R04 Chapter 8

Question 1

What is UFPLS?

Answer 1

Uncrystallised Fund Pension Lump Sum. To access all or some uncrystallised funds without desginating into drawdown.

No PCLS is received, but 25% (typiccally) is tax free and remainder is taxed as pension income.

Only time when TFC paid can be less than 25% is when member is over 75.

Taking an UFPLS is an MPAA trigger.

When paid out, it’s no longer in a pension and no longer in a trust, thus it’s part of the estate for IHT purposes.

Question 2

When can a member take an UFPLS?

Answer 2

1. Must be from uncrystallised or unused funds in a DC.
2. Must be at nomrla retirement age, proteted pension age, or meet ill-health criteria
3. Below 75 - member must have an amount of LTA remainings that’s greater or equal to the UFPLS they want to take
4. OVer 75 - must have some remaining LTA

Question 3

What are HMRC’s rules for UFPLS?

Answer 3

1. No limit on how many payments can be taken
2. Can be all funds at once, or mutliple over time
3. Part of the fund can be taken as UFPLS an the remainded used to buy a lifetime annuity or go into flexi-access

Question 4

When can a member not take an UFPLS?

Answer 4

1. Can’t be from crystallised funds
2. Can’t be taken from pension rights arising from pension credit received from a pension sharing order after a divorce, where the relevant pension was already in payment
3. A beneficiary can’t receive death benefits in the form of UFPLS - any uncrystallised benefits upon member’s death become crystallised - so death benefits can only be paid as a lump sum or continuing income
4. Member has primary/enhanced protection where the protection of the lump sum right is for more than £375,000
5. Member has scheme specific TFC protection that entitles them to a PCLS of over 25% of fund value
6. Member has a LTA enhancement factor and the available portion of the member’s lump sum allowance is less than 25% of the proposed UFPLS

Question 5

W/hat is a drawdown pension?

Answer 5

A way for the mmeber to draw an income from their fund at a frequency and level to suit their needs. Also known as unsecured pensions - linked to investment returns and can be ehausted.

Question 6

What is a Capped Drawdown pension?

Answer 6

1. Only available to members already in capped drawdown pre-5 April 2015.
2. Withdrawals per year are capped
3. No minimum withdrawal level
4. MAx is based on a % of an equivalent annuity that could be purchased with the member’s fund. The quivalent annuity is known as the BASIS AMOUNT and the max income is 150% of the basis amount

Question 7

What’s the process for calculating the max permitted income withdrawal? (other than for dependants under age 23)

Answer 7

1. Calculate member’s age in whole years at reference date (date the calculation will be carried out)
2. Obtain gross redemption yield on UK gilts (15 years) for 15th of the month preceeding the month of the reference date
3. If yield is not an exact multiple of 0.25%, round it down to the next 0.25%
4. Using age from Step 1 and yield from Step 3, look up the maximum withdrawal rate in the male GAD table (Government Actuary Department)
5. GAD rates are expressed as an amount of inome per £1,000 (e.g. £56 per £1,000). To determine the max withdrawal, apply this rate to the fund net of PCLS and multiply by 150%. Result should be rounded to the nearest whole penny.

Question 8

Can you carry forward unused income in a year in a capped drawdown?

Answer 8

No. Max income works on a ‘use it or lose it’ basis.

Question 9

What happens if the max income in a capped drawdown is exceeded?

Answer 9

The plan is automatically turned into a flexi-access drawdown plan.

Question 10

What’s the review procedure for a capped drawdown?

Answer 10

The reference date is the date on which funds were designated into the plan. It’s also the date that the scheme administrator has calculated the basis amount. It’s also the first date of the pension year.

For members below 75, the basis amotunt applies for 3 years after which it is recalculated and then again applies for 3 years etc.

Question 11

When does the 3 year review system stop?

Answer 11

Remains in place until the earlier of the member:
1. Makes a request to end the reference period early and it’s accepted by scheme admin
2. Informing the scheme admin that the pension will now be flexi
3. Using the whole fund to purchase a secure income
4. Dying
5. Turning 75

Question 12

What happens to the review procedure once the member turns 75?

Answer 12

It’s now done annually, starting at the beginning of the pension year following the member’s 75th b-day.

Question 13

What circumstanes would trigger the recalculation of the basis amount under a drawdown pension arrangement?

Answer 13

1. Part of the fund is used to purchase a lifetime annuity or a scheme pension
2. Part of the fund is used to enter flexi-access drawdown
3. The member gets divorced and th capped drawdown pension is reduced due to a pension sharing order
4. The member designates additional funds to their capped drawdown pension arrangement.

