General Flashcards
Factors to consider when advising someone on UFPLS vs PCLS (6)
Amount needed
Pension value
Income tax status
PCLS is tax free, whereas UFPLS only 25% is tax free
UFPLS triggers MPAA to just £10,000
UFPLS results in month 1 taxation
LSA remaining/proximity to higher level
Protected PCLS value?
If someone takes DB pension before the NRA, what happens if the pension scheme goes into the Pension Protection Fund (PPF)?
They will only receive 90% of their standard income
Escalation will be in line CPI, capped at 2.5%
Spouse pension reduced to 50%
What body protects annuity products, and to what maximum level?
The FSCS protects annuities for 100%, additional features will also be maintained
State 5 key bits of information included in a State Pension benefit statement
NI Number
State Pension forecast
State Pension Age
Estimate of benefits if deferred
What can be done to improve the forecast
What are the requirements to be classed as a dependant of FAD (3)
Spouse/civil partner who is financially dependant
Or Child under the age of 23
Or someone dependant due to physical or mental impairment
What are the requirements to be classed as a successor for FAD?
An individual nominated by the beneficiary/previous nominee
Or nominated by the scheme administrator where there is no nomination by the member
What is the income tax treatment of death benefits from UFPLS?
Tax free if before age 75 and if paid within 2 year window
If paid after 2 year window it is all taxable at beneficiary’s marginal rate
Taxable if after death 75
What are the 3 scenarios where IHT may apply to pensions benefits?
Where benefits are paid to a beneficiaries estate are subsequently liable to IHT
Member in poor health transfers to improve death benefits (and death occurs within 2 years of transfer)
Member in poor health reduces income from FAD to improve their death benefits
Is UFPLS subject to special tax?
It is subject to month 1 tax, and therefore will need to be reclaimed as this will be a larger tax bill
Four strategies to mitigate sequencing risk
Higher cash weightings
Smaller withdrawals at the start
Use safe withdrawal rate
Diversified portfolio
Buy annuity
5 benefits and 5 drawbacks of cash flow planning
Positives
- able to visualise future income and capital needs
- demonstrate effects of different growth or inflation rates
- shows how realistic goals are
- can stress test
- allow for ongoing reviews
Drawbacks
- tax and legislation may change
- only provides a snapshot
- inputs can be incorrect
- assumptions are not likely to be borne out of practice
- can’t legislate for unforeseen circumstances
5 Key considerations for a client when being offered Pension Increase Exchange (PIE)
Amount of escalation being given up
Clients immediate income needs
Inflation
Health
Amount of PCLS available
Would PIE lead to additional tax liability
3 benefits of a lifetime annuity vs scheme (DB) pension
- more control over the benefits
- greater PCLS potential
- death benefits tax free before age 75
3 requirements to allow you to take money from a pension before age 55
You were a member of an occupational pension scheme on 5 April 2006
The rules of that pension scheme gave you unqualified right to take your benefits from an earlier age than 55
These rules were in place on 10 December 2003
The maximum PCLS available is the lowest of:
25% of the remaining fund
The remainder of the individuals PCLS
The remainder of the individuals £1,073,100 LSDBA
What is enhanced protection?
Allowed people to protect their tax free cash entitlement before the LTA came in, it is still effective today as long as the application was made before March 2023
What were the 3 LTA levels of fixed protection
2012= £1.8m
2014= £1.5m
2016= £1.25m
(Post LTA abolition) To find the protected LSA amounts, simply divide the above numbers by 4
What is the main difference between individual and fixed protections?
Fixed protection does not require any minimum benefit to apply. Ps the deadline for applying for fixed protection 2016 is 5 April 2025
Client factors to take into account? Acronym
R risk
I income protection
P personal circumstances
T tax planning
H health
E employer security (PPF)
F flexibility of retirement age
L lump sums/pcls
A assets and debts
N number of years until retirement
C charges/capital requirements
What are the FSCS protection limits for annuities and SIPPs?
