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Practice Quesitons Flashcards

1
Q

Pension transfer suitability requirements

A
  1. Must be in writing
  2. Must assess advantages and disadvantages of transferring
  3. Must take into account other material information
  4. Include analysis of financial implications
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2
Q

Three steps for advising insistent clients

A
  1. Follow normal advice process
  2. If the client insists on acting against the advice of the adviser, reaffirm the implications of doing so
  3. Include a clear statement that the client is acting against the advice of the firm
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3
Q

How is CETV is calculated?

A
  1. Pension at date of leaving (determined by accrual rate, salary and years of service). Revalued as per scheme rules (RPI/CPI/NAE)
  2. Pension at date of NPA. Capitalised using annuity rate assumptions
  3. Capitalised value of pension. Discounted at appropriate rate, given amount of time to NPA
  4. ICE. Adjusted for underfunding/discretionary increases
  5. CETV
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4
Q

Differing assumptions for CETV and TVAS

A

CETV assumption are set by the scheme. TVAS assumptions are set by the FCA.

Assumptions: annuity rates, inflation and NAE

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5
Q

What is an employer covenant? Why would it lead to an unreduced CETV?

A

Employer’s legal obligation and financial ability to support its scheme.

  • reduce/eliminate risk
  • maintain funding on a long term basis
  • give trustees confidence in future funding
  • no need to reduce CETV as remaining/existing members will not be disadvantaged
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6
Q

Features of EPP

A
  • might have protected tax free cash. Benefits can be lost unless part of block transfer
  • some contracts include GAR
  • typically set up for one person
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7
Q

Steps a client must take if they want to transfer to access flexibly

A

It benefits are safeguarded and the transfer value is more than £30k, the member will have to provide evidence to the trustees that he has received independent advice from a firm that has appropriate regulatory permissions.

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8
Q

Timeline for statutory transfers over £30k

A

Day 1: member requests statement of entitlement.
1 month: within 1 month the scheme must inform the member of the requirement to seek independent financial advice
3 months: guarantee date
3 months and 10 days: within 10 days of guarantee date the trustees must provide the statement of entitlement and inform member of deadline to provide evidence of advice
6 months: deadline to apply for transfer in writing
6 months and ten days: within 3 months and 10 days of guarantee date, deadline to provide evidence of advice.
9 months: within 6 months of guarantee date, and with evidence of advice, trustees make transfer.

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9
Q

APTA Process

A

Firm must do APTA prior to giving recommendation. Must include TVC.
No need for APTA if only guarantee is GAR.

Step 1: assess benefits likely to be paid and options available under ceding scheme
Step 2: compare results from step 1 with benefits and options of proposed scheme

  1. COBS to illustrate income likely to be paid from ceding scheme
  2. Tax implications
  3. Implications on state benefits
  4. Comparison: likely pattern of income
  5. Comparison: consistent
  6. Plan for reasonable period beyond life expectancy
  7. Income needs
  8. Prioritisation of objectives
  9. Charges
  10. TVC
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10
Q

Describe the TVC

A
  • mandatory element of APTA
  • based on ‘risk free’ return of gilts, in order to compare ‘risk free’ income from DB
  • 0.75% product charge, 4% annuity charge on purchase
  • y axis: cash
  • x axis: CETV and estimated cost of equivalent benefit from an insurer
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11
Q

Explain triage services

A
  1. Giving facts about safeguarded and flexible benefits
  2. Explaining the requirement for advice and cost of advice
  3. Describing how safeguarded benefits would be suitable for general groups of people
  4. Explaining a CETV
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12
Q

List BCE events and how they’re valued

A

BCE 1: age 75 - amount of unused funds
BCE 2: scheme pension - 20 x income
BCE 3: excessive increase to scheme pension - 20 x increase
BCE 4: lifetime annuity purchase - purchase price
BCE 5: DB age 75 - 20 x income plus lump sum
BCE 5B: age 75 - unused funds
BCE 5C: death benefits in FAD before 75 - fund value
BCE 5D: death benefit for lifetime annuity before 75 - purchase price
BCE 6: lump sum - amount of lump
BCE 7: lump sum death - amount of lump
BCE 8: overseas transfer - amount of transfer
BCE 9: adhoc payment - amount of payment