Where any of these occur, the recalculation must occur on the same date as the event triggering th review. So the 60 day window doesn’t apply.

Question 14

What happens if following re-calculation the basis amount increases/decreases?

Answer 14

1. Increases - the increased max income is available to the member immediately
2. Reduces - the reduced max income will only apple from the start if the pension year following the event that triggered the review

Question 15

How were capped drawdown funds set up prior to 6 april 2015?

Answer 15

1. Newly designated funds were placed into a new arrangement that ran alongside the existing capped drawdown arrangement. Basis amount was calculated for each separate arrangement, and each had its own three year referece period whilst member was under 75.
   OR
2. Newly designated funds were placed into the existing arrangement. One basis amount applied to all capped drawdown funds and there was only one 3 year reference period. BUT the designation of the new funds meant the basis amount had to be immediately recalculated.

Question 16

What is flexi-access drawdown?

Answer 16

Anyone reaching minimum pension age can designate funds into flexi access. As long as the funds are:
1. Uncrystallised or unused DC funds
OR
2. Held in a capped drawdown

Subject to this, there’s 2 ways to enter flexi access:
1. Designate uncrystallised or unused funds to flexi access
OR
2. Turn capped drawdown funds into flexi access by choice or by taking income that exceeds 150% of the basis amount

Question 17

Is capped drawdown still available?

Answer 17

No. Since 6 april 2015, flexi access is the only available drawdown option.

Question 18

Does designating funds to flexi access trigger MPAA?

Answer 18

No. But once the fund are designated, if the member withdraws from their fund, MPAA is triggered for the remainder of the tax year and all subsequent tax years.

Question 19

What happens if a member exceeds their maximum income in a capped drawdown?

Answer 19

The plan immediately becomes flexi access and MPAA is triggered, as the excess amount is considered to be accessing the fund flexibly.

Question 20

What is a short term annuity?

Answer 20

Provides a guaranteed level of inome during its term. The income is paid by the insurance company providing the annuity, rather than directly from the member’s drawdown pension.

Can be purchased by a member, dependant, nominee, or successor.

Income taxed as pension income (recipient’s) via PAYE.

Question 21

What are HMRC’s requirements to consider an annuity to be short term?

Answer 21

1. Must be purchased using funds held in a drawdown pension
2. Must be payable by an insurance company
3. Term can’t exceed 5 years

Question 22

What death benefits can a short term annuity have?

Answer 22

Only a guarantee period of no more than 5 years. If not guarantee is included and the memebr dies within 5 years, the payments cease and the funds used for the purchase are lost.

Question 23

What’s the max income payable from a short term annuity?

Answer 23

1. Short term annuities bought using funds in a flexi-access fund dont have a max limit on income (as there’s no limit on how much you can withdraw from flexi access)
2. If bought using funds in a capped drawdown, there’s an upper limit of 150% of basis amount, less any income being directly taken from the capped arrangement

Question 24

What death benefits are available when a member dies whilst in drawdown?

Answer 24

1. Nomination of the funds to a survivor’s flexi access
2. Withdraw the funds as a lump sum death benefit
3. Purchase a survivor’s annuity

Question 25

Is there a limit to how many times funds in a drawdown fund can be passed on after death?

Answer 25

No limit on how many times they can be passed on after the death of the previous holder. Only limit is how long the funds will last.

Question 26

What is a lump sum death benefit?

Answer 26

When the member or survivor dies, their nominated beneficiary has the option of taking some, or all, of the drawdown fund as a lump sum death benefit.

The funds will form a part of the survivor’s estate when they die, but they can be passed to anyone subject to their Will.

Question 27

What drawdown pensions can be transferred?

Answer 27

1. Member’s capped drawdown and/or flexi access
2. Dependant’s capped and/or flexi access
3. Nominee’s flexi access
4. Successor’s flexi access

Question 28

What is meant by mortality gain?

