Chapter 8 - Flexible income options Flashcards
An additional rate taxpayer is aged 66 and his only pension is an uncrystallised personal pension of £850,000. What gross UFPLS must he take to receive a lump sum of £30,000 after all tax has been paid?
a.£42,857.
b.£54,545.
c.£50,000.
d.£45,283.
d.£45,283.
the taxable portion of the UFPLS will fall fully into the additional rate tax band. Therefore, to calculate how much of his pension fund
must be crystallised we have to work out the net amount that will be received for every £100 crystallised.
£100 x 25% = £25 (Tax free amount)
£75 x 0.55 ( 100% less the 45% for additonal tax rate) = £41.25
per £100 they get £25 + £41.25, £66.25, or another way of saying this is they get 66.25% of the £100.
to find out how much we need all we do is divide the target amount by this percentage
£30,000/0.6625= £45,283
Chapter reference 8D3
To help consumers make informed decisions about pensions the Government introduced a guidance guarantee. Which of the following is NOT a feature of guidance?
a.Specific products will not be recommended.
b.The requirement to pay a fee.
c.Consumers are provided with key facts about the consequences of the relevant options.
d.The consumer will receive a record of the discussion for future reference.
b.The requirement to pay a fee.
Difference between advice and guidance, advice involves a fee and is specific to a client guidance has no fee and is more generic no fact finding etc
Chapter reference 8C4
Claudia, who is 62, has total income of £65,000 in the current tax year. If she wishes to take a gross UFPLS of £20,000, how much will Claudia receive after all of the income tax has been settled?
a.£20,000.
b.£17,000.
c.£14,000.
d.£12,000.
c.£14,000.
typically 25% of the funds
taken is paid tax free and the remainder is taxed as pension income via PAYE.
25% of £20,000 is tax free so £5,000
£15,000 is taxable at 40%
£15,000 x 0.6 = £9,000
£9,000 + £5,000 = £14,000
Chapter reference 8A
What restrictions are there on taking withdrawals from a pre-April 2015 capped drawdown pension?
a.Income is subject to no maximum but a minimum of 25% of the basis amount must be taken.
b.Income is subject to a maximum 100% of the basis amount, but no minimum level of income.
c.Income is subject to a maximum 150% of the basis amount, but no minimum level of income.
d.Income is subject to no maximum but a minimum of 50% of the basis amount must be taken.
c.Income is subject to a maximum 150% of the basis amount, but no minimum level of income.
The withdrawals under capped drawdown are subject to a maximum income level, but
no minimum income level. The maximum each year is expressed as a percentage of an equivalent annuity that could be purchased with the member’s drawdown pension fund.
This equivalent annuity is known as the basis amount and the maximum income level is set
at 150% of the basis amount
Chapter reference 8B1A
Zara is a member of her company’s occupational defined contribution pension scheme. The scheme has a protected pension age of 50 and Zara’s fund value is £100,000. When Zara reaches her 50th birthday in October 2024, she would like to take an UFPLS of £20,000 from the scheme. She should be aware that:
a.she can take the UFPLS of £20,000, but she must also crystallise the remaining £80,000.
b.the option of taking an UFPLS from an occupational pension scheme is not permitted in any circumstances.
c.if she wants to take an UFPLS it must be for the full £100,000.
d.she can do this and the remaining £80,000 can be left uncrystallised.
a.she can take the UFPLS of £20,000, but she must also crystallise the remaining £80,000.
A member with a protected pension age who takes an UFPLS before the normal minimum
pension age (currently age 55) must take all the benefits associated with that scheme.
This does not mean the whole fund has to be taken as an UFPLS – they could take part
of the fund as an UFPLS and the balance could be used to purchase a lifetime annuity or
access flexi-access drawdown. However, they cannot use part of the pension to provide
an UFPLS and leave the balance uncrystallised.
Chapter reference 8A1
When illustrating a drawdown income, what does the Type A critical yield show?
a.The growth rate needed to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity.
b.The growth rate needed to ensure the income selected is sustainable until the member’s average life expectancy.
c.The growth rate needed to ensure the income selected is sustainable until the member reaches age 100.
d.The growth rate needed to provide and maintain a selected level of income.
a.The growth rate needed to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity.
- Type A critical yield: this is the growth rate needed on the drawdown investment
sufficient to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity - Type B critical yield: this is the growth rate needed to provide and maintain a selected
level of income
Chapter reference 8C2A
Undrawn funds in drawdown can be paid to a dependant, a nominee or a successor. Who can nominate a successor?
a.A dependant, a nominee or a previous successor.
b.The member only.
c.The member, a dependant or a nominee.
d.The member or a nominee.
a.A dependant, a nominee or a previous successor.
Under HMRC rules these undrawn funds can be paid to
a dependant or nominee of the member, or a successor nominated by a dependant or
nominee of the member (or by another successor).
Chapter reference 8B4
Under COBS 19.9, the FCA sets out the annuity comparison information a provider must show when the annuity it is offering:
a.provides a guarantee period and whether a longer guarantee period would be available with a rival provider.
b.includes a reduction in rate to cover any commission payable.
c.provides more or less income than the market leading pension annuity.
d.increases in line with inflation, and if so, which inflation rate will be used.
c.provides more or less income than the market leading pension annuity.
COBS 19.9
COBS 19.9 sets out the requirements for annuity comparison information. In particular these rules set out when a firm must provide a client with comparison information that shows whether the annuity it is offering will provide more or less income than the market leading
pension annuity
Chapter reference 8C1A
Firms are required to give appropriate risk warnings to consumers accessing their pension funds. What is NOT an example of risk factors set out in COBS 19.7.12?
a.Investment scams.
b.Impact on means tested benefits.
c.The possibility that legislation may change in the future.
d.Whether the client has shopped around.
c.The possibility that legislation may change in the future.
The examples of risk factors that relate to pension decumulation, as stated in COBS 19.7.12 are:
- the client’s state of health;
- loss of any guarantees;
- whether the client has a partner or dependants;
- inflation;
- whether the client has shopped around;
- sustainability of income;
- tax implications;
- charges (if the client plans to invest their pension savings);
- impact on means tested benefits;
- debt; and
- investment scams
Chapter reference 8C1B
Alan died recently aged 62. What option is NOT available to his wife Sarah when taking the death benefits from Alan’s uncrystallised personal pension?
a.Designate the funds to a dependant’s flexi-access drawdown contract.
b.Take the whole fund as a tax free lump sum.
c.Designate the funds to purchase a dependant’s scheme pension.
d.Take the whole fund as an UFPLS.
d.Take the whole fund as an UFPLS.
It is also not possible for a beneficiary to receive death benefits in the form of an UFPLS. This is because any uncrystallised benefits remaining when the member dies crystallise automatically upon their death. As a result, death benefits can only be paid in the form of a lump sum or continuing income.
Chapter reference 8A2
