Flexible Income Options Flashcards
What does UFPLS allow a member of an uncrystallised defined contribution pension to do?
UFPLS allows a member to access some or all of the pension as a lump sum without having to designate funds to drawdown.
How is a typical UFPLS payment taxed?
Typically, 25% of the UFPLS payment is tax-free, and the balance is taxed as the member’s pension income via PAYE.
What does an UFPLS payment trigger?
An UFPLS payment triggers the MPAA (Money Purchase Annual Allowance).
What are the prerequisites for a member to avail UFPLS?
A member must have reached normal minimum pension age, meet the ill-health requirements, or have reached their protected pension age.
What condition must members under age 75 meet to make an UFPLS payment?
Members under age 75 must have sufficient lifetime allowance available to cover the whole UFPLS payment.
What restrictions are placed on UFPLS payments for members aged 75 and over?
Members aged 75 and over must have some lifetime allowance available. They can take an UFPLS in excess of this amount, but the tax-free element will be restricted to 25% of their remaining lifetime allowance.
What happens to the funds once an UFPLS payment has been taken concerning IHT purposes?
Once an UFPLS payment has been taken, the funds are included in the member’s estate for Inheritance Tax (IHT) purposes.
In which cases can an UFPLS not be taken?
An UFPLS cannot be taken where the member has primary and/or enhanced protection, scheme-specific tax-free cash that entitles them to a PCLS in excess of 25% of the fund, or a lifetime allowance enhancement factor and the available portion of the member’s lump-sum allowance is less than 25% of the proposed UFPLS.
Can additional funds be designated to an existing capped drawdown pension?
Yes, providing the scheme rules allow, additional funds can be designated to an existing capped drawdown pension. When this happens, the basis amount must be immediately recalculated.
How many forms of drawdown pensions are there and what are they?
There are two forms of drawdown pensions: capped drawdown and flexi-access drawdown.
Can new capped drawdown pensions be set up after 6 April 2015?
No, no new capped drawdown pensions can be set up since 6 April 2015, but members already in it can continue.
How is the basis period amount for a capped drawdown pension calculated?
The basis period amount is calculated based on the member’s age in whole years, the long-dated gilt yield on the 15th of the month prior to the month of calculation, and the corresponding GAD rate.
What are the income limitations of capped drawdown pensions?
The maximum income available from the capped drawdown pension in a pension year is 150% of the basis amount. There is no minimum income.
What changes in the reference period occur for members aged under 75 in a capped drawdown pension?
Members aged under 75 will have a three-year reference period, changing to an annual reference period on the policy year-end date following the member’s 75th birthday.
What is the timeframe for the scheme administrator to recalculate the basis amount at the end of a reference period?
When recalculating the basis amount at the end of a reference period, the scheme administrator has a 60-day window to carry out the calculation, which ends on the start date of the new reference period.
Does taking an income from capped drawdown trigger the MPAA?
No, taking an income from capped drawdown does not trigger the MPAA.
What drawdown option is available for someone not already in capped drawdown on 5 April 2015?
Flexi-access drawdown is the only drawdown option available to someone not already in capped drawdown on 5 April 2015.
How much can a member withdraw from a flexi-access drawdown fund?
It allows the member to take as much or as little as they wish from the fund, including the option to withdraw the whole fund as a lump sum.
How is income taken from a drawdown fund taxed?
Income taken from a drawdown fund is taxed as the recipient’s pension income via PAYE.
What is the implication of any withdrawal from a member’s flexi-access drawdown fund concerning the MPAA?
Any withdrawal from a member’s flexi-access drawdown fund is a trigger event for the MPAA.
Can a member of capped drawdown convert their fund to a flexi-access drawdown fund, and what are the implications of doing so?
Yes, a member of capped drawdown can request that their scheme administrator converts their fund to a flexi-access drawdown fund. The MPAA rules will only apply once they take a payment from the flexi-access fund.
What happens to a member of capped drawdown who takes income in a pension year in excess of 150% of the basis amount?
A member of capped drawdown who takes income in a pension year in excess of 150% of the basis amount automatically has their fund changed to a flexi-access drawdown fund and becomes subject to the MPAA.
How can a short-term annuity be used in capped drawdown, and what is its maximum term?
A short-term annuity can be used in drawdown to provide an income and has a maximum term of five years.
