Chapter 8 - Flexible Income Options Flashcards
UFPLS - if paid out no longer what and subject to, if gifted then becomes what and may be part of what, HMRC limit to number of UFPLS payments, to qualify as UFPLS must (4, easy)
Can’t take UFPLS when;
- funds are?, received what order
Uncrystallised funds cannot provide UFPLS when;
- have lump sum that’s what and how much, scheme rules…, LTA+lump sum available
Once UFPLS has been paid out is in no longer within the pension and therefore no longer held in trust and subject to IHT. If UFPLS gifted, then it becomes transfer value for IHT purposes (PET) and if die within 7 years will be pat of IHT calc. HMRC do not limit number of UFPLS payments that can be taken.
TO qualify for a UFPLS must meet;
- paid from uncrystallised rights in DC pension
- must have reached NPA, protected pension age or ill health
- if below 75 must have LTA available
- if over, must have some LTA remaining
Can’t take UFPLS when;
- crystallised funds
- if received pension credit from pensions sharing order and pension was already in payment
And when uncrystallised;
- PP or EP where protected lump sum is more than £375k
- scheme rules that entitle them to more than 25% TFC
- LTA enhancement factor and available portion of members lump sum allowance is less than 25% of UFPLS.
Drawdown - Capped - when opened, max level of income expressed as… and known as…, max level of income based on what. If don’t take max amount…
Annuity rates used for calcing basis amount found where and rates are based on what (2) and second one is (4)
Process for calcing max permitted income;
- get what, obtain what, rounding down when, using what steps look up what and how to determine max withdrawal
Must have one pre 04/15. Max level of income is expressed as a % of equivalent annuity known as basis amount and max level of income is 150% of this. If not taken maximum amount they cannot carry forward to next year.
Annuity rates used in calculating basis amount are found in GAD tables and rates here are based on 15 year gilts and a notional annuity which is;
- level in payment, single life, monthly payments and no guarantee.
Process for calculating maximum permitted income withdrawal is as follows;
- calc members age in whole years
- obtain gross redemption yield on 15 year gilts on 15th of month
- if not an exact multiple of 0.25% then round down to next .25%
- using step 1 and 3, look up max withdrawal rate in male GAD table
- to determine max withdrawal, apply above rate to fund net of PCLS and multiply by 150%. (FundGAD rate150%)
Capped - review procedure - when is the reference date and what comes as a result of this, how long does basis amount applied for pre and post 75, when can recalc be carried out and known as what, when can pension year be changed and how many times, if requesting reference period finishes early (2), factors that trigger early recalc of basis amount (3) and what doesn’t apply in this instance and when does basis amount apply if increased or decreased
Reference date - date in which funds designated into capped drawdown and scheme admin calc’d basis amount on this date and becomes first day of the pension year. If below 75, basis amount applies for three years and then recalc’d. Post 75, review period is yearly. Scheme admin can carry out re-calc on any day within 60 day window leading up to reference date. - this date known as nominated date.
When reviewing post 75, pension year can be changed when member has multiple capped drawdown plans to match each other for ease. Pension year for an arrangement can only be changed once.
If under 75 and request that reference period finished before 3 years then;
- can only end at end of pension year
- scheme admin must agree to this change
Factors that trigger early recalculation of basis amount below. 60 day window does not apply and recalc must be carried out same day ;
- part of fund used to purchase LTA or SP or used to enter FAD
- capped drawdown reduced due to pension sharing order
- member adds additional funds to their drawdown account.
If basis amount increased applies immediately whereas decreased applies at new pension year.
FAD - short term annuity - how taxed, how set up, HMRC rules to be a STA (purchased how, payable via and term), only death ben included and if not what happens on death, upper limits via FAD and capped, if max amount less than annuity paid what can they do (2)
Short term annuity - taxed at marginal rate. Can be set up using flexible annuity rules but doesn’t have to be. In order for HMRC to consider it a STA must meet the following conditions;
- must be purchased using funds held in drawdown pension
- payable via insurance company
- term is not exceeding five years
Only death benefit that can be included is a guaranteed period of no more than 5 years. If no guaranteed period and die then payments cease and fund used to purchase income are lost.
If purchased with FAD no upper limit but if capped then upper limit of 150% of basis amount - income being taken from capped drawdown arrangement. If at reference date and max amount is less than annuity paid can be reduced or if level income then capped will automatically become FAD.
FAD - three death ben options
Transferring a drawdown contract - requirement for recognised transfers, like for like basis, capped drawdown transfer does not… (3) and change what to what on transfer
Drawdown pensions preaday must be… and cant be/have (2)
Three options if die in drawdown;
- nominate funds into survivors FAD
- purchase survivors annuity
- lump sum death benefit
Requirement that all sums and assets of fund must be transferred into new arrangement to be considered a recognised transfer. If being used to provide drawdown pension in new scheme it must be a like for like basis e.g. FAD into an FAD. For capped drawdown, transfer does not start new reference period, scheme year or lead to basis amount recalc. Can change capped to FAD on transfer which triggers MPAA rules.
Drawdown pensions that came into payment on pre aday must be kept in a separate arrangement and cannot be merged with other drawdown funds and no further funds can be added.
Drawdown - Risk
Mortality risk - definition of mortality drag, what is cross subsidy and its relation to drawdown pensions, what is mortality drag and increases when
Charges - three examples of charge risk (straightforward)
Annuity risk - what falls with age
Depletion - what is it
Mortality risk - mortality drag is loss of mortality gain that applies to policyholder purchasing an annuity. Mortality gain is used to enhance annuity rates (cross subsidy) but drawdown funds do not have cross subsidy. Mortality drag is therefore extra return required from pension fund investments to offset loss of cross subsidy. Drag increases the older one gets.
