RETIREMENT AFAR Flashcards

Question

The Pension regulator: Statutory objectives

Answer 1

*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

Answer 2

1. Investigating schemes to identify and monitor risks. 2. Putting things right - Imposing fines and prosecuting certain offenses - Requiring specific action to be taken by deadlines - Recovering unpaid contributions from an employer 3. 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.

Answer 3

*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.

Answer 4

* 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%)

Answer 5

* a trust * a contract * a board resolution (Scotland) * a deed poll

Answer 6

Pensions are taken into account in a divorce settlement. There are three ways in which the situation can be assessed: - Earmarking - Splitting (sharing) - Offsetting

Answer 7

* 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.

Answer 8

*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 - if the scheme holder delays taking their pension the ex-spouse has to wait *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

Answer 9

* 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.

Answer 10

*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.

Answer 11

*The bankrupt's pension falls out of their estate, and the Trustee in Bankruptcy cannot claim rights over it. *This rule applies to registered occupational, personal, stakeholder and retirement annuity schemes. It does not apply to unregistered schemes. *However, if the court believes excessive contributions have been made to a pension scheme to avoid the assets being included, it can order the pension provider to make a payment to the trustee.

Answer 12

*earnings cap: the tax relief on pension contributions is capped at the higher of £3,600 or 100% of your earnings. *If no income, £3600 is used.

Answer 13

*Between 2037 and 2039 *It is now based on you date of birth, and is raised accordingly

Answer 14

*For those retiring on or after 6th April 2016 *Provides a basic income for those above state pension age *Based on an individuals NIC - minimum 10 years to receive anything, 35 to gain full amount. *Full state pension is currently £221.20 per week or £11,502.40 per year

Answer 15

* For those retiring before 6th April 2016 *The current full state pension (2024) £169.50 per week with those aged 80 and over earning an additional 25p per week. *Each year is treated differently for calculating benefits *Enough NICs = qualifying year = 30 qualifying years for basic *If an individual couldn’t work owing to illness or unemployment, they may have been given credits towards the state pension. *Credits reduced the number of qualifying years required to gain the full state pension

Answer 16

*More favourable than the new state pension *Deferral of taking your pension for only 5 weeks would result in a 1% increase *10.4% per annum. *If deferred for over a year, the amount deferred could be taken as a tax-free lump sum, plus interest.

Answer 17

*Both are not means-tested - entitlement does not depend on earnings or savings available. * They are paid without tax deducted but are taxable *the recipient’s tax code is adjusted to allow for the fact that the pension has been paid. *Married couples and civil partners can qualify for two full single person’s state pensions if both have qualified for a full pension in their own right. *Those entitled to a UK state pension who retire and move to live abroad are able, in most countries, to receive their UK state pension. *Annual increase in line with the 'triple lock'

Answer 18

*Yes, in most countries. *If the country is in the EEA, Switzerland, Gibraltar, or any other country with an agreement with the UK - then their pension will adjust in line with inflation, so long as they live in the UK for 6 months or more

Answer 19

The triple lock is the guarantee of increase for new and basic state pension. It is based on one of the three, which ever is greatest: - Rate of inflation measured by the CPI - Earnings growth - 2.5% *Additional state pension (SERPS and SP2) payable to those who reached state pension age before 6 April 2016 is only indexed in line with CPI inflation.

Answer 20

*Pension scheme that ran from 1978-2002 when it was replaced by the State second pension (S2P) *Anybody who was in SERPS between 1978 and 2002 and retired before 6 April 2016, will receive SERPS benefits together with any S2P benefits accrued since 2002. *SERPS was means tested; earnings between lower and upper earnings limits. * Provided additional benefits on top of the basic state pension *Objective: boost the basic state pension by 25% of an individual’s upper band earnings over a period of their best 20 years.

Answer 21

* S2P = Maximum 50% of your spouse or civil partner’s State Second Pension. *SERPS = The maximum you can inherit depends on when your spouse or civil partner died (100%-50% Cannot inherit if you remarry before state pension age

Answer 22

*Objective: provide a more generous state pension than SERPS for low and moderate earners, and for certain carers and people with a long-term illness or disability. * S2P gave those with low earnings a better pension than SERPS. * The greatest benefit was for those classed as low earners. * Carers and the disabled got credits towards S2P. The state second pension was earnings related, as with SERPS.

Answer 23

In 1988 it became possible to contract-out of first SERPS and then S2P. This meant that the individual agreed to forgo benefits from SERPS or S2P in return for a reduced rate, or a rebate of, National Insurance contributions. The contributions were then redirected into their private personal pension or occupational pension scheme

Answer 24

Objective: increase the pension income of many older people. Two elements: - Guarantee Credit: tops up your weekly income to a minimum level - Savings Credit: extra payment for those who funded their retirement through other means other than the stage pension. *It is means tested, unlike the other pensions (Based on income and savings) *It is not taxable

Answer 25

*For those from women’s state pension age and over. *That have a weekly income below a threshold, known as the ‘appropriate amount’. Guarantee Credit will provide a top-up payment to bring income up to that level. *Some may have higher 'appropriate amounts' such as those with disabilities or carers *Capital (savings) over £10k (known as capital disregard) is said to produce 'deemed income' of £1 a week for every £500. Example: if the appropriate amount for a single person was £173.75, and the individual earned £160 per week and had savings of £19k, they would not receive guarantee credit. Their income would be deemed as £160 + £18 from savings

Answer 26

Objective: reward people who made some provision for their retirement. *Payable to individuals who reached state pension age before 6 April 2016 *Can still be applied for if state pension age was reached before this date. *To qualify: *are part of a couple and one of them reached state pension age before 6 April 2016; *were already getting Savings Credit up to that date; and * have remained eligible since then. If eligibility stops for any reason, it is not possible to claim for Savings Credit again.

Answer 27

- Tax relief on contributions into the pension fund - No tax due on income received by or gains made by the fund - A certain amount of tax‑free cash on retirement (to a maximum 25 per cent of the fund value) *Known as the pension‑commencement lump sum. *Afterwards, pension income is taxed as earned income, and subject to the individuals marginal tax bracket rate.

