Pension transfers Flashcards
Flexible Benefits
Money Purchase Benefits
Cash Balance Benefits
Third type of benefits
Safeguarded Benefits
Benefits not
Money purchase
Or Cash Balance
Appropriate Independent Advice
Appropriate - firm authorised and regulated
Independent - of the scheme
Required when CETV is > 30000 before reduction
Trustees must check advice has been received
Statutory right to transfer
More than 1 year to scheme retirement age
Applied for entitlement and sent back application for benefits
Must be a deferred member
Must be a dB scheme
Must not have applied for CETV in last year
Can’t be in PPF
Benefits must be uncrystallised
All benefits must be taken at same time
APTA process
Client
Impact on tax position
Impact on means tested benefits
Impact if live past average life expectancy so ie 100
Fca
Say must use TVC
Must use cobs assumptions when illustrating income likely to be paid from ceding scheme at point of retirement
Adviser
Explain trade offs when prioritising needs. If you do this then that happens
Explain rates of return based on asset mix recommended
Explain charges at point of transfer as well as ongoing including those if the transfer does not take place
Ceding schemes
Must compare how each scheme would meet needs
Must compare the pattern of benefits under both schemes
Must compare how both can provide death benefits required
Cetv
Calculate pension at date of leaving
Capitalise based on scheme trustees inflation assumptions to normal retirement date
Discount based on scheme investments and term to spa- this will Give the ICE
Increase ice if discretionary increases allowed
Or decrease to allow for scheme underfunding
= CETV
Difference between CETV and TVC is cost of transfer
TVC
Calculate pension entitlement at date of leaving
Capitalize to normal retirement age using FCA annuity rate based on scheme benefits
Discount based on gilt returns determined by term to spa
= cost of buying an equivalent annuity.
Difference between CETV and TVC is cost of transfer
Advice process
Establish and define client relationship
Fact find including goals and expectations
Analyse data and evaluate financial status
Then formulate and present a recommendation
Implement recommendation
Monitor and review
Risks associated with transfer
Inflation Loss of guarantees Impact on means tested benefits Taxation Whether there are Dependents Loss of guaranteed income Loss of inflation protection Longevity risk and sustainability of income in retirement Debt Investment scams
Suitability
Take account of
Intentions to access benefits
Attitude to and understanding of risk of giving up safeguarded benefits for flexible (attr)
Attitude to and understanding of investment risk(Atir)
Alternative ways to meet objectives ie wol plan, other investment
PTS Pension Transfer Specialist
Check entirety and completeness of advice
Confirm that any personal recommendation is Suitable based on cobs rules
Confirm in writing they agree with the advice before it is presented to client including and personal recommendation.
Db Benefits
Income
Secure for life
PPF protection if insolvent and scheme funded below PPF level
Income increases by at least statutory minimum each year depending on service dates
Death benefits
Typically 50% dependents pension for life
If income guarantee period then anyone nominated by member can receive payments
If remaining instalments less than 30k may commute for trivial commutation lump sum
Db drawbacks
Income
Cannot usually vary once in payment
If in PPF prior to nra then payment reduced
And escalation will be lower than scheme rules
Income ceases upon member death unless guarantee period or dependant pension payable
Death benefits
Max guarantee period usually 19 years
Trivial commutation lump sum taxed at beneficiary’s marginal rate
Dependants pension taxed at paye whatever age member does
Must meet HmRC dependant definition. Benefits cannot be paid elsewhere
Dependants pension may cease where scheme rules permit. Eg if child reaches 18 or partner remarries.
Lta Benefits
Income
Secure guaranteed
100% FSCS protection
Can provide inflation protection at outset
Death benefits
Income under guarantee pd can be pain to anyone selected by member
If less than 30k can be trivial commutation lump sum
Lump sum and dependant lifetime annuity tax free if member less than 75
Can select protection and benefits at outset
Can nominate beneficiaries. Not limited to HmRC dependants.
Drawbacks
Income
Cannot vary once in payment usually
When member dies income will end unless in guarantee pd
Death
No max pd of guarantee but limited to provider options
Trivial commutation lump sum taxed at beneficiary marginal
Dependant/ nominee pension and lump sum protection taxable at marginal if death after 75
General db
Benefits
Easy to understand
No ongoing review needed so no cost
Suits low capacity for loss
Does not trigger mpaa
No exposure to longevity investment or sequencing risk
Drawbacks
Inflexible - amount and frequency fixed
Cannot pass through generations
Cannot invest to grow
New spouse may not qualify for dependants benefits
Cannot benefit from ill health annuity rates of health worsens in future.
Lta
Payments not bce
Dependants scheme pension
Income under guarantee period
Pension protection lump sum payment
Bce3 may be a further lta test once in payment if scheme pension rises above HmRC permitted rules.
Lta general
Benefits
Easy to understand
No review needed so no cost
Alternative to db if income needed for someone not dependant
May offer income in different format to db scheme
Does not trigger mpaa
No investment sequencing longevity risk
Drawbacks
Inflexible once purchased
Limited passing to future generations
No ability to grow fund
New spouse may not qualify for dependant pension
Cannot benefit from ill health annuity rates in future.
Lta
No test of lta if in receipt of payment on member or dependant
But value tested based on purchase price. If db scheme offering high transfer value then may be higher than the scheme pension would have been.