Investment risk - self explanatory
Charges - level of charges higher than annuity e.g.
- advice charges higher
- ongoing management and investment charges
- charges levied for other services such as GAD reviews for capped.
Annuity risk - underlying annuity rate may fall with age.
Depletion - fund could run out before death.
Compliance requirements and consumer protection - gov launched pension wise to do what and now part of what
Open market statement must be provided;
- how long after reaching what birthday and then what period continuously, asked for how long before what date, automatically given how long before what date, cleint decided to do what and if what rejected must give one in what timeframe?
Above does not apply if - statement provided when, bens are what for what point and what is accepted
Gov launched pension wise to provide free and impartial guidance to members of the public wishing to access DC to take advantage of new flexibilities. Now part of MaPS.
Open market statement must be provided;
- no more than 2 months after reaching 50 then five yearly intervals
- retirement quotation asked for more than 4 months before retirement date
- if four to six months to retirement date
- client has decided to exercise open market options
- if ill health lump sum rejected must be sent two months after
- above does not apply if statement provided within last 12 months, fully crystallised (only point 1) and ill health lump sum accepted.
COBS 19.9 - FCA require providers to show what, 19.94 details what must be included
- cost, charges, income, guarantees, payments, death bens, increases and info on what (3)
19.9.7 - what must firm generate, if what then must show what and make what clear and effect on PCLS
FCA requires providers of guarantee income quotes to show whether higher income can be obtained if the client exercises an open market option. 19.94 details what must be included on the quote;
- cost of pension annuity net of adviser charges
- amount and detail of adviser charges and who paid to
- annual income the annuity will provide
- details of any guarantee period
- frequency of payments
- details of any dependants or nominees pension on death
- detail on any escalations
- may need to include info on GAR, GMP and/or PCLS
19.9.7 - firm must generate market leading quote before providing guaranteed quote to client. If market leading is better, firm must show monetary amount of income re how much it exceeds guaranteed quote and must make it clear they can get higher amount by searching open market. If client has entitlement to PCLS, firm must warn that either quote may reduce PCLS.
SR’s - risk factors (5) - value, returns, rates, income and tax
Risk factors that must be included in SR;
- capital value of fund may be eroded
- investment returns less than shown in illustrations
- annuity or SP rates may decrease
- levels of income may not be sustainable
- tax implications
Critical Yields - must show what, what is accounted for (2), what is type a and type b and guidelines (4)
- type b must be accompanied by, type a must show what at what age, regulator prefers what and if client specific must have at least two of these (3)
CYC used to show investment returns required from a drawdown pension arrangement to match income provided by fixed interest annuity. Mortality drag and additional costs included.
Type A - growth rate needed on drawdown investment sufficient to provide and maintain income equal to immediate annuity.
Type B - growth rate needed to provide and maintain a selected level of income.
Guidelines to use;
- type b must be accompanied by type a illustration
- type a must show annuity purchases at 65, 70 and 75.
- regulator prefers type a to be specific but standardised table can be used.
- for client specific, must show at least two of - total critical yield, underlying annuity investment return and/or additional yield
Phased Retirement - two different ways of taking bens for phased retirement (1+segmentation), four methods of phasing retirement
Process of getting income via annuity purchase;
- member decides what, funds are what and used to…, when more income needed they decide what and do what to get this and future increases.
What issue does flexible annuities removes and issues with conventional annuities once built up
Can phase retirement by taking benefits from their pension arrangement in two different ways;
- crystallise part of pension fund then gradually crystallise rest over following years.
- number of sep pension policies crystallised at different times (segmentation).
Four methods of phasing retirement;
- phased annuity purchases, capped drawdown, FAD and UFPLS.
To get income needed for phased retirement via annuity purchase process is;
- member decides how much they want
- some funds are crystallised and used to provide income
- when require more income, they decide on total net income needed.
- then crystallise amount needed to produce this income taking into account annuity already purchased.
- repeat this as often as required.
Flexible annuities can remove issue of little flexibility on income once payments are underway for phased retirement. If conventional annuities, when they build in value amount of tax-free income reduced each year making income levels less tax efficient and flexible.
Phased retirement via capped drawdown - how does it work and how to manage tax once accumulated funds.
How to work out how much to designate to drawdown to provide lump sum -
E.g. £15k net of basic rate tax & GAD of 51 per 1k
Works in similar way to annuity purchase i.e. funds are crystallised to provide selected level of income with PCLS being used to provide an element of tax free income. Member can decide how much they take and therefore possible to stop payments if they have benefits elsewhere to help manage tax payable.
Value of fundGAD rate0.8150% = X
Additional fund - X = Y
Annuity rate = (10025%) + (75GAD rate150%*0.8) = 25+Z = 29.59eg
Y/AR = amount needed to crystallise to receive bens = 28,976eg
Phased FAD and UFPLS - why FAD may be chosen over UFPLS, can decide to take bens how (2) and what’s better for the latter?
Example - work out crystallised amount to get lump sum of £20k and higher rate tax payer
FAD may be chosen over UFPLS as more control over income tax they will pay. Can decide to take a lump sum fully as PCLS or can use PCLS + crystallised funds and may choose this if have some of their personal allowance available - easier to do the latter via UFPLS.
Wants lump sum of £20k and higher rate tax payer.
Need to work out net amount received for every £100 crystallised = £10025% = £25 TFC + £7540%= £45 = £70 and this is the ‘annuity rate’.
Lump sum amount/annuity rate = 20k/70% = £28,571.43 needs to be crystallised to get his lump sum.