Annuities are protected 100% (at point of insolvency)
SIPP’s are protected up to £85,000
What conditions must be met to receive the Guarantee Credit element of the State Pension Credit? (5)
Must be of state pension age
Weekly income less than £218.15 if single, £332.95 joint
Savings under £10,000 (every £500 over £10,000 counts as £1 of income as your credit is calculated)
If you care for another adult you could also claim extra
Risk factors associated with pension decumulation products (8)
Health
Loss of guarantees
Family/dependants
Inflation
Has the client shopped around
Sustainability of income in retirement
Tax implications
Charges
Impact on means tested benefits
Debt
Scams
Common tricks used by pension scammers
Cold calls
Offers of unrealistic returns
Pressure to act quickly
Promise of access to pension earlier than usual
Phishing
3 benefits and 3 drawbacks of PIE?
Benefits
Higher initial income
Higher spouses pension
Good for those with poor health/lower life expectancy
Drawbacks
Member may live past breakeven point
May affect members state benefits
Inflation may be higher than expected
Annuity benefits (GET MADE)
Guaranteed income
Escalation of benefits
Trigger of MPAA (it isn’t!)
Mortality gain
ATR
Death benefits
Easy to understand
What is the tax treatment of Defined benefit lump sum death benefits (DBLSDB)?
If it is paid outside the two-year period, there are taxation implications. If however it is paid within the 2 year window, will be tested against the LSDBA. Any part of the payment in excess of the LSDBA is a chargeable amount and will be taxed at the recipients marginal rate of taxation.
What is the criteria for a lump sum payment from an Uncrystallised personal pension to be treated as a small pots payment, and how will this be taxed?
Member must be 55 or earlier if ill health/protected age
Maximum of 3 small personal pensions can be commuted
Each pension pot cannot exceed £10,000
25% of the funds is tax free
With the balance subject to members marginal income tax rate
What are the death benefits and tax treatment of a lifetime annuity?
Balance of payments within a guaranteed period are paid as income
Tax free if members dies before 75
Taxable at members income rate post 75
Could commute under Trivial Commutation if less than £30,000
Will DB funds that are within the Pension Protection Fund (PPF) escalate with inflation ?
No escalation pre 1997
Escalation post 1997 in line with CPI, up to a max of 2.5%
Drawbacks from taking UFPLS (4)
Triggers MPAA
Member has to reclaim overpayment of tax
Reduced income potential from the personal pension
Increases estate for IHT purposes
Key benefits of using a Spousal Bypass Trust
The member can nominate the trust as the beneficiary to receive the death benefits from the pension scheme. If the death benefits are paid to the trust, the money held in the trust does not form part of the surviving spouse’s estate and so will not be included when calculating their own Inheritance Tax liability.
After the member dies, the trustees can provide loans to beneficiaries. This means the surviving spouse could get a loan from the trust fund if they need access to the funds
Ensures children receive the residual funds once both parents die
Risk factors that should be considered for clients in decumulation? (6)
Clients health
Loss of guarantees
Clients family or dependants
Inflation
Has the client shopped around
Tax implications
Clients debt
Charges
Potential scams
Key points when considering ill health and a members access to pensions scheme?
The ill-health rules allow access to pension benefits at any age. If the member’s life expectancy is less than a year, the benefits can sometimes be taken as a tax-free lump sum (FAD/Annuity also available)
Generally, lump sum payments will tested against the ‘lump sum allowance’ and the ‘lump sum and death benefit allowance’
Medical evidence is needed for ill-health claims
Accessing pension benefits could impact on State benefits
What is the difference between ill health and serious ill health?
Ill-health - Where an individual is unable to continue doing their job for health reasons
Serious ill-health - Where an individual has a life expectancy of less than 12 months
The assumptions used in the transfer value comparator are set by
The FCA
When comparing the death benefit options available under a lifetime annuity and a scheme pension, what is the main difference?
Under an annuity, the benefits can be paid to any nominee. Under a scheme pension it can only be paid to a dependant
3 reasons why using the actual tax free lump sums could produce a different result to the actual LSA calculation?
- LTA at time of crystallisation was different to £1,073,100
- TFC PCLS was different to 25% of the crystallised amount (eg DB protected PCLS amount)
- There may have been a BCE when no TFC was available (eg transferring to QROPS)
3 step procedure for applying for a TTFAC?
1) certificate must be obtained before the first RBCE after April 2024
2) individual to provide complete evidence of actual tax free amounts received before April 2024
3) scheme administrator must issue a TTFAC within 3 months of evidence being received
3 HMRC requirements for scheme pensions
1) paid for life of the scheme member
2) paid at least annually
3) cannot have a guaranteed period of more than 10 years
4) pension payments taxed under PAYE
True or false: For DB schemes, payments made to a surviving spouse during the guaranteed period are taxable under PAYE, irrespective of the age the member dies
TRUE
The maximum lump sum payment on death from a DB pension is calculated as…
The deceaseds original cost x 20 less gross income payments
What is the tax treatment of the lump sum from scheme pensions when the member dies?