Answer 28

- A maximum of 25% of the pension fund can be taken tax-free - This is a crystallisation event, hence the 'commencement' - In phased retirement, the individual can take the PCLS from a number of segments and leave the remainder invested. -Any PCLS drawn from age 75 onwards will be restricted to 25% of the life time allowance remaining at age 75.

Answer 29

- Must be under the age of 75 - Be a resident in the UK during the tax year - Have relevant earnings in the UK chargeable to income tax for the tax year in which the contribution is made - have been resident in the UK at some point in the five years immediately before the tax year in which the contribution was made and when they became a member of the scheme - the contributor, or their spouse or civil partner, must have received overseas income subject to UK income tax as a Crown employee. In the case of those who have earnings subject to UK income tax, the personal contribution on which tax relief can be claimed is limited to the greater of £3,600 or their earned income. Those without earned income, including children, are limited to £3,600 gross.

Answer 30

- Tax relief on pension contributions for those earning an income is the greater of £3,600 or or their earned income. - For those without earned income, this is limited to £3,600 gross

Answer 31

- There is no limit to how much you can contribute, but there is a level to which you do not receive tax relief - and may incur a tax charge - This is called the annual allowance and is £60,000 (2024) - The annual allowance is restricted to the 'pension input period' each year. this runs in line with the tax year April 6 - April 5 - Should an individual's income (including employer contributions) exceed £260,000 then a taper is applied to the annual allowance - For every £2 over this amount, £1 is deducted from the annual allowance

Answer 32

They can still contribute and build their retirement find but they will not receive tax relief on the contributions

Answer 33

- The annual allowance charge is due on contributions made above an the annual allowance during the pension input period. I.e. a tax charge on pension contributions above £60,000 in one tax year. Not due: - The year an individual dies (pension savings are set to nil) - When benefits are taken due to severe ill health (pension savings are set to nil)

Answer 34

-The notional increase in the capital value of any defined‑benefit pension rights is set against the AA. Calculated by 1. Taking value of pension benefits at the start of the year, and multiplying by 16. 2. The value is then increased by the CPI 3. Taking value of pension benefits at the end of the year, and multiplying by 16. 4. The difference between the two figures is the total pension input, and this is the figure that is tested against the annual allowance.

Answer 35

only annual increases in pension rights that are in excess of either what is required by the pension scheme rules that were in place on 10 October 2010 or CPI for the 12‑month period ending with a month that falls in the pension input period count towards the annual allowance. If benefits from a deferred defined‑benefit pension increase by an amount that is less than this, the member is treated as having no pension input. If increases are in excess of this amount, they will be valued using a factor of 16:1 for the purpose of calculating the annual allowance.

Answer 36

- Unused annual allowance can be carried forwards 3 years - Provided you have been a member of a registered pension scheme during that time. - In order to carry forwards, you must use all of your current years AA first.

Answer 37

- Tax relief is given on contributions of up to £3,600 or the value of the individual's salary - which ever is greater. - (Income from savings, investments, pensions and other non‑earned sources cannot be included.) -If the individual has no earned income, £3,600 gross is the limit.

Answer 38

_Relief at source_ - Contributions are made from net income (after income tax). - Provider claims back basic rate tax relief from HMRC and adds it to the pot. - Higher and additional rate taxpayers claim additional relief through self-assessment tax return. _Net pay arrangement_ - Contributions are deducted from gross salary, reducing taxable income. - this gives immediate full tax relief at the individual’s marginal rate with no further action needed. *Personal and stake-holder contributions are paid _net_ of basic rate tax. *Retirement annuity contract (RAC) contributions are usually now paid net of basic‑rate tax.

Answer 39

- Occupation scheme arrangement - This is where the employee contribution is taken from their gross pay before tax is calculated (Thus reducing the amount of income tax paid) - This means that the employee receives the highest amount of tax relief immediately. Where the net pay arrangement is not available, contributions will be paid _net_ of basic‑rate tax. Note: that while the ‘net pay’ contribution is deductible for the purposes of income tax, it is not deductible when calculating National Insurance contributions.

Answer 40

Tax relief is limited to 20 per cent at source unless the person for whom the plan is established is a higher‑rate taxpayer. This means that a higher‑rate taxpaying parent cannot claim 40 per cent tax relief unless the child is also a higher‑rate taxpayer, and in that case the child would receive the additional relief.

Answer 41

- Can make unlimited contributions to an employee's pension and claim as an allowable expense (So long as they can prove is it wholly and exclusively for the purposes of trade). -Pension contributions are therefore usually tax-deductible, so long as not disproportionate. -Employer contributions are made gross, with tax relief claimed as an expense in the accounting year of payment. - One of the advantages of drawing dividends is that there is no liability to employer or employee NICs on the payments. However, if there are significant contributions made to the directions pension, HMRC may challenge - Contributions large in relation to salary (small salary + big dividends)

Answer 42

Employer contributions set up under salary sacrifice are not deemed a benefit in kind, therefore: - Income tax not due by employee - NICs not due on pension contributions Employees may come to an arrangement in which they forgo part of their salary in order for an additional pension contribution. Advantage: no liability to employer and employee NICs on the contribution HMRC is strict on this - cannot be paid into a registered pension scheme for an employee’s spouse or family member as part of their flexible remuneration package. However, the effects of a reduced salary on pension death benefits would need to be considered.

Answer 43

- If pension contributions exceed the annual allowance within the pension input period, then a tax charge is due at their rate of income tax on the contributions over the AA. This is regardless of who makes the contributions above the AA: - Employer can still claim as a business expense. - the employee will still be able to claim tax relief on their contribution, as long as it does not exceed 100 per cent of their earnings, although the tax relief will be cancelled out by the annual allowance charge.

Answer 44

- Scrapped as of 6th April 2024. It is still used to calculate available tax-free cash (LSA) - There is a lifetime allowance (LTA), or limit, on the total value of registered pension funds held by an individual that can benefit from tax relief. - The LTA is enhanced (protected) where a member elected for 'transitional protection' in respect of their pre-A-day benefits. - Or, where an individual benefits from a pre-A-day pension credit on divorce - The enhanced allowances were introduced to protect those who had already built up a pension fund in excess of, or likely to grow to exceed, the lifetime allowance

Answer 45

The enhanced allowances were introduced to protect those who had already built up a pension fund in excess of, or likely to grow to exceed, the lifetime allowance.

