Objective: To ensure Tom and Sally are able to generate adequate income in retirement. Flashcards
In making any recommendations to Tom and Sally in relation to retirement planning, what assumptions might you make? (11)
They both remain in good health for the foreseeable future,
and Tom is able to continue to work until retirement
and they continue to afford to accumulate pension funds
Sally eventually begins to create some earned income from her new writing career
Their attitude to risk remains unchanged
They will both commence receipt of their State pensions at their respective State pension ages
Tom has 35 qualifying years NICs, and so receives the full new State pension
Sally may not have 35 qualifying years, but may have received NIC credits whilst claiming Child Benefit
If not, she could make voluntary class 3 contributions
Their mortgage will be paid off by the time they reach State retirement age, earlier if possible
They are willing to use non-pension assets to supplement income in retirement
Comment on their existing pension arrangements, with respect to their aim of providing an adequate income in retirement (12)
Tom is a member of his company’s group personal pension (GPP), having joined in 2009
Tom has completed a nomination of death benefits for both his current and previous pension plans
Tom’s GPP with Monarch Life is invested in a Global Equity tracker fund which may not be suitable for his high-risk profile
Tom’s company currently contributes 5% of Tom’s basic salary, as does Tom on a matching basis
Tom’s GPP is worth £110,000, and his previous pension is worth £78,000, total of £188,000, which is not a huge sum for his age
Tom’s previous pension is invested in UK tracker fund, not compatible with his ATR
Sally does not have a current pension, but she has benefits in her previous employer’s group personal pension, which she left in April 2012
Her previous pension is only worth £47,000, which is poor for her age
and is invested in the default fixed-interest fund, which is incompatible with her ATR
Sally has completed a death benefit nomination in relation to this scheme for Tom
Neither Tom nor Sally have any other pensions that we are aware of
They do not know their entitlements to State pension, Sally may wish to make voluntary NICs
Detail and justify the recommendation you would make in relation to ensuring Tom has adequate income in retirement. (4)
Detail and justify the recommendation you would make in relation to ensuring Sally has adequate income in retirement. (1)
Detail and justify the recommendation for them (6)
In the event that Tom pre-deceases Sally, explain in detail the options and tax treatment of the death benefits payable to Sally from his pension entitlements. (4)
A lump sum A dependent’s flexi-access drawdown or lifetime annuity Tax-free for Sally if Tom dies before age 75 and payment/designation takes place within 2 years of his death Otherwise taxed as Sally’s income
Explain to Tom the benefits of transferring his previous pension to his current scheme(5)
Easier to manage/all in one place Opportunity to review fund choice as the UK tracker is not compatible with his ATR May be less charges May have greater fund choice
Outline the factors that would make it difficult for Tom and Sally to achieve their retirement aims. (6)
Rates of investment growth assumed in projections are not attained It turns out they need higher income in retirement than predicted They need to use tax-free cash at retirement to clear debts/other commitments Pension legislation/ rules relating to levels of tax relief may become less favourable Plan charges increase Inflation is higher than expected
Explain how Class 3 NICs might potentially help Sally (4)
It is indicated that Sally may not have a full entitlement to State pension as she took extended maternity leave This means she may have a gap in her NIC record Class 3 NICS can be paid within 6 years of the tax year in which a shortfall occurred This will increase her entitlement to State pension which is inflation proofed
