Chapter 9- Tax wrappers 2 Flashcards
What are Master Trust and Automatic enrolment?
Automatic enrolment began on 2012 for large employers
-common way to provide workplace pension scheme through MASTER TRUST
-MASTER TRUST= multi employer pension scheme with one board of independent trustees.
-benefits of MASTER TRUST= it is less costly and provides more protection and governance
-each employer has its own division
What are National Employer Savings Trust (NEST)?
one of the MASTER TUST in the UK which supports the introduction of automatic enrolment (established by law)
PENSIONS ACT 2008- obligation to accept all employers that want to use it as a pension scheme
Define the eligible jobholder under automatic enrolment?
employee who is aged between 22-state pension age and earns over £10,000 a year MUST be auto enrolled with a choice to opt out
Define the non-eligible jobholder under automatic enrolment?
Employee NEEDS to be provided info on how to opt in if they are:
- aged between 16-21 or between State Pension Age-74 and earn more than £10,000 a year
- aged between 16 and 74, and earn between the lower earnings of £6,240- £10,000 in 2022/23
Define entitled-workers under automatic enrolment?
Employees aged 16-71 that earn less than £6,240, must be provided info on how to opt in
-Employers NOT obliged to meet minimum contribution
The process of STAGING DATE for Automatic enrolment?
-Employer is given a staging date by Pensions Regulator
-employers must have implemented changes required under workplace pensions reforms and to automatically enrol all eligible jobholders
STAGE DATE is driven by
employers included on the PAYE system ON 1ST APR 2012
When STAGE DATE approaches= the employer must write to their employees on what automatic enrolment means for them
AFTER 1ST APR 2012- staging dates for new employer coincides with the date by which their PAYE duties have started
Postponement= Employers can delay the date they enrol an employee into a pension by up to 3 months from the deadline given to them by the pensions regulator
-Can be delayed once and must give impacted employees a postponement notice
Which employers are exempt from Automatic Enrolment?
It isn’t a requirement for all employers to auto-enrol. Exemptions are given to employers that:
- consist only of a sole director; and
- consist of a number of directors, but of whom no more than one have an employment contract
What are the contributions for Automatic enrolment?
-Employer has to pay minimum amount for each members QUALIFYING earnings into their workplace pension schemes between £6,240 and £50,270
Total minimum contribution is 8%
What are the different type of asset classes that can meet different investment objectives under a pension scheme?
-Cash= easy to access (suitable for Pension Commencement Lumpsums (PCLS) at retirement ALSO helps provide income in early years from a ‘Drawdown Pension Arrangement’
-Bonds= can match maturity date of bond with retirement providing income and capital at the time of retirement
-Equities=Provides real return over long-term which is suitable for a ‘Drawdown’ portfolio, growth and income maintained
-Property= provides diversification within pension fund, maintains value during market volatility and provides ongoing income
ASSET ALLOCATION= portfolio needs to include different asset classes
What is life-styling under pension?
Option is provides where the mix of investments automatically move from equities to BONDS and CASH near retirement
life styling works as:
-switching 5-10 years before retirement
-locks in gains on investment and reinvests in bonds and cash
-Retiree may take full (PCLS)= Target mix of investment at retirement is 75% GILTS and 25% CASH
-GILTS within the fund provides a hedge against falling annuity rates as annuity rates are calculated from gilt yields.
What are the disadvantages of life-styling?
-switch occurs automatically at pre-set times
-Doesn’t take into account when individual will decide to retire (either late or early)
-not suitable if member wants to phase retirement after a number of years or go into Drawdown
What are Target date Funds?
Similar to life-styling but the DIFFERENCES ARE:
-it provides more FLEXIBILITY as each fund has its own target date
-gradual shift to capital preservation near retirement date
-multi-asset funds= mix of domestic and international
-investment management more likely to take advantage of investment opportunities
Key Information Document (KIDS) requirement on Pension Schemes?
Pension scheme provider MUST provide certain basic info so customers can understand the scheme.
-OCCUPATIONAL scheme= details on how to join, eligibility conditions, rate of contribution and retirement date provided
-DEFINED CONTRIBUTION scheme= must provide info on investment option and investment charges
-PERSONAL pension= KID that sets out key info on offered investment products, illustration shown on amount of annual pension that may be received at retirement (which is entirely based on the amount that is intended to be contributed or transferred into the pension). ALSO SHOWS effects of the charges taken on the investment growth over the term of the investment, using a reduction in yield
What is the meaning of CRYSTALISATION when drawing pension benefits?
Not been necessary to retire in order to take the benefits from an employer sponsored retirement benefits scheme
What is a Pension Commencement Lump Sum?
-some members will choose to take a PCLS
-Scheme decides on the amount payable
-payment CANNOT exceed 25% of the value of the fund
-Paid FREE OF TAX
-if value of PCLS is over LIFETIME ALLOWANCE then excess is taxed at 55%
-Individual can receive a lump sum and invest some of it to provide an income or use it to pay planned purchases
What are the two types of Pension Commencement Lump Sum?
-Small Pension Pot Commutation
-Trivial Commutation
What are the features of Small Pot Commutation?
-pension scheme benefits of less than £10,000 can be taken as a lump sum
-Threshold of 10k applies to each scheme being commuted
-Maximum of 3 NON-OCCUPATIONAL schemes being commuted
-no limit on OCCUPATIONAL schemes being commuted
Eligibility= at least 55 years of age or in ill health
-NOT TESTED AGAINST LIFETIME ALLOWANCE
What are the features of Trivial Commutation?
-Available to customers of DEFINED BENEFIT and DEFINED CONTIBUTION schemes
-Can take benefit as a lump sum if benefits are less than £30,000
-All Trivial Commutation MUST be taken WITHIN 12 MONTHS
-NO MAXIMUM NUMBER on Trivial Commutation Lump Sum that can be taken
Eligibility= at least 55
-MUST have available LIFETIME ALLOWANCE
If these conditions are met=
-member can take 25% of any uncrystallised benefit TAX FREE
-Remainder is liable to tax through PAYE at marginal rate of tax when using BOTH forms of commutation
What is an Uncrystallised Fund Pension Lump Sum (UFPLS)?
- for those OVER 55 and have a DEFINED contribution scheme to access their uncrystallised pension fund as a lump sum payment
What are the features of Uncrystallised Fund Pension Lump Sum (UFPLS)?
-NO LIMIT to UFPLS payments a member can take (depends on the remaining value of the fund that can be accessed)
-payment TESTED AGAINST LIFETIME ALLOWANCE
-excess is taxed at 55%
What is the tax treatment on Uncrystallised Fund Pension Lump Sum?
UNDER 75= receive 25% of UFPLS payment TAX FREE, excess is liable to tax
OVER 75=Tax treatment driven by whether the member has remaining LIFETIME ALLOWANCE.
What are the Pros and Cons of Uncrystallised Fund Pension Lump Sum?
Pros:
-easy to access
-Simple
cons:
-can cash on pension too early without thinking about its longevity in retirement
What is a defined benefits scheme
Only have access to a scheme pension when they have reached retirement age
benefits driven by length of service, salary and accrual rate
