Defined Contribution and Flexible Benefit Schemes Flashcards
Key headings and features of SIPPs (6):
- Contract type
- Investment options
- Employer link
- Commercial Property
- Borrowing and lending
- Illustration
- Self-invested personal pensions (SIPPs) are effectively personal pension plans set up under contract using a master trust and which provide a much wider choice of investment and retirement options;
- Investments are chosen by the member with funds specifically earmarked for their benefit;
- As a form of personal pension there is no link with any sponsoring employer (there is no sponsoring employer in the strict legal sense);
- SIPPs can purchase a commercial property from the member’s employer, other connected or unconnected parties;
- SIPP’s can borrow or lend money, strictly on commercial terms;
- A Statutory Money Purchase Illustration (SMPI) must be issued at least annually (regulated by FCA).
Key headings and features of SSASs (6):
- Contract type
- Investment options
- Employer link
- Commercial Property
- Borrowing and lending
- Illustration
- A SSAS is a defined contribution occupational pension scheme set up under an individual trust; it is a small occupational pension scheme;
- A SSAS will have fewer than twelve members all of whom are trustees of the pension scheme;
- Membership is usually restricted to the directors of the employer company, but not necessarily;
- Investments are chosen by the trustees and benefits are not specifically ear-marked as individual investments. It is a pooled occupational non-earmarked scheme;
- The high cost of SSASs due to greater complexity and more administration;
- SSASs like SIPPs can purchase a commercial property from the member’s employer, other connected party or an unconnected source and they can lend money like a SIPP;
- A SSAS can make loans of up to 50% of the net value of the scheme’s assets to a sponsoring employer (which a SIPP cannot as it does not have a sponsoring employer, but the SIPP can still lend to other parties);
- SSASs are regulated by The Pensions Regulator as they are occupational schemes and not regulated by the FCA;
- A SMPI is not required provided all members are trustees.
How can SIPP/ SSAS contracts be useful for small business owners (and others)? (in terms of commercial property) (4 points)
- If the SIPP/SSAS does not have sufficient liquid assets to make the purchase, then it can borrow up to 50% of the net scheme’s assets’ (see further);
- The tenant of the property (who could be the small business owner) must pay rent under the terms of a formal lease;
- The rental income from the property is received tax-free by the scheme, and when the property is sold there is no capital gains tax on any capital appreciation of the property’s value;
- The property would also be protected from creditors in the event of bankruptcy/insolvency.
What are the drawbacks of investing in property? (5)
- Property is an illiquid asset and may be difficult to sell;
- Lack of investment diversification;
- Rent payable must be on a commercial basis;
- Property cannot be used for loan collateral by the company and is not on the company balance sheet;
- Higher initial/on-going administrative costs and complexity
What transactions and fees are associated with property investments?
- Stamp duty land tax
- Legal fees
- Surveys
- VAT
These fees must all be taken into account and paid from the SIPP/SSAS (as appropriate) and the scheme must have cash to pay fees/costs/charges, as appropriate.
What is the maximum amount a pension scheme can borrow?
The maximum amount a pension scheme can borrow is an aggregate amount of 50% of the scheme’s net asset value at the borrowing date.
Scheme assets should be valued on a market value basis, with deductions for any existing liabilities, such as existing borrowing.
An occupational pension scheme can’t make an authorised employer loan at all unless:
- the scheme has less than 12 members;
- all members are trustees of the scheme;
- the scheme rules need all members to agree in writing before any employer related investment is made
In general, pension schemes aren’t allowed to make loans to connected individuals or other connected parties (which applies to SIPPs), but this is the one exception: SSAS loan backs. These employer loans are subject to strict rules and means that only a SSAS can make authorised employer loans
Events that do not trigger the MPAA (8):
- Receives a pension commencement lump sum.
- Receives a trivial commutation lump sum.
- Receives a small pots lump sum.
- Receives a payment from a scheme pension from a defined benefit arrangement.
- Receives a payment from a scheme pension paid directly from the funds of a money purchase arrangement where at least 12 people
- Receives a scheme pension secured by way of an annuity from a money purchase scheme of any size.
- Is in receipt of a lifetime annuity where payments cannot go down except in prescribed circumstances (conventional lifetime annuity).
- From 6 April 2015, takes no more than the permitted maximum for capped drawdown from a pre-6 April 2015 capped drawdown pension fund.
Events that do trigger the MPAA? (9)
- Takes an income withdrawal from a flexi-access drawdown fund; •
- Takes an uncrystallised funds pension lump sum (UFPLS);
- Notifies the scheme administrator of their intention to convert capped drawdown fund to a flexi-access drawdown fund and then subsequently takes an income withdrawal from that fund;
- Takes more than the permitted maximum for capped drawdown;
- Receives a stand-alone lump sum when entitled to primary protection where the lump sum protection exceeds £375,000;
- Receives a payment from a lifetime annuity where the annual rate of payment can be decreased (flexible annuity);
- Receives a scheme pension paid directly from the funds of a money purchase arrangement where the arrangement is providing a scheme pension paid directly from the funds of the money purchase scheme to less than eleven other members (SSAS);
- Payment of one of the types of benefit listed above from an overseas pension scheme that has benefitted from tax relief will also be a trigger event;
- Those members who entered flexible drawdown before 6 April 2015 will automatically be subject to the MPAA rules from 6 April 2015
The figure shown in GAD tables for income per £1,000 is the equivalent that would be available from a lifetime annuity, assuming that: (4)
- A level annuity
- Based on the individual’s age
- With no guarantees
- Payable in advance
Gilt yields are found by: (3)
- Using the 15-year gilt yields
- Published on the 15th day of the preceding month in the Financial Times
- Rounded down to the nearest 0.25%
What three events might trigger an immediate income review of income from a capped drawdown arrangement?
- Additional funds are designated
- A secured pension (either lifetime annuity or scheme pension) is purchased with part of the PID fund, or
- The fund is reduced as a result of a divorce pension sharing order.
Whilst any of these 3 events would trigger an immediate income review on the new fund basis (using appropriate income calculation with fund values, age and GAD rates applicable at the time of the trigger event), the next triennial three-year reference period review would still fall on the original three-year anniversary/reference period and a new basis amount would be calculated at that point as well.
What does critical yield A represent in terms of mortality gain?
The rate of return which is required to match the income which could have been obtained by purchasing an annuity.
What does critical yield B represent in terms of mortality gain?
The rate of return which is required to maintain a specific level of income.
What are the risk factors of entering into income withdrawal?
- the capital value of the fund may be eroded;
- the investment returns may be less than those shown in the illustrations;
- annuity or scheme pension rates may be at a worse level in the future;
- the levels of income provided may not be sustainable; and
- there may be tax implications