Answer 46

- A factor of 20:1 is used to convert each £1 of benefits from a defined‑benefit scheme to a notional capital sum. This factor will apply irrespective of the age of the member and their retirement date. (pg 206) - **this is used when benefits have not been taken** - A factor of 25:1 is used to convert each £1 of benefit already in payment prior to 6th April 2006 to a notional capital sum. This higher factor assumes a tax-free sum will already have been taken. - Where a member is in receipt of pension fund withdrawal benefits that started before 6 April 2006, it is assumed that the income being withdrawn is the maximum available for someone of that age,

Answer 47

- Removed from 6th April 2023. was a tax charge on crystallising benefits that exceed the available LTA. - Instead, for certain lump sums, the individual will be charged income tax at their highest rate. These lump sums include: * Serious-ill health LS * Uncrystallised LS death benefits * LTA excess LS * DB LS death benefits At any time when an individual crystallises (takes) benefits from a registered pension scheme, there must be a check to ensure that the lifetime allowance has not been exceeded.

Answer 48

Check whether their lifetime allowance has not been exceeded. Otherwise, a tax charge will occur on the amount in excess of the LTA. This is charged at the individuals highest rate of income tax

Answer 49

- Commencing pension fund withdrawal (drawdown) - Purchasing a lifetime annuity - Taking lump sum cash benefits - Reaching the age of 75 with an uncrystallised pension - Paying a lump sum death benefit - Transferring to an overseas pension scheme.

Answer 50

Extremely tax efficient - There is no CGT on gains made on investments within the pension fund. - The is no income tax on any income generated by investments within the pension fund. If any tax has been deducted at source, it can be reclaimed by the fund.

Answer 51

For DB schemes: - Usually provide lump sum death benefit and scheme pension - The lump sum death benefit is usually a set amount or a multiple of the member’s salary. For DB schemes, member under 75: - Paid tax free if under LTA and within 2 years of death For DB schemes, member over 75: - Taxed as either the recipient’s income via PAYE (or 45% if to a trustee or representative) - Isn't tested against LTA. A scheme pension is taxable as the recipient’s income regardless of the age at death. A trivial commutation lump sum death benefit may be paid when the value of a dependant’s pension or remaining guaranteed instalments are £30,000 or less - non-crystallisation event but is taxed as income (regardless of when death occurred).

Answer 52

For DC schemes, member under 75: - Paid tax free if under LTA and within 2 years of death - If in drawdown or receiving annuity, benefits are tax free if paid within 2 years either if lump sum or as income. For DC schemes, member over 75: - Taxed as either the recipient’s income via PAYE (or 45% if to a trustee or representative) - If in drawdown or receiving annuity, any lump sum is taxed as income (or at 45% if to a trustee or rep).

Answer 53

A trivial commutation lump sum death benefit is a payment made from a pension scheme when the total value of a deceased person's pension benefits is below a certain threshold. This type of payment allows the beneficiaries to receive the pension benefits as a one-off lump sum rather than through regular payments. Can be made when the remaining pension is £30,000 or less.

Answer 54

Upon first taking benefits from a registered pension (i.e. crystallisation) an individual can take a maximum of 25% of the value of the pension fund as tax free cash. This is normally to a maximum of 25% of the recipient's available lifetime allowance. For a member of a defined‑benefit scheme, taking the maximum PCLS needs to be considered carefully since it can reduce the amount of pension income available

Answer 55

- The process of an individual taking tax-free cash, and then reinvesting into their pension - receiving tax relief. HMRC may challenge if: - Contribution to pension greater than what it usually would be - The recycling was planned. - The PCLS, plus any other PCLS received in the previous 12 months, is more than £7,500. -The increase in the annual pension contribution is more than 30 per cent of the amount received from the PCLS.

Answer 56

- Income taken from registered pension is treated as earned income. - Once PCLS has been taken, pension income is taxed at the individuals marginal rate of income tax. - Income from state pensions - tax not deducted at source, but is taxable. - Tax code is reduced to allow for the payment. Pension Credit payments are tax‑free.

Answer 57

- Annuities are the most secure and reliable option at retirement - they provide a secured income for life - It is a contract between the insurance company and individual to provide an income for life. - Capital-protected annuities ensure that the outstanding balance (annuity less payments received before death) is returned to the beneficiaries (tax free if under 75, at their marginal tax rate if not) - They are purchased via lump sum (usually the individuals pension fund) Two types of annuities: - Compulsory-purchase annuity - Purchased-life annuity

Answer 58

An annuity that an individual has purchased as part of a pension arrangement. Income from these annuities is always taxed as earned income through the PAYE system, with the pension provider effectively acting as ‘employer’.

Answer 59

An annuities that the individual has chosen to buy, outside of any pension arrangement – with investment capital or a pension tax‑free lump sum. Income from these annuities is treated as a part return of capital (tax‑free) and, in part, interest (taxable).

Answer 60

- Those with accrued rights in excess of £1.5million - Increased the individual’s ongoing lifetime allowance in proportion to the amount by which the existing fund exceeded the 2006 limit -E.G. if the fund on 6 April 2006 was 25 per cent over the new lifetime allowance, the ongoing lifetime allowance would be 125 per cent of the standard allowance.

Answer 61

- For those who do not have an active membership to pension schemes before A-day - had built benefits but no longer accruing. - So long as membership was not resumed after April 2006, all benefits coming into payment will be exempt from the lifetime allowance charge.