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13
Q

Benefits and drawbacks of a defined benefit pension

A

Benefits

  1. Income
    - Guaranteed and paid for life
    - PPF protection
    - Income will increase at least at statutory minimum
  2. Death benefits
    - Benefits can be paid to beneficiary
    - If remaining instalments are less than £30k a they may be able to commute
    - Dependent’s pension may be payable (typically 50%)
  3. LTA - the following are not BCEs
    - Payment of dependent’s scheme pension
    - Payment of income in guarantee period
    - Payment of pension protection lump sum
  4. General
    - Easy to understand
    - No need for ongoing reviews (less costly)
    - Doesn’t trigger MPAA
    - No exposure to longevity, investment or sequencing risk

Drawbacks

  1. Income
    - Once in payment, income cannot be varied
    - If scheme enters PPF, benefits may be reduced or rate of escalation may be lower
    - If member dies, income may cease
  2. Death benefits
    - Max guarantee period is 10 years
    - Dependents pension always taxed at PAYE
    - Scheme rules may be narrow about ‘dependent’
    - Income paid to dependent may cease prior to death
  3. LTA
    - Further LTA tests can occur in payment (BCE 3)
  4. General
    - Inflexible
    - Cannot pass through generations
    - No ability to invest funds
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14
Q

Benefits and drawbacks of a lifetime annuity

A

Benefits:

  1. Income
    - Secure and guaranteed for life
    - 100% FSCS protection, no upper limit
    - Can provide inflation protection
  2. Death Benefits
    - Remaining instalments under guarantee can be paid to anyone
    - If remaining instalments are under £30k, can be commuted
    - Level of protection can be selected
  3. LTA
    - On death of a member there is no test against survivor’s LTA
  4. General
    - Easy to understand
    - No need for ongoing reviews so less costly
    - Payment doesn’t trigger MPAA
    - No exposure to investment, longevity, sequencing risk

Drawbacks:

  1. Income
    - Once in payment, usually cannot be varied
    - When member dies, payment will end (unless guaranteed)
  2. Death Benefits
    - Guarantees limited by cost
    - Taxed as PAYE
    - If beneficiary dies before member, wont be payable
  3. LTA
    - Value tested against LTA on purchase price (may be higher than DB equivalent)
  4. General
    - Inflexible
    - Limited ability to pass through generations
    - No ability to invest
    - Cannot benefit from ill health increase if health worsens
    - New spouse may not be paid
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15
Q

Benefits and drawbacks of flexible options

A

Benefits:

  1. Income
    - Full flexibility
    - Full PCLS can be taken at outset
    - PCLS can be taken flexibly to help with tax planning
  2. Death Benefits
    - Member can nominate anyone to receive death benefits
    - Beneficiaries can choose how to take benefits
    - Can pass down generations
    - Where member dies before 75 death benefits are paid tax free
  3. LTA
    - When member dies under 75 with crystallised funds, no BCE will occur
    - When member dies after 75 with uncrystallised funds or funds in FAD, no BCE will apply
  4. General
    - Taking PCLS doesn’t trigger MPAA
    - Ability to invest funds
    - Outside estate for IHT purposes
    - Flexibility

Drawbacks:

  1. Income
    - All payment in excess of PCLS triggers PAYE
    - Client takes longevity risk and possibility funds will run out
  2. Death Benefits:
    - Any UFPLS not spent will be in member’s estate for IHT
    - After 75 or outside of 2 year window will be taxed at marginal rate
    - Also applies to subsequent beneficiary
    - If death benefits are taken as lump sum, will be in beneficiaries estate
  3. LTA
    - Where member dies under 75, there will be a BCE event
  4. General
    - Taking a flexible payment will trigger MPAA
    - Investment/sequencing/longevity risk
    - Cost (ongoing reviews)
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16
Q

Definitions of:

  1. Dependent
  2. Nominee
  3. Successor
  4. 2 year window
A
  1. Dependent:
    - Widow/civil partner at time of death
    - Child of member under 23 at date of death
    - Child of member who was dependent on member due to mental/physical impairment
    - Person who was, in the opinion of the scheme, financially dependent, on the member
  2. Nominee
    - Individual nominated by the member to receive benefits from the member’s pension plan upon death.
    - If the member doesn’t make a nomination, the administrator can on member’s behalf
  3. Successor
    - Nominated by member to receive death benefits from flexi-access drawdown on death
    - If no one is nominated, the administrator can on member’s behalf
  4. Two year window
    - Two year period starting from the day in which the scheme administrator first knew of the member’s death
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17
Q

