Chapter 7 - Secured Pension Options Flashcards
Small pots payments - rules that apply (6) - max amount from where (2), limit per pot, when can they take, LTA and can be paid from where
Less than £10k and rules that apply are;
- can take max three SPP from non-occupational schemes
- unlimited number from unconnected occupational scheme
- £10k limit per pot
- taken once reached MPA
- not tested against LTA as not BCE so don’t have to have any LTA to take
- paid from crystallised and uncrystallised funds
Trivial commutation by member - bens that can be commuted (2, think earlier chapter),
Conditions that must be met for TCLS (4) - previous TCLS, LTA, when get and extinguishes what
Nominated date - what is it, after three months, when must payment be made, when commutation period starts and how many periods in life
Bens that can be commuted;
- uncrystallised DB pension and if its in payment
- in payment money purchase in house scheme pension
Conditions that must be met;
- not been paid TCLS previously except earlier payment from comm period.
- lump sum paid if LTA available
- paid on NRA
- TCLS extinguishes bens as taken as lump sum
Nominated date is date all pension bens are valued. If do not start to commute within three months of nominated date then can start process again. PAyment must be paid in the commutation period which is 12 months. Comm period can start no later than 3 months after nom date or no earlier than nom date.
Only get one commutation period in life and if they don’t do multiple comms then, they wont be able to do it again.
TCLSDB - where can this be paid (2, think previous chapter), if over £30k charged as what, paid what age and time limit
Comm survivors pension (2) - paid to who and must extinguish what
Valuation to comm - Crystallised - income received pre and post 04/06
- Uncrystallised - DC and DB
Two scenarios where TCLSDB is paid;
- survivor commutes survivors pension
- member dies within guaranteed period and member commutes remaining payments.
If over £30k charged as unauthorised member payment. Paid whatever age and no time limit for making payment. Not a BCE.
Commuting survivors pension must meet following conditions;
- paid to dependant or nominee that meet rules of pension scheme
- payment must ext survivors entitlement to pension and LSDB
Crystallised - Income being received Pre 04/06 valuation = income25 (TFC not added) & Post 04/06 - value of BCE+PCLS
Uncrystallised - DC - value of fund and DB = pen at nom date20+PCLS
Scheme Pension - benefits (4) and drawbacks (4) for scheme paying SO directly from scheme assets
- capital, performance, secure income, mortality
- payments, life, risk, admin
Benefits to SP;
- no immediate outflow of capital from the scheme.
- funds remain within scheme and benefit from any good performance.
- scheme can secure income via insurance company at later date and therefore benefit from better annuity rates or decline in members health.
- scheme benefits from mortality gain (retains unused funds but if insurance company then they get these).
Drawbacks;
- payments must be made despite funding position
- longevity
- scheme retains both longevity and investment risk (taken on by ins company if used)
- Additional administration
Scheme Pension continued - if secured by ins who name can it be in and how paid, HMRC requirements to be a SP (4, straightforward), allow scheme to offer (2)
Reducing or stopping SP as per HMRC guidance - if paid on what grounds, reduction is being applied to who, what that is affected at SPA, insolvency, what orders can reduce (2), breaking regulations, how public service scheme reduced and what charge can reduce
If SP secured via ins company, policy can be in name of;
- member - pension payments paid directly to member
- trustees - insurer to scheme then scheme to member
HMRC requirements;
- paid for life
- paid at least annually
- incapable of reducing year on year (only under below circumstances)
- paid by scheme admin or insurance company
+ they allow scheme to offer
- guaranteed period and capital protection lump sum
Reducing or stopping SP (HMRC specific circumstances);
- being paid on grounds of ill health and this stops
- reduction in rate payable being applied to all those in scheme
- bridging pension that is being reduced/stopped at SPA
- reduced due to winding up as insufficient assets to cover payments
- reduced as consequence of pension sharing order or court order
- rate reduced due to forfeiture of entitlement permitted by regulations (e.g. defraud their employer or assign bens elsewhere).