Answer 62

Replaced Funded unapproved retirement benefits schemes (FURBS) and unfunded unapproved retirement benefits schemes (UURBS) on April 2006 *Until 5 April 2011 employee contributions were not treated as a benefit in kind and so the employee did not pay tax or NICs based on them. * The employer cannot claim contributions as a deductible business expense until the benefits become payable. *The fund will pay income tax at the trust rate on any income received from investments. Capital gains are also taxed, although the trustees do have an annual exempt amount (which is equal to half the individual exempt amount). *Retirement benefits will be subject to income tax at the individual’s normal rate, but do not count as part of the member’s lifetime allowance. *Any lump sum death benefit will form part of the individual’s estate for IHT purposes. Pre-2011 used to have the benefit of Income tax deferral and NIC avoidance, however, now does not have these benefits. Does have the disadvantage over cash bonuses now that they have to be paid in a certain form and at retirement

Answer 63

An overseas pension arrangement that can accept a transfer from a UK pension scheme, other than the state pension, provided that the UK pension fund has not been used to provide an annuity. - For those who intend (or have already moved) to move away from the UK. - For International workers who have been part of a UK scheme but are returning home. The QROPS can be set up to provide benefits on retirement, death or serious illness. Conditions: - Must be a recognised pension for tax purposes in both jurisdictions - Subject to time constraints/conditions. - Overseas transfer charge may apply Charge applies made after March 2017 and if the applicant is not: - A resident where QROPS receiving the transfer is based - in the European Economic Area (EEA), Gibraltar or the UK The QROPS they are transferring to is: - an occupational pension scheme and they are an employee of a sponsoring employer under the scheme at that time; - an overseas public service scheme and they are employed by an employer that participates in that scheme at that time; or - a pension scheme of an international organisation and they are employed by that organisation at that time. If none of the above apply, there is a 25 per cent tax charge on the transfer and the tax charge will be deducted before the transfer is made by the scheme administrator.

Answer 64

An additional arrangement made by an individual who wishes to contribute towards their retirement savings outside of their employer and state provision. All PPPs are defined contributions. PPP providers must supply an annual illustration showing the value of the fund and estimate future income (in today's terms). Individuals have a wide option of providers available - from banks, building societies , investment companies, friendly societies etc. and can be arranged via with profit or unit-linked investment principles Stakeholder pensions (SHPs) AND Self-investment Personal Pensions (SIPPS) are additional options

Answer 65

- Master trust - Deed poll The main benefit of both approaches to the plan holder is that death benefits can usually be paid free from inheritance tax

Answer 66

Organised under trust, with the provider appointing a trust company to act as scheme trustee

Answer 67

Not organised under trust - the Deed poll appoints the pension provider as the scheme administrator and there is no need for a trustee.

Answer 68

Stakeholder pensions were introduced by the government as part of their stakeholder suite of products, these were designed to: - Serve the needs of lower earners - Simple-to-understand low-charging savings vehicles Conditions for a stakeholder scheme: - Max charge - cannot be higher than 1.5% for the the first 10 years, and then 1% thereafter. - Minimum contribution cannot be higher than £20, whether a single or regular payment. - Must offer lifestyling investment option - The plan must accept transfers from other pension plans

Answer 69

Phased retirement is where an individual gradually reduces their number of working hours whilst simultaneously drawing a portion of their retirement income from their pension. The pension plan is arranged in a number of 'mini-policies' each representing a proportion of the total premium and fee etc. When the member decides to take benefit, they can chose to drawn from any number of these 'segments' - each with its own tax-free PCLP. The value of the combined segments can be used to generate an income in the form of an annuity, drawdown, or to take further taxable lump sums.

Answer 70

- Relatively conservative - Uses the principle of 'smoothing' returns over the years. - Contributions are allocated into units win the provider's with-profit fund - these will grow/fall in value based on performance of underlying assets. - At the end of the year, actuaries decided how much of the fund is needed to pay current and future liabilities, costs and guarantees - The balance is profit, some of which is held back for 'smoothing', the rest is passed on as bonuses to policyholders - When a member decides to take benefits, a terminal bonus may be added. - The retirement value will be the value of units x how many units held. - If benefits are taken earlier than originally stated, an early retirement penalty or Market rate reduction (MVR) may be applied.

Answer 71

The market rate reduction is a penalty that may be imposed if benefits are taken early from a private personal pension that is arranged under a 'with-profits' investment principle. When a member decides to take benefits, a terminal bonus may also be added.

Answer 72

- Offers a wider selection of funds compared to With-profits funds. - Unit-linked funds operate similarly to unit trusts but pension fund legislation. - As with unit trusts, the value of each unit is simply the value of the fund assets divided by the number of units in issue. - As with unit trusts, units are sold at the offer price and bought back from the investor at the bid price. A typical bid/offer spread would be 5 per cent. - Charges are more specific than with-profits funds. Other charges include: Allocation rates - This is where only a proportion of the investment (contribution) is used to purchase units. - Most modern providers have an allocation rate close to 100% however. Initial and capital units - Different types of units may carry an additional Annual fund management charge. Policy Fee - Monthly or annual fee to cover admin, often included within the annual management fee. Annual Management Fee - Either a monetary amount or percentage of the value of the fund. - Covers the cost of investing funds and admin for the scheme. There may also be a charge for taking benefits earlier.

Answer 73

Broad categories of funds available: -Managed -Equity -Fixed interest -property -Overseas equities -Guarantee

Answer 74

Is a policy option that allows for a 'premium payment holiday' in the event the member is unable to work through accident or illness. Since 6 April, tax relief has not been available on waiver of premium benefits. NOT available for pension plans taken out instead - Pension contribution insurance can be taken out instead. Group income protection insurance - Income from claim = taxable income, can be used for pension contributions. individual income protection insurance policy - Income from claim = Not taxable and cannot usually be used as earnings for pension contributions. Pension contribution insurance - contributions to continue in the event of being unable to work as a result of an accident or illness. There is no tax relief on premiums for this insurance. ALTERNATIVE - Critical illness cover to provide pension contributions.

Answer 75

Under the minimum pension age - currently, aged 55. To increase to age 57 in April 2028

Answer 76

Due to ill health where the member's life expectancy is less than 12 months. Special occupation (Such as professional footballers, military personnel, police): - The member’s lifetime allowance (LTA) will be reduced by 2.5 per cent for each complete year before the normal minimum pension age that the benefit is taken.

Answer 77

- As a tax free lump sum (Pension commencement lump sum) - up to 25% of the fund value can be taken this way. - The rest can be taken as a taxable lump sum, or used to provide an income via drawdown or annuity.

Answer 78

- Turning 75 with uncrystallised benefits - Turning 75 in drawdown - Buying an annuity - Starting pension drawdown - Taking PCLS

Answer 79

Yes, however, any PCLS drawn from age 75 onwards will be restricted to 25 per cent of the lifetime allowance remaining at age 75. ** double check **

Answer 80

An annuity with additional protection to ensure that the outstanding balance (annuity less payments received before death) is returned to the beneficiaries (tax free if under 75, at their marginal tax rate if not)

Answer 81

Annuity rates are based on life expectancy. If an individual has a lower life expectancy than normal for their age, they may receive improved annuity rates. Enhanced - higher rates for certain medical conditions or lifestyles Impaired-life - higher rates for certain medical conditions that are life-shortening. Often these terms are used interchangeably

Answer 82

- Joint will provide less income, can be arranged to pau a surviving partner between 50-100% of the annuitant's initial income. - A joint life annuity will continue to pay out until both parties have died.