List the transitional protections

A
  1. Primary protection (PP)
  2. Enhanced Protection (EP)
  3. Fixed Protection 2012 (FP12)
  4. Fixed Protection 2014 (FP14)
  5. Individual Protection 2014 (IP14)
  6. Fixed Protection 2016 (FP16)
  7. Individual Protection (IP16)
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18
Q

Primary Protection

A

Min value to qualify: more than £1.5m April 2016
Level of protection: PP factor multiplied bye underpinned LTA of £1.8m
Contributions permitted: Yes
Restrictions: N/A
Lose protection of DB transfer: No

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19
Q

Enhanced protection

A 
Min value to qualify: No minimum
Level of protection: No LTA 
Contributions permitted: No
Restrictions: N/A
Lose protection of DB transfer: enhanced protection is lose if 'relevant benefit accrual occurs'. If a member with enhanced protection elects to transfer benefits from a DB scheme to an MP scheme they may lose protection
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20
Q

Fixed Protection 2012

A 
Min value to qualify: No minimum
Level of protection: £1.8m
Contributions permitted: No
Restrictions: Cannot hold if either PP or EP held
Lose protection of DB transfer: No
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21
Q

Fixed Protection 2014

A 
Min value to qualify: No minimum 
Level of protection: £1.5m
Contributions permitted: No
Restrictions: Cannot hold if PP, EP, FP12 held
Lose protection of DB transfer: No
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22
Q

Individual Protection 2014

A

Min value to qualify: £1.25m as at April 2014
Level of protection: value of pension as at April 2014, subject to £1.5m cap
Contributions permitted: Yes
Restrictions: Cannot hold PP
Lose protection of DB transfer: No

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23
Q

Fixed Protection 2016

A 
Min value to qualify: no minimum
Level of protection: £1.25m
Contributions permitted: No
Restrictions: Cannot hold with PP, EP, FP12 or FP14
Lose protection of DB transfer: No
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24
Q

Individual Protection 2016

A

Min value to qualify: £1m as at April 2016
Level of protection: value of pension as at April 2016, subject to £1.25m cap
Contributions permitted: Yes
Restrictions: Cannot hold PP
Lose protection of DB transfer: No

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25
Q

Retirement Annuity Contracts (RACs)

A
  • Not possible to set up new contracts since 1988.
  • Those with existing contracts can continue contributions
  • Were available to self-employed who did not have employer schemes
  • Member had option to take a tax-free cash lump sum of 3 x initial annuity. Now it is 25% PCLS
  • Death benefits can be restrictive (e.g. return of contributions)
  • Many RACs include GARs
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26
Q

Executive Pension Plans (EPP)

A
  • Occupational money purchase scheme typically set up for one person
  • If set up prior to 2006 then it may be possible to take 100% fund as PCLS
  • Where available tax free cash exceeded 25% of the funds value at A Day then this higher percentage is automatically protected
  • Some contracts include GARs
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27
Q

Section 32 Buy-out

A
  • Individual money purchase contracts used to hold benefits transferred out of a DB scheme as they allow preservation of GMP benefits
  • Can include protected tax free cash
  • Required to pay out, as a minimum, the GMP at retirement (even if investment performance doesn’t cover the cost)
  • GMP valued at fixed rate in deferment (up to 8.5%)
  • May not be able to take PCLS
  • If GMP cannot be covered, insurance company cannot allow scheme to be transferred
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28
Q

Describe how an increase in the inflation assumption used will impact the cash flow model and potential suitability of a transfer

A
  • Inflation reduces spending power of income and higher income would be needed to be taken from the fund, which may lead to earlier fund depletion
  • Higher returns may be needed to sustain fund value which would mean inappropriate levels of risk being taken
  • Revaluation/escalation will be increased within DB pension
  • The above may make the transfer less suitable
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29
Q

State the key documentation an adviser should retain on file for compliance purposes in respect of an advised pension transfer from a DB scheme

A
  1. Fact find
  2. Suitability report
  3. TVAS
  4. Ceding scheme info
  5. Statement of entitlement
  6. Supplementary DB transfer questionnaire
  7. Disclosure documentation
  8. Recommended plan research
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30
Q