- public service pension scheme reduced due to abatement
- reduced due to annual allowance charge being paid in relation to member
Scheme Pension cont -
Setting up pension income - DB - what determines bens payable and what bens
DC - who must do what and what can member do
Phasing receipt of SP - how does it work for DB and DC
Setting up the pension income - once taken the PCLS, remainder paid as follows;
- DB scheme - scheme rules determine bens payable under the scheme re guarantees, spouse/dependants pension and escalation.
- DC - scheme admin must purchase SP and member can choose bens (the more bens the lower the initial pension).
Phasing receipt of SP;
DB - become entitled to portion of balance whilst deferring amount so it continues to grow and accrue bens.
DC - portion of bens used to secure an income but balance would continue to be invested and member retains flexibility on how its used to provide income.
Scheme Pension cont - Death benefits - Dependants SP - what are bens based on if purchased through ins company or paid direct form scheme assets, choice of income for DB and DC schemes, how does DSP differ to member SP (3), number of dependants, timing of DSP (when entitled) and DSP cannot include (2)
Dependants scheme pension - if purchased via insurance company, DSP based on format that was purchased and cant be altered. If paid directly from scheme assets scheme admin can also pay DSP from assets.
DB - dependant has no choice on income format
DC - admin must give option of purchasing lifetime annuity and, if rules permit, can also offer FAD.
DSP different to member SP in that;
- does not have to be paid for life of dependant (if remarry lose or come of a certain age)
- Does not have to be paid annually
- Can be reduced at any time
More than one dependant can get DSP and do not have to be paid at same time. Does not have to start on death and rules may defer start date e.g. certain age. DSP cannot include a guaranteed period or any pension protection.
Scheme Pension cont - Death benefits -
guaranteed period - how long, HMRS restriction rules and when can scheme cease payments (3)
DB LSDB - restrictions on who can receive (HMRC & Scheme rules), what must it be expressed as in rules to be treated as such and example, would not be considered LSDB when
Pension Protection LS - only payable from… and does what and if die before this, member must specify what and HMRC max lump sum formal
SP guaranteed for a term of no more than 10 years. HMRC rules do not place restrictions on who can receive payments but do allow scheme to cease payments if recipient
- Gets married
- Reaches age of 18
- Ceases full time education
DB LSDB - e.g. employer pays multiple of final salary on death. No HMRC restrictions on who can receive but likely to be outlined in scheme rules. To be treated as LSDB, must be expressed as LSDB in scheme rules e.g. LSDB x2 final salary. If scheme has choice on how it’s paid then would not be considered LSDB.
Pension Protection LS - only payable from SP from DB scheme and guarantees certain amount that will be paid. If die before this, rest can be given as lump sum. Member must specify that this is treated as PPLS not DBLSDB. Not a BCE
Max lump sum under HMRC rules = crystallised amount of SP for LTA purposes - gross amount of SP paid.
Scheme Pension cont - Death Bens - Annuity protection lump sum - how payable, rules on who or when paid (HMRC), max APLS formula and tax treatment
Only payable from a SP or lifetime annuity from DC scheme. Not a BCE. Scheme may have rules on when or who paid but HMRC don’t. Max APLS paid under HMRC rules = amount of SP or annuity crystallised for LTA - gross amount already paid. Tax treatment depends what age they die (think chapter 3)
Lifetime annuity - what is it, amount depends on what, suitable for those… (5, easy) and HMRC requirements if bought post 04/15 (purchased how, payable length, income reduction)
Bought from insurance company and can only be purchased using DC funds. Amount depends on size of fund and annuity rates available which depends on age and options selected.
May be suitable for those;
- who have a low ATR or low or no capacity for loss.
- Need guaranteed income
- No desire to mange investments
- Have longer life expectancy based on family history
- Have medical condition that allows an enhanced annuity rate
HMRC requirements for a lifetime annuity bought post 04/15;
- must be purchased via insurance company
- Must be payable for life or guaranteed period (if die)
- Nothing stopping income paid reducing by more than amount prescribed by HMRC.
