General Revision Flashcards
Documentation required as part of advice process (9)
Client Fact Find Supplementary defined benefit specific client questionnaire Disclosure Documentation Transfer Value Comparator Report Statement of Entitlement Ceding scheme information Recommended plan research, illustration and KFD Suitability Report Proof of PTS sign off
Process to be followed to complete a transfer (10)
Statement of entitlement requested by client
Scheme trustees inform client of the need to take financial advice
Information given within one month of initial request
Unless transfer value is under £30k
Trustees must set guarantee date
This must be within 3 months of the initial request
Trustees must provide statement of entitlement
Within 10 days of the guarantee date
The client must confirm wants to transfer
Within 3 months of the guarantee date
Client must prove that they have received independent advice
Within 3 months of receiving the statement of entitlement
Before making the transfer the trustees must check that the firm providing the financial adviser holds the relevant regulatory permissions and that the scheme being transferred to is a legitimate arrangement
Trustees must transfer the benefits within 6 months of the guarantee date
Advantage of transferring DB pension (potential) (9)
- Flexibility over the form benefits are taken
- Generally greater death benefits and ability to leave them to a wider range of recipients (nominees and successors)
- Possibly increased flexibility over retirement date - depends on scheme rules
- Tax free death benefits on death prior to age 75 (not the case with DB INCOME DEATH BENEFITS)
- Possible ability to retire early without incurring an early retirement reduction (in the event that the scheme allows early retirement) - be careful as annuity rates would be lower and pressure on sustainable withdrawal rate also
- Likely entitlement to higher PCLS
- Ability to benefit from investment returns
- Greater control over clients tax position
- Opportunity to benefit from investment returns (need to consider attitude to risk in the context of critical yield. Is it achievable within clients constraints?)
Potential disadvantage of transferring DB pension
- Loss of guarantees
- Loss of inbuilt revaluation and excavation
- Loss of inbuilt dependants pensions
- Loss of protection offered by PPF
- The member is subject to investment risk
- Subject to shortfall risk
- Possibility of longevity risk
- DB scheme is simpler to understand and manage
- No ongoing advice/monitoring fees with DB scheme
- Exposure to historically low and fluctuating annuity rates
- Lifetime Allowance issues are more likely to come into play given current transfer values
Factors which would indicate that the client should/should not transfer (20)
- ATR
- Level of other assets
- Value of guarantees and preparedness to give them up
- Need or none for flexible income
- Expectations of inflation
- Level of investment experience
- Health and life expectancy (CETV does not consider this). Consider IHT implications if there is extreme ill health
- How far away from retirement (do they know what the shape of requirements is)
- Low or high critical yield (consider in context of clients ATR)
- Willingness/unwillingness to accept uncertainty surrounding potential legislative changes
- Need/no need for PCLS
- Non-dependant children or other family members who the client wishes to pass funds to as part of their estate planning/ no relatives (need for flexibility in terms of death benefits)
- Requirement to control tax position or no such need
- Ability to retire earlier - if this is possible through the scheme what is the penalty
- LTA issues - if transfer values are high this can surface
- Protection issues - sometimes transfers may impact on the clients LTA PROTECTION e.g. ETVS
- Scheme funding (well funded/ deficit)
- Willingness to forego the protection offered by PPF
- Willingness/unwillingness to pay ongoing monitoring and advice charges
- Enhanced/ temporarily reduced transfer values
Additional information required regarding the DB scheme to provide advice
- Accrual rate
- Date joined scheme
- Date left scheme
- Scheme basis (FS/CARE)
- Pensionable earnings
- PCLS entitlement
- Commutation rate (if applicable)
- Death Benefit available pre and post retirement
- Scheme definition of dependants
- Whether contracted in or out and for what periods
- Revaluation rates on GMP/non GMP
- Escalation rates on GMP/non GMP
- Funding status
- GMP Entitlement if applicable
- GMP revaluation basis
- Pre/post -88 GMP
- Enhancement/ reduction to transfer value
- Any state pension offset
- CETV offered
- Whether scheme offers partial transfers
- Early retirement factors/late retirement increases
Information required from client to assess suitability of a transfer
- Clients health/life expectancy/family longevity history
- Intended current age and intended retirement date
- Attitude to risk
- Attitude to transfer risk
- Current financial position /capacity for loss
- Expectations of inflation
- Willingness to pay advice/monitoring fees
- Any significant lump sum capital expenditure requirements
- Likely expenditure in retirement
- Pattern of expenditure throughout retirement
- Requirement for flexibility of income and importance against guarantees
- Clients likely retirement income tax rates
- Clients total pension provision and LTA position
- Potential IHT position
- State pension age and NIC record
- Any outstanding liabilities and plans for repayment
- Any expected inheritances/ capital lump sums
- Any spouse/dependants and ages they will be dependant until
- Requirement to provide death benefits/flexibility or death benefits
Potential death benefits and tax treatment
DB schemes
-DB lump sum benefit
- Maybe a set amount, multiple of salary or linked to some other measure
- If the member was under 75 at the time of death then this will be paid tax free
– So long as it is paid within two years of the scheme administrator becoming aware of the death;
– the payment will be tested against the lifetime allowance
– it is not made within two years, or if the member was over age 75 then it will be taxed at the recipients marginal rate
– and there will be no lifetime allowance test
– where benefits are paid to a non-natural person e.g. trust are you special lump sum death benefit tax charge of 45% will apply
– usually free of IHT provided the nomination is not binding on the scheme administrator
– Dependants pension paid as ongoing income
– taxed at the recipients marginal rate