Potential death benefits from a DB

A
  1. Dependent’s pension
    - Must not be subject to a guarantee period
    - Cannot have pension/annuity protection
    - Cannot be surrendered (except under pension sharing)
    - Cannot provide any further benefit on dependent’s death
    - Not commutable (except triviality)
    - Where a scheme pension is paid to a child, this must cease at 23 (unless mentally/physically impaired)
    - Taxed as PAYE
  2. Guarantee periods
    - Can only be guarantee for maximum of 10 years
    - Taxable as PAYE
    - Non commutable
  3. Pension/annuity protection lump sums
    - Maximum lump sum on death is deemed original pension cost, less gross income payments made to the date of death
    - Before 75 tax free, after 75 PAYE
  4. Lump sum
    - Lump sum paid is assessed against remaining LTA and any excess is charged at 55%
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31
Q

Potential death benefits from a DC

A

Lump sum death benefits:

  • Death before 75, no tax (this will not apply if not made within 2 year window)
  • On death after 75, where payment is made directly to beneficiary, it will be taxable as income under PAYE
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32
Q

Potential death benefits from a lifetime annuity

A
  1. Survivor’s annuity
    - Must not be subject to a guarantee period
    - Cannot have pension/annuity protection
    - Cannot be surrendered (except under pension sharing)
    - Cannot provide any further benefit on dependent’s death
    - Not commutable (except triviality)
  2. Guarantee periods
    - May be guaranteed for an period at the discretion of the annuity provider and no longer restricted to the previous limit of up to 10 years
  3. Pension/annuity protection lump sums
    - Calculated as original annuity purchase price, less the sum of gross income payments made to member (taxable as PAYE if after 75)
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33
Q

a) What is the role of TPR?
b) Statutory objectives of TPR?
b) What are the powers of TPR?

A

a) To ensure:
- schemes are adequately funded
- operated in the best interest of members
- employers meet obligations to enrol staff

b)
1. Protect members of occupational pension schemes
2. Protect benefits of members (where there is direct payment involved)
3. Promote and improve understanding of good administration of work based schemes
4. Reduce risk of pensions entering PPF
5. Maximise employer compliance
6. Minimise adverse impact on sustainable growth

c)
1. Investigating schemes
2. Putting things right
3. Acting against avoidance

34
Q

The role of trustees

A
  • Provide a statement of entitlement within 3 months of request, and once in every 12 month period
  • Decide on what basis the transfer value will be calculated
  • Decide whether ICE should be increased/decreased
  • Communications in line with statutory requirements
  • Advise member whether they need to take advice
  • Check advice has been received
  • Check scheme is able to receive funds
  • Pay to receiving scheme
35
Q

Statutory rights to transfer:

a) Flexible benefits
b) Safeguarded benefits

A

a) Uncrystallised: any time

b)
- Uncrystallised
- No longer in accrual
- Made an application within 12 months of statement of entitlement
- More than 12 months before NRA
- Right to transfer once every 12 months

Statutory rights override scheme rules. In general the right to transfer only applies where a member transfers a whole scheme (except where GMPs)

36
Q

What is appropriate independent advice?

A
  • Appropriate: adviser/firm authorised and regulated
  • Independent: not connected with scheme or trustees
  • CETV over £30k
  • Check: trustees must check advice has been received
    (evidence must be in writing from adviser to member and feature FCA number and member/scheme)
37
Q

What factors need to be taken into account when determining attitude to transfer risk?

A
  1. Risks and benefits of staying the ceding scheme
  2. Risk and benefits of transferring into flexible arrangement
  3. Client’s attitude to certainty of income in retirement
  4. Whether the client would like to access funds in an unplanned way
  5. Likely impact on sustainability of funds over time
  6. Client attitude to and experience of managing investments or paying for advice
  7. Clients attitude to restrictions on their ability to access funds
38
Q

When can a member take early retirement through ill health?

A
  • May be available before age 55 depending on the severity of the condition. The trustees have discretion to pay full unreduced benefits (enhanced benefits only likely to be available for active members)
  • Scheme administrator receives medical advice
  • Medical advice confirms that member is unable to carry out occupation
  • As a result the member has ceased their occupation
  • Member receiving the pension will have the options to take PCLS in the normal way

Serious ill health - the member may be able to commute a cash lump sum

39
Q

Which statutory instrument defines the regulated activity for advising on the transfer of safeguarded benefits?