Tax free up to the LSDBA if the member dies pre 75
Excess of the LSDBA taxed on the recipient, if the scheme was set up after April 2024
Taxable if member dies after 75, with 45% tax charge if payment is made to trustee/personal representative
What is the main difference between a lifetime annuity and purchased life annuity?
A lifetime annuity is purchased from a Dc arrangement, whereas a purchased life annuity is bought directly with the provider rather than from the pension fund (many would use their PCLS for a purchased life annuity) with the capital element tax free and income element taxable as savings income
True or false, UFPLS is not available to those with primary and enhanced protection
TRUE
True or false: a firm should send an open market options letter within 2 months of the client reaching 50
True
Individuals reaching state pension age after 6 April 2016 will receive the
New State Pension
To receive any state pension amount, an individual must have a minimum of how many years NIC’s…
10 years minimum, and for full SP you need 35 years
SP triple lock means SP will increase by the higher of…
Earnings growth
CPI
2.5%
To qualify for bereavement support payment, the deceased partner must have paid what?
At least 25 weeks in Class 1 or 2 NIC’s in any year prior to death
In what 3 areas would someone continue to benefit from triple lock, if they live overseas?
EU
EEA
CH
In other areas they’d receive their SP but would not benefit from triple lock
When would someone be able to contribute to their pension without losing their enhanced protection?
As long as they applied before 15 March 2023 and assuming they have a valid certificate, they will retain their enhanced protection
Outline 4 transitional protections that would allow people to take their pension benefits at age 55 rather than the new age of 57 (from 2028)
Does not apply to armed forces or police
Does not apply to schemes where there is an unqualified right to take pension at an earlier age
Protected pension age will be retained as part of a block transfer
Or on an individual transfer but only when the benefits are ring fenced
Small pension pots can be commuted if the value is no more than X, and DB schemes can be commuted immediately if the value is no more than Y
X= £10,000
Y= £30,000
Consideration for calculating state pension (apart from NIC’s)
Calculate what one would get under the old state pension rules, reducing it if contracting out, compared to the calculation under new state pension rules. Whatever is higher this is what they will receive.
PCLS tax free, UFPLS only 25% tax free!
When comparing using ISA vs Pension for income withdrawals, remember you would always need to take more from a pension (gross) given the taxable nature
5 benefits of pension sharing order:
Clean break
Flexibility regarding taking benefits (lump sum/income)
Can take benefits in line with their own retirement age
Can invest in line with ATR
Not lost should the recipient re-marry or ex-spouse die
3 things a DB scheme could do to reduce their liabilities
Change commutation factor
Extend retirement age
Change from final salary to career average earnings scheme
Give 4 examples of when there would be a test against the LSDBA
Member reaches 75
Member takes UFPLS or PCLS
DB lump sum on death
Member takes an ill health lump sum
What is the value of the overseas transfer allowance?
£1,073,100
What are the 3 examples of a relevant lump sum?
PCLS
UFPLS
Serious ill health lump sum (full amount of this lump sum is deducted from the LSDBA, whereas first two just 25% is deducted)
Pre A day you multiply DB income by how much? Post A day you multiple DB income by how much? (For calculating LSA allowance)
Pre A Day = 25x
Post A Day = 20x
A lifetime annuity and flexible annuity, which one triggers the MPAA?
A flexible annuity
Benefits of annuity vs FAD (4)
Simple
Cheaper
Income guaranteed
Annuity rates may fall if a client decides to take annuity later
Are serious ill health lump sums taxable?
Under 75 and if the person has enough LSDBA then no tax
If over 75 the payment will be taxed at marginal rate, but will not reduce the LSDBA
Are serious ill health lump sums taxable?
Under 75 and if the person has enough LSDBA then no tax
If over 75 the payment will be taxed at marginal rate, but will not reduce the LSDBA
When was A day?
6th April 2006
When calculating the annual allowance, what amount are DB pensions multiplied by?
Take the pension input amount (after inflation) multiplied by 16 to give a notional amount