– not tested against the lifetime allowance
– can only be paid to someone meeting HMRC/Scheme definition of a dependent
– continuing income under a guarantee period
– can be paid to any nominated individual
– taxable at the recipients marginal rate
– can be paid for a maximum 10 year period
– trivial commentation lump-sum benefit
– can be paid if the actual value of the benefits is under £30,000
– taxable as income in the hands of the recipient
Death Benefits on uncrystallised DC schemes
– Lump-sum return of the fund value
– dependants/nominees Flexi access drawdown
– dependent/nominees lifetime annuity
– tax-free if the member died under age 75
– however the value of the fund is crystallised will be tested against the members lifetime allowance
– excess benefits will be subject to an LTA excess tax charge
– at 55% if taken as a lump sum
– or 25% plus income tax is taken as income
– Taxed at the recipients marginal rate if the member died over the age of 75
– or if not paid within the two year period
– however there will then be no LTA test
– benefits are not subject to IHT
– they can be paid to any nominee not just dependants
– nominees FAD does not trigger the recipients MPAA
Death Benefits on flexi - access drawdown
– lump-sum return of the fund value
– dependants/nominees flex a straw down
– dependants/nominees lifetime annuity
– tax-free if the member died and the age of 75
– no further LTA test as the payment comes from crystallised funds
– taxed at the recipients marginal rate if the member died over the age of 75
– or if lump-sum benefits are not paid within the two period
– income benefits are tax-free where the member was under 75 regardless of the two-year designation period
– if over 75 and paid to a trust subject to 45% lump-sum tax charge
– Benefits are not subject to IHT
– they can be paid to anybody, not just dependants
Nominees FAD does not trigger the recipients MPAA
Death benefits under lifetime annuity
– Joint life annuity
– -the second party can receive ongoing payments tax free if the money was under 75 at age at death
– - or at the beneficiaries marginal rate if over 75
– -no further LTA test
– continuing income payments under a guarantee period
– no maximum term, subject to the commercial judgement of the provider
– no LTA test
– tax-free if the member was under 75 at the date of death
– and paid within the two years
– taxed at the recipients marginal rate if over 75/outside 2 years
– Not subject to IHT
Annuity protection lump-sum benefit
– tax-free under 75/marginal rate if over
– usually free of IHT provided the nomination is non-binding
– flexible annuity do not trigger the recipients MPAA
– payments can be made to any nominate not just a dependent
Process to carry out CETV
Need to complete
Process for carrying out TVC
– Calculate the preserved pension at the date of leaving the scheme
– which will be based on the definition of pensionable salary, the scheme accrual rate and the length of time in this game
– this is then revalued up to the members NRD in line with this scheme rules
– where information is known such as fixed rates and historic inflation (i.e. from the date of leaving to the date of the calculation) these known rates of revaluation are used
– where information is not known such as future inflation and future average weekly earnings increases (particularly for section 148 revaluation) an assumption is used which is set by the FCA
– they revalued pension is then converted to a capital sum using mortality tables and an annuity interest-rate assumption set by the FCA
– do annuity rate takes into account the PCLS payable, plus the value of any death benefits such as a guarantee/dependence pension, plus the rate of escalation in payment, so the rate will include an inflation assumption we are future increases in payment are based on inflation
- this future capitalised value is then discounted back to the date of the calculation
– using a discount based on gilt yields
– the gilt you used is based on the fixed coupon yield on the UKFTSE actuaries indices for the appropriate term
– the gilt yields used is based
– product charges will be assumed during accumulation of 0.75%. There is no explicit allowance for advisor charges during the accumulation. This 0.75% is the deducted from the discount rate
– this calculation provides the current cost of replacing the defined benefits. This is the amount of money you would need to invest today (using FCA assumptions) which will grow between now and NRD to give you an amount of money at an NRD to secure the defined benefits via an annuity
– this is then compare to the CETV, and the shortfall between the CETV and the cost of replacement identified
– this must be explained clear to the client
– the TVC allows the adviser to illustrate to the client
– – this is how much you would need to replace the benefits you are giving up should you transfer and change your mind at a later date but based on calculations today
– – your scheme is offering you £XXX less than the amount that I have calculated (using the assumptions instructed by my regulator, the FCA) are worth
– – these calculations are prescribed by our regulator. This is how your benefits would be valued and how much you would need, if you were to seek to replicate your scheme pension benefits in the future, but outside the occupational pension scheme
The main differences between a TVC and a TVAS
- TVAS calculates the critical yield
- Which is the annualised return required, after charges, to match the capitalised value of the defined benefits at NRD, and SRD if relevant
- Critical yields give an indication of the value- for - money of the transfer; with high CYs indicating lower value /lower CYs indicating higher value
- Which intends to help advisers determine the suitability of the transfer
- On the other hand, the TVC calculates the capitalised value of the DB scheme based on FCA assumptions - the “cost of replacement” of the DB benefits
- Including a discount rate based on gilt yields
- 4% initial charge on annuity purchase
- 0.75% ongoing annual charge assumed during accumulation, reducing the assumed yield
- This is then compared to the CETV
- To show the pounds and pence shortfall between the CETV offered by the scheme, and the cost of replacing the DB benefits outside the scheme, based on the FCA assumptions
- Like TVAS, TVC is designed to help demonstrate suitability and value for money of a proposed transfer
- TFAS was a regulatory requirement for DB transfer advice up to 1st October 2018 when it was superseded by TVC