A

FSMA 2000

40
Q

Risk factors the FCA would expect firms to consider when establishing the risk warning appropriate for a consumer considering transferring their benefits from a DB scheme

A
  • Health
  • Loss of any guarantees
  • Whether the client has partner/dependents
  • Inflation
  • Whether the client has shopped around
  • Sustainability of income
  • Tax implications
  • Charges
  • Impact on means tested benefits
  • Debt
41
Q

What is the statutory definition of safeguarded benefits?

A

Any benefits which are not money purchase or cash balance benefits

42
Q

Where would you find the regulatory requirements which relate to pension transfer advice?

A

FCA Handbook

43
Q

List the 6 steps in the advice process

A
  1. Establish and defined client relationship
  2. Gather client data and determine goals/expectations
  3. Analyse and evaluate client’s financial status
  4. Develop and present financial plan
  5. Implementation of the recommendation
  6. Monitor and review
44
Q

Explain what information can be obtained from an income/expenditure analysis in relation to pension transfer advice?

A
  • Establish a client’s basic income need pre/post retirement
  • Can the client save further for retirement
  • Identify expenditure that will cease on retirement
45
Q

A member of a defined benefit scheme has applied for a Statement of Entitlement and the
trustees have informed them that they must obtain appropriate independent advice.
Explain what is meant by the term ‘appropriate independent advice’, and why the member
is required to seek this.

A
  • Appropriately qualified and authorised firm
  • Independent of the trustees
  • CETV more than £30k, before reductions for scheme underfunding are applied
46
Q

Outline the conditions that must be met in order for a member of a defined benefit scheme
to have a statutory right to transfer their safeguarded benefits.

A
  • Must not have made a request in last 12 months
  • Must have ceased accrual/be a deferred member
  • Make a formal application for transfer after receiving their statement of entitlement
  • Request must be made at least 1 year before scheme’s normal pension age
  • Must transfer all benefits (except GMP)
47
Q

George has accepted a cash equivalent transfer of £495,000 from his former employer’s defined
benefit scheme. Explain what evidence he must provide to the scheme trustees to prove he has
received appropriate independent advice.

A
  • Written confirmation from adviser to George
  • Confirm advice provided was specific to the transaction and that the adviser had appropriate permissions to advise on transfer of safeguarded benefits
  • FCA number and George’s name
  • Confirm name of ceding scheme
48
Q

What are GMPs?

A
  • GMP for contracted out benefits accrued before April 1997.
  • Members who were contracted out between April 1978 and April 1997 build up an entitlement
  • In return for reduced employer and employee NICs, the trustees had to provide a minimum level of pension at least equivalent to the additional state pension that was given up.
  • Value confirmed at date of leaving the scheme and revalued between date of leaving scheme and retirement
  • Contracting out was abolished in April 2016
49
Q

What are the statutory increases to pensions in payment for those reaching SPA before April 2016?
(Learn the table)

A
  • Pre-1988 GMP: state is responsible for paying the increases to the GMP in payment
  • GMP between 1988-1997: CPI max 3% (excess is paid for by state)
  • Non GMP before 1997: no requirement
  • 1997-2005: CPI max 5%
  • Post 2005: CPI max 2.5%
50
Q

What are the statutory increases to pensions in payment for those reaching SPA after April 2016?
(Learn the table)

A
  • Pre-1988 GMP: scheme doesn’t have to provide escalation
  • GMP between 1988-1997: CPI max 3%
  • Non GMP before 1997: no requirement
  • 1997-2005: CPI max 5%
  • Post 2005: CPI max 2.5%
51
Q

What are the statutory rate of revaluation?

A
  • Pre-1997 GMP: valued at date of leaving service
  • Pre-1997 excess: CPI capped at 5%
  • Pre-2009: CPI capped at 5%
  • Post 2009: CPI capped at 2.5%
52
Q

What are the compensation levels for the PPF?