Answer 83

Continues to pay even after the annuitant dies. The ten‑year limit on guarantee periods has been removed and guarantee payments can now be commuted for a taxable lump sum where their value is under £30,000.

Answer 84

If escalating, it is to rise based on a fixed about each year (i.e. 3%) or index-linked (increased by RPI or CPI). Escalating annuities pay less than level annuities (can take 10 years to catch up) Decreasing annuities are also available since April 2015.

Answer 85

- Payment immediately or later? - Is income required monthly, quarterly, half‑yearly or annually? Payments in advance result in a slightly lower income than payments in arrears. - A with proportion annuity will pay any income due between the last payment and the annuitant’s death. - A without proportion annuity will not make a further payment if the annuitant dies between payments but will result in very slightly higher income.

Answer 86

- Not as common, not for the risk-adverse - Pension fund buys units in a unitised fund linked to equities and income based on the bid value of the units. - Can choose the anticipated growth rate: If the funds grow at the chosen rate, the income will remain the same. If fund growth exceeds the chosen rate, income will increase; if it is below the chosen rate, the income will decrease.

Answer 87

Similar organisation to unit-linked, but invested in with-profit fund: Applicant selects bonus rate (ABR) between 0 per cent and 5 per cent pa - the higher the ABR, the higher the initial income but the more the danger of a reduction later. Each year the income is reassessed – the annuity is first reduced by the ABR and then the newly declared bonus is added, together in many cases with a one‑year temporary bonus. Providers usually provide a guaranteed minimum level, below which the annuity cannot fall, regardless of bonus performance. If the actual bonus rate matches the chosen rate, the income will stay the same for the next year. If the rate exceeds the chosen rate, the income will increase for the next year. If the actual rate is below the chosen rate the income will decrease for the next year, and the base annuity rate will for the next calculation be lower.

Answer 88

A reduced annual allowance amount instigated by the individual going into drawdown. - Current limit is £10,000 Stops benefits being taken then immediately reinvested into pension for further tax relief (i.e. pension recycling)

Answer 89

Pension fund - PCLS -> Drawdown account (crystallised) -> take ad hoc payments, regular income, or purchase an annuity. - No limits to how many payments can be made - Once PCLS has been taken, the remained of their fund is invested in a drawdown fund of their choosing. - They can then arrange regular income, further lump sums, or purchase an annuity. All withdrawals in excess of their tax-free cash will be classed as INCOME and taxed as such. - Triggers the MPAA.

Answer 90

- Purchased with part of pension fund - Income is paid directly by the insurance company rather than the scheme admin in this circumstance. - Maximum term is 5 years, though another can be purchased. - Remainder of funds remain invested to capitalise on potential further growth.

Answer 91

- Allows the member to take Tax free cash without the need for the drawdown component -The rest of the funds remain invested and untouched (crystallised) - Must be: DC pension scheme, over 55 (unless ill-health) and from an uncrystallised fund - Not called PCLS as there must be an arising entitlement to income, ie drawdown or annuity to be called this (It's just called tax-free cash) Not available for individuals that have: - lump sum protection under enhanced or primary protection; or - a lifetime allowance enhancement factor and where the available portion of the lump sum allowance (LSA) is less than 25 per cent of the proposed UFPLS.

Answer 92

- Allows for greater control over investments - Allows for the delay of taking an annuity, therefore allowing the investor to take advantage of more favourable Gilt yields and beneficial rates based on their age. - Further investment growth may be achieved by leaving a proportion of funds untouched. - Greater flexibility of income

Answer 93

- Fund performance may decline - There may be high fund charges on withdrawals - Annuity rates may not increase as expected - Requires careful management: each withdrawal runs the risk that the member runs out of funds, as people tend to underestimate their life expectancy. - If member withdraws a large portion of their funds, they may face a higher or additional rate tax charge if this pushes them into another tax bracket (withdrawal will be added to income for tax purposes) With annuities, those who die earlier than expected effectively save the insurance company money and this represents a gain to the fund that is to the benefit of other annuitants. This ‘mortality cross‑subsidy’ does not exist with pension fund withdrawal.

Answer 94

When annuitants die early, the insurance company saves money as they do not have to pay out the remaining income (unless a guaranteed annuity). This saving is passed on to other annuitants: If someone lives longer than the average life expectancy, they continue to receive payments, effectively funded by the premiums of those who did not live as long.

Answer 95

Income - Tax‑free if taken as income via drawdown - Tax‑free if taken as income via a joint life or guaranteed term annuity Crystallised funds - Tax‑free to any beneficiary if member died in drawdown or an annuity protection lump sum is paid out Uncrystallised funds - Tax‑free up to the deceased’s lifetime allowance

Answer 96

Income -Taxed at beneficiary’s marginal rate of income tax Crystallised and uncrystallised funds - Taxed at beneficiary’s marginal rate of income tax

Answer 97

Self Investment Personal Pension - Personal pension scheme with enhanced agency and options for investment. -SIPPs can borrow funds for investment purposes and can purchase commercial property - Up to the value of the fund + 50%. - Must pay a market rent to use the building, the rent is paid to the SIPP tax‑free. - Residential property is classed as prohibited. Any investment involving this will be subject to punitive charges there is an unauthorised payment charge of 40 per cent on the member and a surcharge of 15 per cent on the scheme. Scheme can be shut down if 25% of the fund value is in residential property.

Answer 98

- Residential property is prohibited. - Unauthorised payment charge of 40% on the member - A surcharge of 15% is applied to the scheme. If the investment represents 25% of the fund value: - Further charge - Risks scheme being shut down. Indirect investment is allowed - via real estate investment trusts

Answer 99

Prior to 1988 - was the only option for an individual to take out a form of personal pension.

