (i.e. make a payment to
an insurance company in respect of the member) and may benefit from an increase in annuity rates or the worsening of the member’s health (i.e. a smaller capital sum is needed to secure the same level
of income). - If the member and/or their dependants die sooner than expected, the scheme retains the ‘unused’ funds for the benefit of all members, whereas if they secured the income with an insurance company, the insurance company would benefit from these funds, i.e. the scheme benefits from mortality gain.
Drawback
- The payments must be made whatever the funding position of the scheme.
- The member and/or their dependants may live longer than expected and the scheme bears the cost of these ‘extra’ payments.
- The scheme retains both the longevity and investment risk, whereas these are transferred to
the insurance company where the scheme is bought from an insurance company. - It entails additional administration for the scheme.
Chapter reference 7C1
Which statement relating to a dependant’s scheme pension is INCORRECT?
a.It does not have to be paid for the life of the dependant.
b.It can include a guarantee period.
c.It can be commuted for a cash lump sum on the grounds of triviality.
d.It does not need to start as soon as the member dies.
b.It can include a guarantee period.
A scheme pension paid to a dependant, by whatever method, may not give rise to any further PCLS nor can it provide any further benefit following the death of the dependant. In other words, a dependant’s scheme pension cannot include:
- a guarantee period
- any form of pension protection.
Chapter reference 7C1E
What is the maximum term for a guarantee included in a scheme pension for a scheme member who is 68 when they crystallise their benefits?
a.Seven years.
b.Two years.
c.Ten years.
d.Five years.
c.Ten years.
A scheme pension may be guaranteed for a term of no more than ten years. This is often
referred to as a ‘term certain’. When a member dies within the guarantee period the full pension continues to be paid until the guarantee period ends.
HMRC rules do not place any restrictions on who can receive the payments in respect of a
guarantee
Chapter reference 7C1E
Nino, who is 55, is about to purchase a lifetime annuity with his personal pension fund. Which annuity structure would NOT be possible?
a.A joint life annuity with 50% of the income paid to Nino and 50% paid to his wife Ellen.
b.A joint life annuity, where any survivor’s income would be paid to his daughter Sharon, who is 26 and not dependent upon him.
c.A joint life annuity, where any survivor’s income would be paid to his wife Ellen.
d.A single life annuity with annuity protection where any annuity protection lump sum would be paid to his son Matthew, who is 28 and not dependent upon him.
a.A joint life annuity with 50% of the income paid to Nino and 50% paid to his wife Ellen.
A joint life annuity is mostly designed for couples. Like a single life annuity, it pays you a regular, guaranteed income until you die. But when you die that income switches to someone else instead of just stopping. Some or all of it will go to your partner or a dependant as regular payments.
it cannot pay out to two people at once, it must pay to a single life, but when one dies the other takes over.
Survivor’s annuity
- Lifetime annuity bought before 6 April 2015: member could include a dependant’s annuity if they chose.
- Lifetime annuity bought after 6 April 2015: if its rules allow, a member can choose that a
continuing income is paid to a dependant or nominee after their death.
Chapter reference 7C2E
A member will shortly become entitled to receive his scheme pension. He also wishes to take the maximum possible lump sum payment. Within what period must this lump sum payment be paid to be treated as a pension commencement lump sum?
a.Within eighteen months of the date the member becomes entitled to the scheme pension.
b.No earlier than twelve months before, and no later than six months after, the date the member becomes entitled to the scheme pension.
c.No earlier than six months before, and no later than twelve months after, the date the member becomes entitled to the scheme pension.
d.Within six months of the date the member becomes entitled to the scheme pension.
c.No earlier than six months before, and no later than twelve months after, the date the member becomes entitled to the scheme pension.
When a member becomes entitled to a scheme pension, the scheme rules may also give them the right to a PCLS. To be treated as a PCLS, entitlement to the lump sum must
be linked to the scheme pension entitlement. It must be paid no earlier than six months before, and no later than twelve months after, the date the member becomes entitled to that scheme pension.
Chapter reference 7C1C
Joe retired three years ago at age 65 and now receives a scheme pension from his former employer’s defined benefit scheme. If his pension has recently been reduced, the most likely reason is because he:
a.is in ill-health.
b.has recently divorced and his scheme pension is subject to a pension debit.
c.has reached State Pension Age.
d.has returned to work for the company on a part time basis.
b.has recently divorced and his scheme pension is subject to a pension debit.
Chapter reference 7C1B
A member wishes to commute their pension benefits valued at £28,000 on the grounds of triviality. Why have they been informed this is not possible?
a.The benefits they wish to commute are uncrystallised.
b.The benefits are held in an executive pension plan.
c.The member has not yet reached age 65.
d.The benefits are valued at less than £30,000.
b.The benefits are held in an executive pension plan.