Answer 28

1. When an annuity is purchased, all of the funds are invested together by the insurance company
2. Some annuitants will die earlier than expected - less annuity income will be paid out
3. Extra funds remain invested and the extra amount is the MORTALITY GAIN
4. Insurance company uses mortality gain to slightly enhance the rate they offer to individuals who buy an annuity (also known as cross subsidy)

Question 29

Summarise flexibility of income and tax treatment of a scheme pension:

Answer 29

1. Level of scheme income is set at outset based on the value of the fund and selected options.
2. Income usually can’t be altered once the scheme is in payment (but can increase if indexation is selected at outset)
3. PCLS can be taken at outset
4. Income is taxable as pension income via PAYE
5. Payment of a scheme pension doesn’t usually trigger MPAA (unless it’s from a DC with less than 11 other people in receipt of the scheme pension)

Question 30

Summarise flexibility of income and tax treatment of a lifetime annuity:

Answer 30

1. Level set at outsef based on value of fund an selected options
2. Can choose a conventional lifetime annuity or flexible
3. PCLS can be taken at outset
4. Income taxable as recipient’s pension income via PAYE
5. Payment from a conventional lifetime annuity doesn’t trigger MPAA
6. Payment from a flexible lifetime annuity triggers MPAA

Question 31

Summarise flexibility of income and tax treatment of an UFPLS:

Answer 31

1. Lump sum taken from an uncrystallised DC
2. Member can choose how much they want to withdraw as an UFPLS (subject to having sufficient LTA pre age 75)
3. Normally 25% of the value is tax free
4. Balance taxable as pension income of the recipient via PAYE
5. Triggers MPAA

Question 32

Summarise flexibility of income and tax treatment of a flexi access:

Answer 32

1. No restrictions on income withdrawals
2. Income can be taken as withdrawal or using the fund to purchase a short term annuity.
3. PCLS can be taken at outset and is tax free
4. Income and short term annuity taxable as pension income for recipient
5. MPAA triggered as soon as any income is taken

Question 33

What are the death benefits for a scheme pension (from DC funds):

Answer 33

1. Can include guarantee for up to 10 years
2. Dependant’s scheme pension can be included when the contract is up
3. Annuity protection lump sum can also be included
4. Payment’s under guarantee or dependant’s scheme pension is taxable for reciepient
5. Annuity protection lump sum death benefit is tax free if member died pre 75
6. Annuity protection lump sum death benefit is taxable where member died after 75 - recipient’s income if payment is to a beneficiary, and when made to a trustee or personal representative, it’s subject to the special lump sum death benefit tax charge of 45%

Question 34

What are the death benefits for a lifetime annuity?

Answer 34

1. Can inclue guarantee period of any length under the contract
2. Dependant’s / nominee’s annuity can be included when contract is set up
3. Annuity protection lump sum can also be included
4. Beneficiary’s income and income under a guarantee is tax free if member died before 75
5. Taxed as recipient’s income if member was over 75
6. Annuity protection lump sum death benefit is tax free if member died before 75
7. Annuity protection lump sum death benefit is taxable if member died after 75 - beneficiary’s income where payment is made directly to them, or 45% special lump sum death benefit charge if made to a trustee or personal representative

Question 35

What are the death benefits for an UFPLS?

Answer 35

1. When UFPLS is taken there are no funds remaining in respect of the fund crystallised to provide the UFPLS so no pension death benefits
2. If only part of the fund is taken as UFPLS. there will be uncrystallised funds left to provide death benefits
3. Any funds taken as UFPLS still held on death will form part of the estate

Question 36

What are the death benefits for a flexi access?

Answer 36

1. No restriction on who death benefits can be paid to
2. Options for survivor are: lump sum (return of fund), continue with flexi-access drawdown (via income withdrawals or short term annuity), or purchase a survivor’s annuity
3. Lump sum and cintinuing income is tax free if member died before 75 (for lump sum, payment must be made within 2 year window to be tax free)
4. Lump sum death benefits taxable in all other circumstances (pension income to beneficiary if paid directly to them, or special lump sum death benefits charge of 45% if to a trustee of personal rep)
5. Continuing income taxable as beneficiary’s pension income via PAYE if member died over 75

Question 37

What is phased retirement?

Answer 37

When an individual choose to ‘phase’ their retirement by taking the benefit from their pension arrangements at different times on one of two ways:
1. They can crystallise a part of the pension fund and then crystallised the rest over the next few years
2. They have a few pension policies which can be crystallised at different times - it’s called SEGMENTATION

Question 38

What are the 4 methods of phasing retirement?

Answer 38

1. Phased annuity purchase
2. Phased capped drawdown (only for those already in capped drawdown pre 6 April 2015)
3. Phased flexi-access drawdown
4. Phased taking of UFPLS

Question 39

How to phase retirement via annuity purchase?

Answer 39

1. Member decides how much they need in the coming year
2. Some pension funds are crystallised to provide the income needed. Amount is determined by income required and annuity rate available. Member receives 25% of the amount crystallised as PCLS and uses the balance to purchase a lifetime annuity
3. When member decides they need more income, they decide on the total net income they need
4. They then crytallise the amount of fund needed to produce this level of income
5. Repeat