A
  • Members who have reached NRA: 100%
  • Members already in payment: 100%
  • Members who have retired but yet to take benefits/or deferred: 90% subject to cap of £39,006.18 (so max £35,105.56 pa). Cap is reduce in line with members age if paid before 65
  • Survivor: 50% member’s PPF entitlement
  • One child: 25% member’s PPF entitlement, two children 50%
  • Ill health members: up to 100% (case by case)
53
Q

Rates of revaluation of deferred benefits within PPF

A
  • Pre 2009: CPI capped at 5%

- Post 2009: CPI capped at 2.5%

54
Q

Rates of escalation of benefits in payment from PPF

A
  • Pre 1997: no increases

- Post 1997: CPI capped at 2.5%

55
Q
  1. What is sequencing risk?

2. How can it be reduced?

A
  1. Regular withdrawals amplify poor returns experienced in the early years of a drawdown plan which increases the possibility that the funds will run out soon.
    • Take less income during periods of poor performance
    • Utilise rising equity glidepath strategy
    • Calculate and use a safe withdrawal rate
    • Use an investment strategy that has volatility protection
56
Q

Give reasons why a previous CETV might reduce

A
  • A previous CETV was enhanced by trustees
  • Scheme funding has deteriorated
  • Life expectancy has reduced
  • Higher equity returns leading to a higher discount factor
  • Lower inflation leading to lower revaluation/lower projected pension/lower escalation and higher annuity rates al resulting in a lower capitalised value being required.
57
Q

What are advice requirements for GARs?

A
  • Advice required where transfer value exceeds £30k
  • If only safeguarded benefits are GARs then doesn’t require PTS involvement
  • Personal recommendation required but no requirement for comparison set out n COBS
  • Once GAR has expired, the benefits are no longer considered to be safeguarded
58
Q

What is a bridging pension?

A
  • Additional amount of scheme pension paid to a member who draws their benefits before SPA
  • Stops at the point member reaches SPA
  • Enhancement will be tested against LTA
59
Q

What are the benefits and drawbacks of pension increase exchange?

A

Benefits:

  • Higher initial income
  • Higher PCLS
  • Higher spouses pension
  • Benefit those with reduced life expectancy or spend more in early years

Drawbacks:

  • Member may live past ‘break even’ point
  • Higher value tested against LTA
  • May affect state benefits
  • Inflation might be higher than expected
  • May push member into higher tax bracket
60
Q

What is a safe withdrawal rate?

A

Quantity of money which can be withdrawn each year, for a given quantity of time, including adjustments for inflation, and will not lead to portfolio failure (where failure is defined at a 95% probability of depletion to zero at any time in the specified period).
- 4% indexed with inflation over a 30 year period

61
Q

What are the stress tests that should be used when cash flow forecasting?

A
  1. Permanent loss of asset
  2. Need to increase income
  3. Large adhoc withdrawals
  4. Inflation higher than forecast
  5. Living longer than expected
  6. Investment returns lower than forecast

About seeing how long the funds are going to last

62
Q

What are the effects of rising prices on real income over 20 years?

A

2% - 1/3
3.5% - 1/2
5% - 2/3

63
Q

Explain the difference between flexible and safeguarded benefits

A

Flexible benefits - money purchase, cash balance and any benefit that is calculated by reference to a fund

Safeguarded benefits - those than are neither money purchase nor cash balance

64
Q

How does entering into phased retirement for a 65 year old based on flexi-access drawdown as opposed to lifetime annuities compare with regard to the taxation of lump-sum death benefits?

A
  • In both instances the uncrystallised and crystallised element will be paid out tax-free provided it is paid out within the 2 year window following the member’s death.
  • Also, the uncrystallised element will be tested against the member’s lifetime allowance
65
Q

List the issues trustees must take into account when considering offering reduced CETVs

A
  • Degree of underfunding
  • Strength of employer covenant
  • Recovery plan structure
  • Any contingent assets
  • Implications of not applying a reduction (or a lesser reduction)
66
Q

What four aspects should consideration be given to when assessing the suitability of the receiving money purchase scheme?

A
  1. Flexibility of income
  2. Options for payment of death benefits
  3. Investment options
  4. Cost of administration/services
67
Q

Outline the information that must be communicated to an insistent client

A
  • The firm has not recommended the transaction/the transaction is not in accordance with the firm’s personal recommendation
  • The reasons why this is the case
  • The risks of the proposed transaction
  • The reasons why the firm did not recommend the transaction
68
Q

What are the assumptions that must be used within the TVC calculation process?

A
  • Annuity interest rate
  • RPI
  • CPI
  • Average earnings
  • Mortality rate
  • Product cost (0.75%)
  • Purchase cost of the annuity (4%)
  • Fixed coupon yield
69
Q

The FCA provides rules and guidance to help advisers determine the suitability or otherwise of a
proposed transfer of safeguarded benefits. These rules and guidance are contained in COBS 9 and
19.1.