The following benefits can be commuted on the grounds of triviality:
- uncrystallised defined benefit pension rights;
- defined benefits scheme pensions that are in payment; and
- in payment money purchase in-house scheme pensions.
Certain conditions must be met if a lump sum payment made on or after 16 September 2016 is to be considered a trivial commutation lump sum payment. These are that:
- the member has not been paid a trivial commutation lump sum previously (from any registered pension scheme), except any earlier payment within the commutation period;
- the lump sum is paid in respect of a defined benefit arrangement and/or an in-payment money purchase in-house scheme pension;
- the value of the member’s pension rights (defined benefit and defined contribution, including those previously crystallised for lifetime allowance purposes) on the nominated date does not exceed the commutation limit of £30,000;
- when the lump sum is paid the member must have some available lump sum allowance (LSA), although the payment does not use any of the member’s LSA or lump-sum death benefit allowance;
- the lump sum is paid when the member has reached the normal minimum pension age (currently 55, but increasing to age 57 in 2028) or meets the ill health conditions or has a protected pension age
- the lump sum extinguishes the member’s entitlement to defined benefits and in-payment money purchase in-house scheme pensions under the registered pension scheme making the payment.
Chapter reference 7B2
What is the maximum amount that can be paid as a trivial commutation lump sum death benefit?
a.£30,000 in total across all schemes.
b.£10,000 in total across all schemes.
c.£30,000 per scheme.
d.£10,000 per scheme.
c.£30,000 per scheme.
s the maximum that can be paid as a trivial commutation lump-sum death benefit is £30,000.
This is the maximum amount per scheme, not a maximum across all schemes.
Where the amount of the lump sum paid is more than £30,000, the excess is not a trivial
commutation lump-sum death benefit. If it cannot be paid as some other type of authorised lump-sum death benefit, the excess over £30,000 will be an unauthorised member payment
and taxed accordingly.
Chapter reference 7B3
Outline the differences between a conventional lifetime annuity and a flexible lifetime annuity.
The payments from a conventional lifetime annuity can only reduce in line with HMRC prescribed circumstances. A flexible annuity can reduce by a greater amount.
Receiving a payment from a conventional lifetime annuity is not a trigger event for the money purchase annual allowance rules whereas receiving a payment from a flexible lifetime annuity is.
James selected a with-profits annuity on his retirement. He chose an anticipated bonus rate of 2%. The actual bonus rate declared by the life office at the end of the first year is 4%.
What will happen to James’ income?
James’ annuity income will increase because the actual bonus rate exceeds the anticipated bonus rate.
Harriet is in receipt of a dependant’s pension following the death of her husband, Simon, in May 2024. The scheme agreed to commute the dependant’s pension for a trivial commutation lump-sum death benefit, but at the point her benefits were due to be paid the scheme informed her that they were valued at £32,000. Harriet should be aware:
a. She cannot take this benefit as a trivial commutation lump-sum death benefit as
the payment will exceed the triviality limit of £30,000.
b. She can take £30,000 as a trivial commutation lump-sum death benefit but the remaining £2,000 will have to be forfeited.
c. She can take £30,000 as a trivial commutation lump-sum death benefit and will have an unauthorised payment charge applied to £2,000.
d. 2024 She can take this benefit as a trivial commutation lump-sum death benefit but she will have an unauthorised payment charge applied to the whole payment.
c. She can take £30,000 as a trivial commutation lump-sum death benefit and will have an unauthorised payment charge applied to £2,000.
Following the death of his wife at the age of 67, Quentin, aged 70 started to receive a guaranteed payment in respect of her lifetime annuity in January 2017. The remaining payments are valued for triviality purposes at £26,000. If Quentin commutes the remaining payments for a trivial commutation lump-sum death benefit,
how will this payment be taxed?
a. 25% will be paid tax free and the remainder will be taxed as his pension income via PAYE.
b. The whole payment will be taxed as his pension income via PAYE.
c. The whole payment will be taxed at 45%.
d. The whole payment will be paid tax free.
The answer is b.
Even though the income he was receiving was paid free of tax, if he commutes the remaining payments the whole lump sum will be taxed as his pension income via PAYE.
Dominic is aged 58. In September 2024 he takes benefits from his pension plans for the first time when he takes a small pots payment from a personally held stakeholder pension valued at £8,000. In December 2024 he takes a further small pots payment, this time from an executive pension plan valued at £10,000. Dominic should be
aware that, under the current regulations, he can take:
a. Only one more small pots payment.
b. Only two more small pots payments from non-occupational schemes.
c. Only two more small pots payments from occupational schemes.
d. An unlimited number of small pots payments.
Answer is b. He has taken one small pots payment from a non-occupational scheme (the stakeholder – the EPP is an occupational pension) and the current rules only permit a maximum of three such payments from non-occupational funds (therefore, (d) is wrong). There is no limit on the occupational small pots payments so (a) and (c) are
also wrong
