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R04 Chapter 5 > R04 Chapter 10 > Flashcards

R04 Chapter 10 Flashcards

1
Q

What is the decumulation phase?

A

Starts when a client first accesses their pension fund.

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1
Q

What is the accumulation phase?

A

The period during which the client is contributing to their pension and has not yet accessed their funds.

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2
Q

What factors affect pension planning needs?

A
  1. When the client wants to retire
  2. Amount and pattern of income to support lifestyle
  3. Does retirement income need to be guaranteed?
  4. How they want to take their income
  5. Any non-pension assets?
  6. Any specific needs?
  7. Any liabilites?
  8. Requirements for income or capital to be available to beneficiaries?
  9. Other requirements - e.g. long term care
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3
Q

In what areas will expenditure likely to decrease close or at retirement?

A
  1. Mortgage repayments
  2. Pension contributions
  3. NICs
  4. Life assurance premiums
  5. Savings
  6. Child expenditure
  7. Income protection premiums
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4
Q

In what areas will expenditure likely increase close to or at retirement?

A
  1. Car and travel expenses
  2. Medical Insurance
  3. Extra holidays
  4. Expenditure on grandkids
  5. Long term care
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5
Q

What factors affect attitude to risk during the accumulation phase?

A
  1. Timescale - if far from retirement, more risk is usually okay. Close to retirement, people may want to reduce short term fluctuations
  2. Wealth - if the pension is likely the only source of income, they’re likely to be more cautious
  3. Past experience
  4. Other investments
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6
Q

What are the risk categories?

A
  1. No risk - client isn’t prepared to see any reduction in the nominal value of their investments
  2. Low risk - Cautious investor - high proportion of funds to be in cash or other guaranteed investments
  3. Medium risk - Prepared t osee fluctuations in return for a higher level of prospective growth in both income and capital
  4. Client is prepared to invest in asset-based investments with very little mixed-in funds like with-profits policies and managed funds.
  5. High risk - prepared to invest in asset-based investments with little or no managed fund or with-profit expenditure
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7
Q

What are the 4 Asset Classes?

A
  1. Cash
  2. Fixed Interest Securities or Bonds
  3. Equities
  4. Property
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8
Q

What are the main characteristics of cash deposits?

A
  1. Capital value remains unchanged and the only return is interest paid - value is eroded by inflation
  2. Interest may be variable or fixed rate
  3. Higher rates tend to be available for larger despotis and for investments over longer term
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9
Q

Why are cash deposits suitable for as part of pension investment?

A
  1. Readily realisable and so holding in cash is suitable for providing a PCLS, an UFPLS, or the income or lump sums taken from a drawdown pension arrangement
  2. Using cash can avoid ‘reverse pound cost averaging’ (cashing in equity units when their value is low)
  3. If interest rates are rising, cash deposits are preferred to fixed interest invetments because the value of fixed interest investments falls as interest rates rise.
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10
Q

What are fixed interest securities or bonds?

A

Loans issued by governments, companies, and other official bodies to raise capital. The borrowing institution paus interest and the capital is usually repaid at the end of a pre-determined period.

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11
Q

What are the main characteristics of fixed interest securities or bonds?

A
  1. Loan is paid back at a pre-set time (known as redemption date)
  2. Various terms are available
  3. Some are undated, so there’s no specific date of redemption
  4. Pay a fixed rate of interest, known as the coupon: some offer an index-linked return (e.g. index linked gilts - both interest payments and the capital repayment at redemption are adjusted in line with inflation measured by RPI)
  5. Fixed redemption value, known as par value - they’re redeemed at their nominal or face value
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12
Q

Reasons fixed interest
securities are suitable as part
of a pension investment:

A
  1. Gilts are secure - guaranteed by the government
  2. Capital value of the investment is protected if held to redemption
  3. Term of the gilt can be matched by policyholder’s term to retirement
  4. Provide a safehaven during stock market uncertainty
  5. Annuities are generally backed by gilts
  6. Provide a guaranteed level of income
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13
Q

What are equities?

A

Most common is a share in a company.

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14
Q

What are the main features of equities?

A
  1. Returns are reproduced in the form of dividends and capital growth in the value of the share
  2. Term of the investment in indefinite - can be bought and sold whenever
  3. Share value isn’t guaranteed and depends on factors like expectation of future company profitability
  4. Over long term, equities tend to outperform cash and fixed interest securities, but there have been periods of negative return.
  5. More risky
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15
Q

What is property?