Outline these rules and guidelines.

A
  • Start with the assumption that the transfer is unsuitable
  • Take into account the clients intention for accessing the benefits
  • Attitude to/understanding of risk of giving up safeguarded benefits for flexible benefits
  • Attitude to/understanding of investment risk
  • Income needs/how they can be achieved/role of safeguarded benefits in achieving these/impact on need to transfer/any trade offs
  • Alternative ways of achieving their objectives/ways of achieving benefits if there is no transfer
70
Q

What actions do the FCA require PTS to undertake?

A
  • Check entirety and completeness of advice
  • Confirm that any personal recommendation is suitable for client
  • Confirm in writing that they agree with the proposed advice before it is provided to the client
71
Q

Outline the FCAs requirement’s for a ‘two adviser model’

A
  • Both firms must work together to collect information required to provide transfer advice and associated investment advice
  • Must undertake risk profiling that assesses attitude to investment and transfer risk
  • Consider impact of loss of safeguarded benefits on client’s ability to take
  • Client must understand role of both firms/charges of both firm and how to make a complaint at each firm.
72
Q

Outline the requirements the FCA places on a firm when advising a self-investor

A
  • Full information about receiving scheme and planned investments
  • If he cannot/will not provide information, the firm cannot offer advice.
  • If the advice is not to transfer specifically because of the destination, the adviser must explain that the transfer may be suitable if he selects a different scheme.
73
Q

Factors the FCA requires an adviser to take into account when determining a client’s attitude to transfer risk

A
  • Risks and benefits of staying in the ceding arrangement
  • Risks and benefits of the receiving scheme
  • Attitude to certainty of income in retirement
  • Whether the client would like to access funds in unplanned way and the impact this could have on sustainability
  • Client’s attitude to and experience of managing investments and paying for advice
  • Clients attitude to restrictions of ceding arrangement
74
Q

Outline factors the scheme trustees will have taken into account in developing a recovery plan

A
  • The contingent security provided by the employer, including its value term and enforceability
  • Likely benefits available to members if employer suffers insolvency event in the short term.
  • Any changes to membership profile that would significantly affect funding
  • Impact of recovery plan on the employer and plans for sustainable growth
  • Assumptions used and the impact is assumptions used are not borne out of practice
  • Anticipated level of risk-based element on the PPF levy
75
Q

Outline the conditions that must be met if the trustees wish to pay a transfer value in an assessment period

A
  • Member must have requested a transfer value before entering the assessment period (in writing)
  • Designated a scheme willing to accept the transfer
  • Trustees reduce the payment to the amount needed to secure the member’s PPF level of benefits
76
Q

Under what circumstances can a scheme enter the PPF?

A
  • Firm must suffer an insolvency event and have no chance of being rescued
  • Scheme assets must be insufficient to secure benefits on wind up at least equal to those payable under PPF
77
Q

Q15/16/19 (b and c)/22

A

Revaluation/PPF rates etc

78
Q

Mike, aged 63, was a member of a contracted-out defined benefit scheme between 1978 and
1998. He transferred these benefits into a section 32 contract in 1999.
Mike is interested in transferring these benefits in order to access them flexibly. The only
information he has on the policy is that the value of the GMP at the point the policy was set up
was £697.02 per annum and the policy is wholly invested in a with profits fund.
Identify the additional information you would require in respect of the section 32 policy before
you can provide any advice to Mike.

A
  • What is the transfer value/does the value cover the GMP/will the provider permit the funds to be transferred?
  • What is the revalued GMP at 65?
  • How much PCLS is available?
  • Performance of with profits funds/bonus history
  • Do the contract terms allow the fund to be switched?
  • Charges
  • Are there any other guarantees?
79
Q

Ursula, aged 59, wishes to transfer a number pension contracts in order to access these flexibly.
One of these contracts is an uncrystallised retirement annuity contract (RAC).
Explain why she has been told that she must receive advice from a pension transfer specialist if
she wishes to transfer the RAC.

A

The value of the RAC is greater than £30k and the contract includes GARs/safeguarded benefits. The PTS must provide advice because on or more of her other contracts includes GMP or is from a final salary scheme.

80
Q

Question 26-29. Case study/death benefit questions

A

Practice

81
Q

Question 31-36.

A

Practice

AF7 (11 decks)

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