Answer 100

Prior to early 2000s Only way to increase your pension was to make AVC (additional voluntary contributions) to their contribute their occupational scheme. Or to contribute to a free‑standing additional voluntary contributions (FSAVC) arrangement. - Similar structure to PPP in that they belonged to the individual and fund could be chosen. Essentially replaced by Private personal pensions in 2006 with the pension simplifications.

Answer 101

- Does not have to state a normal retirement date, though 65 is usually used. - Fund grows free on UK taxes. - Pensions paid are taxed as earned income - Tax-free cash (PCLS) can be taken. - Contributions by employer and employee qualify for tax relief, subject to the annual allowance. - Death benefits treated as outside of the estate for IHT - provided that the trustees or administrators retain discretion over the distribution of the benefits and distribution occurs within two years of the member’s death.

Answer 102

- After April 2006, No - Contracting out is the process of opting out of the additional state pension, saving NICs for employer and employee

Answer 103

Employer contributions are treated as a deductible business expense and offset against profits in the accounts. - Employer must make contributions to ensure that the defined pension and death benefits can be provided to scheme members. - As wage inflation and investment performance may change, it may result in additional contributions from the employer. - Equally, if overfunding occurs, a contribution holiday might be necessary - or the surplus may be used to increase benefits. Employer contributions are usually paid annually, based on the level of contributions calculated by the scheme actuary. The rate of funding is reviewed every three years in a triennial review.

Answer 104

- Small number of schemes are 'non-contributory' (only employer pays) - Employee contribution is usually a % of pensionable pay, usually around 5-6% - Pensionable pay (or salary) is the scheme definition of earnings that will be taken into account when calculating contributions and benefits. - Employee contributions are paid under the net pay arrangement, where the full amount is taken from pay but then deducted before tax is calculated.

Answer 105

- Length of service - The scheme's accrual rate - this is the rate at which benefits build up (expressed as a fraction, such as 1/60, which would represent 1/60th of the final salary for each year of membership) For example, after 30 years (30/60) the member would retire with 50% of their final salary. - The employee's 'scheme pay' - how much of the individuals salary that goes towards benefits.

Answer 106

- From 55, although a penalty would normally be charged. - Most schemes have a retirement date of 60 or 65

Answer 107

- Yes, though this will reduce the pension you will receive. - The old rules capped the lump sum at 1.5x final remuneration (many schemes still use this) - Alternatively, 25% of their 'fund' can be taken - calculated by multiplying

Answer 108

- Lump sum - Dependants pension

Answer 109

- Pre A-Day - maximum 4x final salary tax-free. - Post A-day - any amount is tax-free. However, if the lump sum exceeds the individual's Lifetime allowance, then it will be taxed at the recipients income tax rate.

Answer 110

Any pension paid to a dependant is taxed as their earned income. - Pre A-day, Typically, most schemes provided a pension of between 50 per cent and 66.7 per cent of the member’s projected entitlement. - Post‑A‑Day, there is no limit to the pension that can be provided for dependants

Answer 111

Any pension paid to a dependant is taxed as their earned income. - If a member dies whilst receiving benefit, their spouse or dependants will receive a pension from the provider - Usually pays 50-67% of the members pension. - Paid for the life of the beneficiary, or a specified term.

Answer 112

- both employee and employer make defined contributions - this makes it easy to budget for (unlike for DB schemes) - Each employee has a 'pot' which grows with each contribution and investment performance that the pension fund is held in (Fund of funds). - This pot is then used to (usually) purchase an annuity on behalf of the member to provide an income for life. - Type of annuity is limited to the scheme but typically be rising with inflation

Answer 113

- Annuity funded by the scheme member's pot typically provides a spouse’s pension of 50 per cent if the member dies. - Some schemes provide a lump-sum death-in‑service benefit. If the member dies in service, the value of their fund will be used to buy a dependant’s pension or may be returned as a lump sum.

Answer 114

-Easy for members to understand in terms of benefits and contribution rates - Usually better value for short‑service members who leave the scheme before reaching retirement - Able to offer a known outlay for the employer.

Answer 115

- there is no underlying benefit promise for members - the employee ends up bearing the risk that the investments within the scheme will underperform, because the employer has no commitment other than to pay the agreed contributions - ultimately, members’ benefits will be affected by the fund value on the day of retirement and, if relevant, annuity rates - No guarantee of the level of benefits payable. The criteria for contributions are normally defined at the outset, with specific contributions for both employer and employee. These will either be a percentage of salary or a fixed monetary amount

Answer 116

- A defined-contribution scheme designed for small to medium sized companies - Subject to the same rules as any occupational scheme - Often set up as one-person schemes.

Answer 117

- Particularly useful for the owner/directors of small or medium‑sized companies. -Group defined‑contribution scheme - 12 or fewer members - All of whom must be trustees. - Often set up to purchase the company premises through the scheme. This way the income and gains from owning the building will be sheltered from income, CGT, and corporation tax. - SSAS can borrow up to the value of the fund + 50% (like SIPPs) These loans cannot be for more than 5 years (rolled into a new loan once for an additional 5 years). - Punitive charges for prohibited investments (like SIPPs) - the sponsoring company MUST pay market value rent to the pension fund for the use of the business premises. -The pension scheme can invest up to a maximum of 5 per cent of the fund value in the sponsoring company’s shares.

Answer 118

- A similar way for an employer to set up a pension as opposed to an occupational scheme - Employer makes arrangement with pension company, each employee has their own policy as part of a group. - Each policy is a personal pension, so the employee can do with it what they wish - if to be used as a qualifying workplace pension, the minimum contributions need to be satisfied. - Payments are usually made by payroll deduction net of basic‑rate tax. - defined contribution only

Answer 119

- simplicity of administration and the lower costs for employer - The advantage to the employee is in the provision of the pension itself and its portability.

Answer 120

A stakeholder pension is a form of personal pension that was brought in by the government as part of their 'stakeholder' suite. These aimed to be low-cost and simple-to-understand to assist the lowest earners.

Answer 121

This refers to the arrangement in which the contributions of the current workers fund the current retirees benefits - Employers and Employees pay contribution directly to the treasury. - The contributions are NOT invested, but instead treated as a loan (or Gilt). - More burden on the employer as Gilts provide less growth than equities - The government pays benefits when they fall due. Examples include the Teachers’ Superannuation Scheme and the NHS scheme,

Answer 122

This is where no fund exists - the pension provision is paid directly from the public's purse. Example: Civil Service

Answer 123

Depends on individual scheme, however: *1/60 is used for career average *1/80 is used for final salary Example: - (Years of service/80) x career average - A lump sum can be provided at 3/80 x career average.

