RETIREMENT AFAR Flashcards
When can a DB pension scheme member potentially commute their entire pension entitlement and draw all of the benefits as a tax-free lump sum?
*If their life expectancy is less than 12 months
What is the ‘Pension input period’?
*The time frame in which individual’s pension benefits can be accrued and set against the annual allowance.
*Pension benefits are increased by contributions, increases in pension rights (DB scheme) or salary increases.
What is the ‘annual allowance?’
*A limit on how much pension benefits can be accrued before a tax charge is due.
*Currently, £60,000
*earnings cap: the tax relief on pension contributions is capped at the higher of £3,600 or 100% of your earnings
*Tapered AA: if adjusted income is greater than £260k your AA is reduced by £1 for every £2 over this amount
*Annual allowance can be carried forwards (unlike MPAA) from the past 3 years, so long as:
- used all current allowance
- UK taxpayer at time of year brought forward.
- active member of pension scheme at time of year brought forward
‘Smoothing’ is a feature of which type of pension fund? Explain what it is?
*With-profits funds
*Provides a more stable return by spreading investment gains and losses over a period of time.
*This is achieved by holding back some returns in good years to support payouts in years when investment performance is poorer.
Financial Reporting Standard (FRS) 17 requires employers to revalue the assets and liabilities of occupational pension funds every:
*Every three years
Client wishes to defer taking their state pension - How much will it increase by?
*It will increase by 1% for every 9 weeks it is deferred.
*It has to be deferred by 9 weeks
*5.78% for 1 year
Investment assets for retirement:
How should portfolio change as retirement becomes less than 10 years away?
*Shift from assets in equities towards Fixed-interest securities such as bonds and Gilts.
*Offers some growth, but avoids risk of loss closer to retirement.
The amount of a switch depends on the individual’s attitude to risk.
Investment assets for retirement:
What should the portfolio largely consist of if retirement is greater than 10 years away?
*Equities
*There is a good chance of capital growth ahead of inflation and the money can be tied up for the long term
SSAS (Small Self-administered Scheme). What is the maximum value the SSAS can use to purchase property?
*Can use assets and borrow up to 50% of its net assets.
Why might a personal pension holder choose flexi-access drawdown rather than an annuity?
*Gilt yields are low
How does the majority of defined-contribution occupational pension schemes provide pension benefits on retirement?
*Purchasing an annuity for the member
Can members of a defined-benefit scheme take benefits early?
*Yes, members can take benefits after age 55 as with DC schemes.
*The pension will be based on their years of service less a probable early retirement penalty
What is the ‘lifestyling’ investment option in personal and stakeholder pensions?
*Some schemes provide an automatic switch in which money is moved from equities to fixed‑interest investments during the last five or ten years to retirement.
How is the state pension funded?
*It is funded by the current working population’s National insurance contributions.
*It is not funded in advance - the decline in birth rates and increase in life expectancy therefore poses an issue for future funding of the state pension.
How many qualifying years must be paid for full state pension entitlement?
- 35 Years (if retiring after April 2016)
(30 years before this date)
- 10 years minimum to receive any state pension
How much is the current full state pension?
*£11,502.40 (2024/2025)
*This can be deferred, and increases by 1% for every 9 weeks delayed - it has to be deferred by at least this amount
Current and future retirement age?
Depends on your date of birth:
*Currently is 66 (2024)
For those born after 5th April 1960, it’ll rise each month, one month at a time until it reaches 67 in April 2028.
*Increasing to 68 in 2028 (affecting those born after April 1977)
Options for retirement: ISAs
*While ISA contributions do not benefit from tax relief, there is no tax payable when the funds are withdrawn.
*Funds can be taken out at any age.
* LISAs offer 25% top up on deposits of up to £4000 (£1000 bonus per year)
*if this is withdrawn before retirement age there is a 25% penalty charge - not just the removal of the bonus
*However, withdrawals and growth is tax free.
*Contribution limit into ISAs each year is £20k for Pensions, it’s £60k.
Pension provision and public perception on long-term care provision.
*Perceived that those who save for their retirement effectively are penalised should they need care as all assets are taken into account when assessing how much is paid.
*Those who have little pension provisions pay little or nothing towards care costs.
*As of October 2023, a cap on an individual’s care costs was instigated by Gov. £86,000
What is the upper and lower capital limit in terms of benefits?
*The upper capital limit - Max value of chargeable assets owned before they can receive benefit from local authority:
- Currently, £23,250
- In Oct 25, £100,000
*The lower capital limit is the threshold below which people will not have to pay anything for their care from their assets:
- Currently £20,000
- In Oct 25, £14,250
Non-state pension: Defined contribution
*Also know as ‘money-purchase’ schemes
*Occupational or individual arrangements.
*Benefits are based on the amount of money in the fund
(which will, in turn, depend on the levels of contribution and investment performance).
*Contributions are made regularly by both employer and employee - often via salary sacrifice.
What is a ‘cash-balance’ scheme
*A form of defined-contribution scheme in which certain additional benefits are offered.
*The pension on retirement will not be solely dependent on fund
performance.