Lifetime Annuity cont -
Flexible LTA - what is it, what method of fluctuation is FLTA and BCE
Conventional LTA - what is it, what methods of fluctuation is CLTA and BCE
How can they be set up (3) and HMRC methods of fluctuating payments (5)
Flexible lifetime annuity - set up post 04/15 that allows income to fall by more than prescribed amount. Method 3. Income from this is BCE and subject to MPAA
Conventional LTA - set up whenever but does not allow income to fall by more than prescribed amount. Method 1 & 2. Income from this not considered BCE and retain full AA.
Since 04/15 they can be set up in three ways;
- level income or rising by fixed amount
- Income that uses methods 1-5 to vary payments (see below)
- Income that decreases by any method set out in contract.
HMRC methods that LTA provider can use to fluctuate payments
- Indexation
- With-profit variations
- Mixture of the above
- Selected rate of growth linked to methods 1, 2 & 3
- Flexible withdrawals
Lifetime annuity - options on how they set up income (4), how taxed
Death bens - guaranteed period - two differences to SP + brief explanation
Transfer of LTA - insurance company, if agreed then can do what and pre 04/15 transfers
Once member has taken PCLS, balance of fund used to purchase a LTA and member can choose how they set up income;
- frequency of income payments
- How long income guaranteed
- Amount of annuity protection included
- Level of survivors pension payable on death
Taxed as member’s pension income via PAYE.
Death benefits - Guaranteed period - close to those for SP with two exceptions;
- length of guaranteed period and taxation of income payments.
Maximum limit of ten years removed and limit imposed by terms offered on contract. Taxation depends on when they die.
Can transfer LTA from one insurance company to another but insurance company do not have to accept. If transfer agreed then terms of annuity may be reshaped. Pre 04/15 can only be transferred to another CLTA.
Lifetime annuity cont - survivors annuity - pre 04/15 could include what, what is survivors annuity, how can it also be purchased (2), HMRC require what, if paid to child paid to earlier of (3) and if not to child earlier of (2) and SA does not include what
If purchased pre 04/15 could include dependants annuity. Post 04/15 can give continuing income and is expressed as % of members income.
Can also be purchased by;
- Dependant or nom using uncrystallised funds
- As above + successor using unused funds or flexi drawdown fund.
HMRC require that a survivors annuity be paid by an insurance company. If paid to child, income must be paid to earlier of; - child ceasing to be dependant - Dying - Marriage If not child then paid to earlier of; - death - Remarriage
Survivors annuity does not include any death bens and dies with them.
Lifetime Annuity cont - Annuity rates - two main factors (2+1 other)
Long term bond yields - how do insurance companies ensure payments, what type of bond used and why, what is bond yield, security of bond
Longevity - what used to find what, contracts must be set up how and achieved by and two circumstance they don’t have to take this into account. Another factor that could effect annuity rates
Two main factors that effect annuity rate;
- long term bond yields
- Longevity expectations
- Options selected could also effect
Long term bond yields - insurance companies ensure regular payments through investing funds used to purchased annuity in long term bonds and are mainly Gilts due to no currency risk.
Bond yield is amount of money received compared to purchase price. How secure bond is perceived to be is when demand for gilts goes up it reduced supply and pushes the price up therefore lower yield and vice versa.
Longevity - mortality table used to establish how long they will live which helps devise sustainable level of income for insurer. Contracts must be set up gender neutral and achieved by blending % of male and females with annuitant population. Two circumstances where do not have to take into account;
- gender specific medical conditions
- Where income is purchased for member by scheme.
Health and lifestyle may also have an effect on annuity rates.
Investment linked annuities - With profit annuities - income reflects…, smooth return (what is it) and how does w/p annuity work
- returns paid as what, what do they select and how does this effect income and is actual is lower than above then what happens
With profit annuities - Annuities income reflects the performance of the w/p fund. Actuary will produce smoother return i.e. hold back bonuses in good year to supplement bad year.
With profits annuities works as follows;
- returns are paid in bonuses
- Annuitant selects anticipated bonus rate
- Initial level of income reflects anticipate bonus rate
- If actual bonus is lower than anticipated bonus then initial income with decrease next year to reflect this.