Can a member nominate someone to receive their drawdown funds in the event of their death?
Yes, a member can nominate a dependant or a nominee to receive their drawdown funds in the event of their death.
Can a dependant or nominee nominate a successor to receive the drawdown funds, and is there a limit to how many times the funds can be passed on?
Yes, a dependant or nominee can nominate a successor to receive the funds in the event of their death. There is no limit to how many times the funds can be passed on.
What are the death benefit options available in respect of a drawdown fund?
The death benefit options available in respect of a drawdown fund are a lump sum, continuing in drawdown, or purchase of a survivor’s annuity.
Is it possible to transfer a drawdown pension between providers, and if so, under what conditions?
Yes, it is possible to transfer a drawdown pension between providers, subject to certain conditions being met.
What are some of the risks associated with drawdown?
Drawdown is subject to a number of risks including mortality drag and investment risk.
How can a member phase their benefits in regards to PCLS and annuity income?
A member can phase their benefits by using a combination of Pension Commencement Lump Sum (PCLS) plus annuity income.
Is it possible to phase benefits using capped drawdown, and what are the conditions for it?
Yes, it is possible to phase benefits using capped drawdown as long as the capped drawdown fund was in place before 6 April 2015 and the rules of the scheme allow additional funds to be designated to the same arrangement.
How does the use of PCLS impact the tax due on the income being taken?
In all cases, part of the income will be in the form of PCLS which is paid tax-free and so reduces the tax due on the ‘income’ being taken.
What service did the Government launch to provide free and impartial guidance to members of the public wishing to access defined contribution pensions, and what is it a part of now?
The Government launched Pension Wise to provide free and impartial guidance to members of the public wishing to access defined contribution pensions to take advantage of the new flexibilities. It is now part of MoneyHelper.
What does COBS provide guidance on regarding open market options statements?
COBS provides guidance on what should be included within an open market options statement and when such a statement must be provided.
What requirement does the FCA enforce concerning providers of guaranteed income quotes and open market options?
The FCA requires providers of guaranteed income quotes to show whether a higher income can be obtained if the client exercises an open market option. Information on this is included in COBS 19.9.
Is there a requirement in COBS to nudge clients towards pensions guidance such as Pension Wise?
Yes, there is a requirement in COBS to nudge clients towards pensions guidance, such as Pension Wise.
Where can one find the list of warnings that must be included within the suitability report according to COBS?
The list of warnings that must be included within the suitability report can be found in COBS 9.4.
What do Critical yield A and Critical yield B represent?
Critical yield A shows the growth rate needed on the drawdown investment sufficient to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity. Critical yield B shows the growth rate needed to provide and maintain a selected level of income.
What does the FCA’s Finalised Guidance FG21/1 stipulate about the treatment of vulnerable customers?
The FCA’s Finalised Guidance FG21/1 stipulates that firms are required to take account of the needs of vulnerable customers and ensure that they suffer no harm or disadvantage as a result of their vulnerabilities.
What does the FCA’s introduction of the Consumer Duty, effective from 31 July 2023, require of firms?
The FCA’s introduction of the Consumer Duty from 31 July 2023 requires firms to put the consideration of the needs of consumers and a focus on good outcomes for them at the heart of everything they do.
Gail, who will reach her 75th birthday on 10 November 2023, has funds held in a capped drawdown pension arrangement. If the last triennial review took place on 1 September 2022, what is the latest date her current reference period can end?
a.
31 August 2024.
b.
9 November 2026.
c.
9 November 2023.
d.
31 August 2025.
a.
31 August 2024.
The review of a capped drawdown pension is due on 1 August this year. The re-calculation of the basis amount can be carried out within a ‘window’ that ends on 1 August. How long is this ‘window’?
a.
50 days.
b.
60 days.
c.
30 days.
d.
40 days.
b.
60 days.
Daniel, who is 62, has two uncrystallised defined contribution pension arrangements. These are an executive pension plan [EPP] valued at £110,000 with a protected tax free cash entitlement of £45,000 and a personal pension plan [PPP] valued at £650,000. From which of these plans, if any, can he take an uncrystallised funds pension lump sum?
a.
Both of them.
b.
The EPP only.
c.
The PPP only.
d.
Neither of them.
c.
The PPP only.