What are the statutory minimum contributions into any occupational pension scheme?
*5% from employer
*3% from employee
Non-state pension: Defined benefit schemes
*Alternatively called ‘final-salary’ or ‘career-average’
*Occupational scheme.
*Benefits are based on an employee’s length of service, the scheme rules and salary.
*Should not be affected by investment performance.
The Pensions Act 2015 - Two important introductions
*Allowed individual’s access to their retirement savings without the need for a ‘minimum level of secure income’
*‘guidance guarantee’ - where everyone with a defined‑contribution pension arrangement is offered free, impartial guidance so they are clear on the range of options available to them at retirement.
The Pension regulator: Statutory objectives
*to protect the benefits of members of occupational pension schemes
*to protect the benefits of members of personal pension schemes where employees
have direct payment arrangements
*to promote and to improve understanding of the good administration of occupational
pension schemes
*to reduce the risk of situations arising that may lead to compensation being payable
from the Pension Protection Fund
*to maximise employer compliance with employer duties and with certain employment
safeguards
*in relation to defined benefit scheme funding, to minimise any adverse impact on the sustainable growth of an employer
The Pension regulator: Power’s fall into three categories
- Investigating schemes to identify and monitor risks.
- Putting things right
- Imposing fines and prosecuting certain offenses
- Requiring specific action to be taken by deadlines
- Recovering unpaid contributions from an employer - Acting against avoidance
-contribution notices, requiring the employer to make good the amount of the debt either to the scheme or to the Pension Protection Fund
- Financial support directions, which require financial support to be put in place for an underfunded scheme
- restoration orders, where assets can be restored to the scheme if there has been a transaction at an undervalue involving the scheme’s assets.
When are employers required to make contributions into employee pension scheme by?
*Must be made by the 22nd day (or 19th day if paying by cheque) of the month following the deduction from the employee’s pay.
What is the Pension Protection fund?
- Established by the Pensions Act 2004
- Protects members of private sector defined‑benefit schemes whose employers become insolvent with insufficient funds in their pension scheme.
*People who have not reached the original scheme’s normal retirement date receive 90 per cent of their accrued scheme entitlement immediately before the assessment date. (If they have reached original retirement age, it is 100%)
A pension scheme may be established by 4 different methods:
- a trust
- a contract
- a board resolution (Scotland)
- a deed poll
Pensions and divorce: three ways
Pensions are taken into account in a divorce settlement. There are three ways in which the situation can be assessed:
- Earmarking
- Splitting (sharing)
- Offsetting
Pensions and divorce: Offsetting
- Transfer value is added to the total assets of the marriage
*The assets are split but the scheme member retains the fund as part of their share.
For example, a scheme member may retain their pension but their ex‑spouse/civil partner may keep other assets, such as the house or the right to a certain income (assuming that the two assets are of similar value).
*Offsetting allows a clean break, so there is no need for the two parties to keep in touch after the settlement.
Pensions and divorce: Earmarking
*Court allocates a percentage of the scheme member’s future
pension entitlement to the ex‑spouse/civil partner.
*The earmarking order can apply to pension income and/or lump‑sum benefits (a separate order would be needed for each).
*The ex‑spouse/civil partner will receive a percentage of
the income or lump sum when the member crystallises the pension
*For tax purposes, the scheme member is held to have received all of the pension before passing part of it on to their ex‑spouse/civil partner
Pensions and divorce: Earmarking - Disadvantages
- It does not allow a clean break between the two parties.
- The scheme member decides when to crystallise the pension.
- If the scheme member is a higher‑rate or additional‑rate taxpayer, 40 per cent or 45 per cent income tax will be payable on the pension income. The ex‑spouse/civil partner can reclaim none of this even if they do not pay tax at the higher rates.
*Income benefits may be lost on the death of the scheme member.
* Entitlement to income may cease upon remarriage or upon a new civil partnership of the ex‑spouse/civil partner.
* The ex‑spouse/civil partner has no control over investment decisions made by the scheme member.
Pensions and divorce: Sharing (splitting)
*Court ascertains the value of the fund, known as the cash equivalent transfer value (CETV), and splits it on a percentage basis between the two parties.
*The proportions will depend on the judge’s interpretation of the situation, taking into account other assets.
- Each party will have their own independent fund and can take benefits as and when they wish, without reference to each other. Future contributions will be outside the split and will belong to whoever makes them.
*The splitting arrangement creates a debit (reduction) in the scheme member’s pension fund and the member is free to build the fund up as they wish. The amount transferred to the ex‑spouse/civil partner’s fund is a ‘credit’ to their pension.
*The credit is not treated as part of the recipient’s annual allowance, but will count towards their lifetime allowance. The debit will be taken away from the ‘donor’s’ fund when calculating their lifetime allowance.
*There is one exception to this: if a pension benefit is already in payment before the divorce, it will not count towards the ex‑spouse/civil partner’s lifetime allowance. This is
because it has already been assessed against the scheme member’s lifetime allowance. Effectively, their lifetime allowance is enhanced by the amount of the transfer.