A

In a pension scheme, investment could be directly into commercial property via a property unit trust or shares in a listed company property.

16
Q

What are the features of direct investment in a property?

A
  1. Values tend to follow a cyclical pattern
  2. Income is obtained via rent
  3. Direct property investment is expensive - properties cost a lot
  4. Sale and purchase ofproperty is slow
17
Q

Reasons commercial property
is suitable as part of a pension
investment

A
  1. Overall risk is reduced - movement in property prices isn’t directly correlated to movement in equity prices
  2. Long term, property investment could produce positive real rate of return
  3. A person with a SSAS or SIPP can invest in a commercial property for the benefit of their business
18
Q

What are examples of collective investments?

A
  1. With-profit funds
  2. Insurance company funds
  3. Unit trusts, OEICs, and investment trusts
19
Q

What is a with-profit fund?

A

Contributions into a with-profit fund are invested in all of the asset classes. Investment growth is governed by bonuses added by the provider.
Returns are smoothed - set at a rate the provider can expect from the fund over long term.

20
Q

What are insurance company funds?

A

Managed funds, equity funds, fixed interest funds, and property fund. Growth in the value of the units reflects the groth of the underlying investments.

So value ca go up and down. Returns are more volatile than with-profit funds, as there’s no smoothing.

21
Q

What are unit trusts, OEICs, and investment trusts?

A

Allow the individual to invest in different asset classes. Each fund contains a range of investments, reducing the overall level of risk of the portfolio.

22
Q

What is lifestyling?

A

Move away from high risk investment to low risk at retirement.

  1. Switching starts between 5 and 10 years before selected retirement age
  2. Locks in the gains made and reduces risk of the fund falling in value approaching retirement
23
Q

What are Target Date Funds?

A

Used by NEST as the default fund for its members.
Member selects a fund that aligns with their intended retirement date. It’s invested in riskier growth assets initially. and moved into less volatile assets as the retirement target approaches.

Unlike a lifestyle fund, it’s actively managed and so can take account of market movements.

24
Q

What are the 3 phases of NESTs Retirement date funds?

A
  1. Foundation - for people in their 20s - focus is on growing steadily, aiming to keep pace with inflation and preserve capital
  2. Growth - Members could be in this for up to 30 years - focus is on growing the pot more quickly, while still aiming to protect the funds from market shocks
  3. Consolidation - starts around 10 years before the fund is due to mature. Start to move away from riskier investments to protect from big falls in value.
25
Q

What are investment pathways?

A

An FCA initiate introduced in Feb 2021. Aimed at providing people without an adviser with better retirement outcomes when moving pension savings into drawdown or transferring between drawdown arrangements.

26
Q

What are the 4 investment pathways?

A
  1. I have no plans to touch my money in te next 5 years.
  2. I plan to use my money to set up a guaranteed income (annuity) within the next 5 years.
  3. I plan to start taking my money as a long-term income within the next 5 years
  4. I plan to take out all of my money in the next 5 years.
27
Q

What is a SIPP?

A

Self Invested Personal Pension. Gives more control over the choice of investments held in the individual pension. Can invest in FCA authorised or recognied collective funds, securities listed on recognised stock exchanges, commercial property and bank deposits.

28
Q

What assets are ‘controlled’ when being invested in in a SIPP?

A
  1. Loans made by a scheme to a member or employer
  2. Borrowings by a scheme
  3. Investments in sponsoring employer
  4. Investments in taxable property
  5. Investments that benefit members e.g. residential property let to an employee at below the commercial rent
29
Q

What are the limits on occupational schemes (SSAS)?

A

Total value of shreholdings in the sponsoring employer that an occupational scheme can hold is limited to:
1. Under 5% of scheme ssets in any one sponsoring employer
2. Under 20% of scheme assets where the shareholdings relate to more than one sponsoring employer

30
Q

What are the rules for loans to a sponsoring employer?

A
  1. Allowed from occupational schemes (SSAS or SIPP set up under an individual trust) subject to conditions.
  2. Loans from a contract-based SIPP are not permitted.
  3. Loans from an occupational scheme to the sponsoring employer must not exceed 50% of the net value of the scheme’s assets at the date the loan is granted.
31
Q

What is the value of the scheme’s assets?

A
  1. Market value of such assets as represents the members’ and survivors’ drawdown pension funds
    PLUS
  2. The aggregate of the value of each scheme pension or dependant’s scheme pension
    PLUS
  3. The value of uncrystallised rights
    LESS
  4. Any existing scheme borrowing

R04 Chapter 5 (6 decks)

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