Answer 124

- Rarely, as there are often initial charges involved. - You're banking that the other providers fund performance will be better (no way of knowing) - Can be beneficial when charges are lower than current provider

Answer 125

- Refund on contributions -> if they have been employed less than 2 years. They will not receive interest, and there may be a tax charge. - If completed at least 3 months with scheme, the employer may offer to 'preserve pension' - benefits taken at normal retirement age. - Transfer the value of their benefits to another scheme if they have been a member for at least 3 months.

Answer 126

- to consolidate pension benefits - to achieve freedom from a previous employer - for investment choice and flexibility - to secure greater flexibility of benefits, particularly those offered by the pension freedom legislation - a desire for personal and private arrangements - the possibility of improved benefits - the option to retire early. Always important to understand the charges, penalties, and drawbacks of transferring out. For example: A transfer to a defined‑contribution arrangement may not carry a high enough level of financial security despite other advantages it might have.

Answer 127

Retained benefits are the accrued benefits built up in a previous employer’s scheme. The individual can chose to transfer the cash equivalent pension to: - Another occupational scheme - A personal or stakeholder pension - A section 32 buyout plan

Answer 128

1. Obtain the annual pension as at date of leaving employment. 2. Revalue the annual pension to the scheme’s normal retirement date. 3. Calculate the capital value of the revalued annual pension at the scheme’s normal retirement date. 4. Discount the capital value to today’s date to arrive at the CETV.

Answer 129

1. If the new scheme is DB, it is possible to use the CETV to 'purchase' additional years of service or guaranteed benefits in the new scheme. 2. Alternatively, the cash equivalent is transferred into the new scheme fund on a defined‑contribution basis and allocated as a separate pot within the main fund.

Answer 130

A transfer club is an arrangement under which certain schemes agree to transfer benefits from one scheme to another on a like‑for‑like basis. - Often in the public service sector an easy and cost‑effective method of allowing transfers without the expenses usually involved.

Answer 131

If an individual's pension pot is low in value, it may be converted into a cash payment in certain circumstances. - the minimum age for doing so is 55. Trivial commutation - Can be taken if fund is less than £30,000 - Added to income (and taxed as such) - Additional rules for DB schemes Small pots - if less than £10,000 - Up to three personal pension pots can be taken this way - Any any number of occupational pension pots - Benefits taken do not trigger the MPAA - Taxed as added income

Answer 132

- The pensions regulator - Fixed penalty of £50,000 - Additional penalties of £10,000 for each day they do not take remedial action.

Answer 133

NEST (National employment saving trust) is a government workplace pension scheme that employers can use. - Members are charged 0.3% of their fund each year - 1.8% contribution charge

Answer 134

- ISAs are a relatively tax efficient savings product - Tax free wrapper - Deposits into ISAs do not receive tax relief (unlike pensions) - However, tax is not paid on withdrawals - Funds within an ISA grow free of Capital gains tax, and any interest that accrues is not subject to income tax. - The ISA allowance is £20,000, across all types of ISA - You may only fund one of each type of ISA in each tax year. May be attractive for their flexibility - funds can be drawn for retirement whenever the investor chooses NOT ideal for a retirement fund - only grows with interest which often will not outpace inflation. Good to supplement other retirement funds or for emergency funds.

Answer 135

An ISA in which money can be taken from a cash ISA at any point and returned in the same tax year without it reducing the current year’s allowance.

Answer 136

Stocks and shares ISAs allow a number of investments to be held in a tax‑free wrapper. - Have the potential for real growth over time (in comparison to cash ISA) and therefore a more viable option for a retirement fund - There is current no limit to the value held in S&S ISA - 25% charge on total fund if withdrawn early - can only contribute up and receive bonus until 50 They can be invested in any of the following: — shares; — unit trusts; — investment trusts; — open‑ended investment companies (OEICs); — gilts; and — corporate bonds.

Answer 137

Lifetime ISA - government tops up with 25% bonus for every £4 deposited - Limit of £4000 per year, equalling a £1000 bonus - This is included in the ISA allowance Funds within an LISA can only be used to fund retirement or the purchase of the individual's first property (which has to be for their own residence and below £450,000) - If withdrawn for any other reason, a 25% charge on the ENTIRE fund is charged (not just loss of bonus) - An individual can continue to contribute into their LISA until age 60, however, the bonus is stopped at age 50

Answer 138

Collective investments such as UT/OEIC offer diversification and professional fund management. Performance is is similar to pensions. - Investments into UT/OEIC do not receive tax relief. -No CGT on disposals within UT/OEIC (fund switches?) - Individual may pay CGT on again gains when they encash their investment. - Depending on underlying investments - equities = dividend tax. Non-equity = income tax (included in personal savings allowance - No limits on value able to invest, no restrictions of when they can withdraw - UT/OEIC typically have an AMC of 1-1.5%

Answer 139

Insured investment plans, such as endowments and investment bonds, can be a useful way to build up additional funds. Endowments: - Regular premium - Fixed maturity date (can't be encashed before this) - Do not benefit from tax relief - £3600 max premiums to be qualifying (thus reducing investment opportunity) IB: - Single premium, whole-of-life policy. - Bonds can be encashed at any time, though possible income tax. - IBs are non-qualifying - Premiums do not receive tax relief - Higher and additional tax payers pay 20% and 25% (basic rate satisfied) - 5% of the original investment can be withdrawn each year without tax, this rolls over The capital gains tax (CGT) rate for basic‑rate taxpayers combined with the annual exempt amount may, however, mean that many investors would be better off investing in unit trusts, etc. They would not pay tax in the fund and, on retirement, the holder can cash in units to provide income within the annual exempt amount and effectively pay no tax.

Answer 140

- Higher charges than UT/OEIC - No professional fund management - Difficult to provide diversification (Not collective investments so unless high funds it's difficult) -Equities offer the potential for capital growth as well as income. There is a risk, however, of capital loss, and diversification is essential. - Investment does not receive tax relief – income tax is payable on dividends. An investor may be liable for capital gains tax on any gain on disposal. - Shares received through employee incentive schemes often have significant tax and National Insurance contribution advantages. There is, however, a danger that an employee building up substantial holdings in an employer’s shares will lack diversification.

