Defined Contribution Schemes Flashcards
What are the types of DC pensions?
Personal pensions
Stakeholder pensions
Group personal and steakholder pension
Self-invested personal pension
Retirment annuity contracts
Ocupational money purchase scheme
Executive pension plan (EPP)
Small self-administed pension scheme (SSAS)
Section 32
Targeted money purchase scheme
Explain personal pension scheme
Contributions from individuals, employers, and others are invested with tax relief.
25% can be taken tax-free at 55
Can have death benefits before 55
Describe stakeholder pension
Similar to personal pension but with certain legal standards
Charges capped at 1.5% AMC, no other charges in 10 years, 1% after for schemes set up before 6 aprik 2005
Minimum premium no more than £20 net in single payment.
Lifestyle approach offered (move funds into safer investment)
Registered with TPR
Regulated by FCA utilise decision tree
Describe group personal and stakeholder pensions
Personal pensions grouped together to look and feel like employer pensions
Employer does not have to contribute
Describe self-invested personal pension (member directed)
Same as personal pension with wider investment options. Ie commercial property.
Memeber controls investment
Can borrow 50% of net value
May not lend money to employers
Describe retirement annuity contracts (RAC) (s226 contracts)
Forerunner to personal pensions
Offen have a guaranteed anuity rate (GAR) built in. (Often higher than market rate)
Often, bad death benefits. Ie premiums only no interest or no benefit all.
What is a solution to bad death benefits?
Term assurance till retirment
Describe occupational money purchase scheme
Employers pension scheme set up on money purchase basis.
Different from group personal or stakeholder pensions as is legitimate employer pension not just set up to look like one.
Describe Executive pension plan
Legacy one person occupational pension set up to provide benefits for top employees above standard benefits. From time when it wasn’t possible to have plbith employee and personal pension
Describe small self administered pension scheme
Ocupational pension for up to 11 people (fewer than 12 in legislation)
Often set up by small family businesses.
Can hold commercial property
Can make loans to sponsoring employer
Fund can be adjusted between memebers (not earmarked)
All memebers must be trustees
May borrow money for investment.
Describe section 32
Legacy arrangement used prior to A-day
Transfer out of occupational to money purchase under their own control (pick funds and provider)
Whilst maintaining benefits and (if the scheme accepted it) allowing GMP
Describe targeted money purchase schemes
A hybrid scheme designed to pay benefits equivalent to DB.
Contributions facilitate this, but there is no guarantee. (When there is, it becomes DB)
Encouraged by the government.
Who chooses who can join a group arrangement?
The employer.
Ie could set this to a certain position or set a rule on how much contribution is put in.
What is an in-specie contribution?
Paying a contribution with assets. Ie using shares.
What are the rules for inspicie contributions?
Must be specified upfront in money terms
Sperate agreement made to settle obligation by transfer of assets
If assets fall in value between the agreement and transfer, price is made up by the member
If they rise, either paid back as cash, bought for extra value, or excess treated as contribution
What are the choices for the running of a DC scheme for an employer?
Put into trust- employees and trustees (Same as DB)
Contract - 3rd party
Master trust arrangements - trust based marketed to multiple employers
What form of DC scheme is usually contracted
Group personal pensions
Sumarise the difference between contracted and trust
What is the benefit, and what is the drawback of master trust?
Less administrative burden
Employers do not select trustees and so have less control of governance.
Who governs trust and who governs contract
Trust- TPR
Contract- FCA
What are the limits a qualifying scheme for auto enrollment must adhear to?
If simple percentage, cannot exceed 0.75% per annum over charge year
If an intial charge on contributions and annual management charge made these are subject to their own limits.
All costs covered by cap besides transaction costs.
Deffered members can not be charged more.
What must group personal and group steakholder pensions have?
An independent governace committee.
5 members all independent.
Effectively do the job of trustees for contracted
What are the rights for an early leaver of an occupational DC scheme?
Short service refund available under 30 days
Short service benefit (preserved benefit) over 30 days
Over 3 months, right to transfer
What factors should be considered for someone considering transferring a preserved benefit?
Charges
Investment range
Willingness of new scheme to accept transfer
What death benefits can attach to defined contributions?
Death in service from uncrystalised funds- just pays out acculated value
Death in service from life cover- runs alongside scheme. Pays multiple of salary
What is minimum retirement age for DC
55 unless protected before A-day
Pensions set up before 6th April 2001 can add waver. What does this mean?
Theny can add waver as an opition in the scheme. Treats premiums as paid and accumulated to the fund without being treated as a contribution in case of severe illness.
So
Can then pay full contributions even without relevant earnings.
Pensions set up after 6th April 2001 waiver is provided in the form of a standalone policy. What does this mean?
Small income protection policy
Pays income to scheme members in sickness, which pays premiums.
If there is no relevant income, the maximum tax free is £3,600.
This can cause problems if the scheme does not allow non-taxfree contributions
What are statutory money illustrations for?
To help DC members decide how much money they will need for retirement.
What are the standards for assumptions made on Statutory money purchase illustrations
Projections based on growth assumptions of the provider
Inflation converstion 2.5%
Earnings are deemed to increase at 2.5%
Future charges and e lenses must be taken into account
Max PCLS of 25% will be taken, income provided by level annuity
Inclusion of spouse pension at discretion of the provider
Unisex mortality rate used
What DC pensions don’t require SMPI?
SSAS
Retirement anuity
What considerations should be taken for pension SWITCHING