Answer 141

Buy-to-let - provides an income - However, tax implications need consideration - CGT, income from rent liable into income tax. - Stamp duty Land Tax has increased on additional residential purchases Downsizing - Release cash for retirement - Buying/selling costs need to be considered - Emotional toll on moving if not entirely wanted

Answer 142

An interest only mortgage, an agreement that the interest will be rolled-up and repaid when sold or owner dies. - Owner may release 20-50% of property value depending on their age - any existing mortgage would have to be paid off as part of the arrangement. Advantages - Owner remains in their own home - No regular payments - Plans guarantee that, if the loan exceeds the value of the home when the owner dies, the lender will not require the excess to be repaid. This is known as the ‘no negative equity’ guarantee. Disadvantages - Home is mortgaged (again) - Reduces inheritance - Debt rolls up quickly.

Answer 143

For older homeowners, above 70, who have no outstanding mortgage. Owner sells the property to a reversion provider in exchange for a lump sum, which is likely to be a substantial discount from its market value. Essentially equity release The former owner will have a guaranteed lifetime lease on the property. Some arrangements might involve a nominal annual rent. Upon death, the provider takes possession of the proportion Advantages: - The owner can remain in their own home. - It allows cash to be raised. - Higher cash sums are usually available than those for lifetime mortgages. - No regular repayments are required. Disadvantages: - Part of house out of of the estate. - The cash raised will not reflect the true value of the property. - The owner no longer owns the property that might have taken them a lifetime to buy. Many people would not like to be a tenant in their ‘own home’.

Answer 144

* At what age does the client wish to retire? * What income will the client need at retirement? * Are there any capital needs at retirement? * Should an individual take the maximum 25 per cent tax‑free cash (pension‑commencement lump sum) from the pension arrangement? * Is it desirable to have a higher level of income in the first few years to provide a ‘wind‑down’ period? * What level of dependant’s pension will be needed? * Is long‑term care an important factor?

Answer 145

* How much of this pension need is already provided for? - State pension (forecaset - gateway or BR19) - Occupational pension - Retained benefits from previous employment - Personal pensions * What is the gap between current provision and the amount needed? * How is this shortfall to be funded? * If the shortfall is not funded, does the client appreciate the potential impact on their living standards?

Answer 146

* Does the client understand the concept of risk and reward? * Are they aware of the relative performance of each asset type? * How do they feel about the possibility of losing some of their capital? * Do they understand that choosing a more secure investment will mean funding to higher level to compensate for lower growth potential? * Do they have other pension provision or assets that they might use in retirement? If the proposed provision is only part of the overall plan, they might be able to take more risk.

Answer 147

* Attitude to risk * Time to retirement

Answer 148

* Cash deposits - Inflation risk - Tend to be outperformed by bonds and equities. - Useful for those who have built up a fund and wish to protect it near to retirement. * Fixed‑interest securities - Considered less risky than equities - Good for those nearing retirement and wishing to consolidate and protect gains already made. Advised to change portfolio away from equities to these form of investments 10 years before retirement.

Answer 149

* Property - Growth over the medium to long term - Rental income can ofset captial losses - High entry costs - CGT * Equities - Volitile, fluctuate over the short term - Should be considered medium to long term investments (at least 5 years) - Usually outperform other assets

Answer 150

1. With a long time till retirement, the investors portfolio should consist mainly of equities (though being mindful of diversification). - Good oppurtunity for growth that outpaces of inflation, and time to have investments tied up. 2. As individual approaches 10 years before retirement, should shift to lower-risk investments such as bonds and Gilts. - This does depend on the clients attitude to risk - So may chose to move 10% of the fund over each year - Others may chose 20% each year in the final 5 years. - Some personal pension schemes offer an automatic switching facility – often called a lifestyling option

Answer 151

* Also known as automatic switching facility * Lifestyling option is an automatic switching of asset allocation within personal pension schemes as an individual approaches retirement.

Answer 152

Correlation looks at the linear relationship between two types of asset in terms of performance, measured in numbers from +1 to –1: the extent to which asset classes tend to rise and fall together. * A correlation above 0 is said to be a positive correlation, getting stronger the nearer it gets to +1. * A correlation below 0 is said to be a negative correlation, getting stronger the nearer it gets to –1. * A correlation of +1 will be a perfect positive correlation, whilst a correlation of –1 will be a perfect negative correlation. * A correlation of 0 would indicate no correlation between the assets. They would move up or down independently of each other. A netural correlation or slighlty negative correlation would be best to offer diversification - avoiding the risk if one type of asset drops, the other don't drop too.

Answer 153

* Contributions to the SIPP benefit from tax relief, which will help with the property purchase. * The SIPP fund can be used to buy the property. * The SIPP can borrow up to 50 per cent overall of its net fund value to assist in the property purchase, ie assets minus any outstanding loans. * Property investment provides a regular tax‑free income to the SIPP from rent. When the plan holder decides to take benefits the rent could be used to fund the income from the SIPP via drawdown, leaving the property in the fund. * There is the potential for steady tax‑free total returns. Although commercial property does not tend to grow at the same rate as equities, rental income is generally steady and adds to the total return. * Any gain made on selling the property will be exempt from CGT. * On the death of the SIPP holder, the property would not be subject to IHT.

Answer 154

* The purchase of property may use up most or all of the SIPP funds and borrowing capacity, leaving the SIPP with an undiversified portfolio. * If the property is the SIPP owner’s own business premises, a full market rent will still have to be paid, and the SIPP provider has a responsibility to pursue the tenant for unpaid rent, even if the tenant is the SIPP owner. * If the property forms the bulk of the SIPP fund it may have to be sold to provide retirement benefits. This could be at a bad time in the market, which could result in the property selling for less than its true value. * Property is illiquid – if it needs to be sold to provide benefits, it could be some time before the funds are available. * If business partners have combined their SIPPs to buy the premises, what will happen if one partner wants to take benefits? Is there enough liquid capital or loan capacity in the other SIPP funds to allow a buyout? * Property transactions are expensive, with loan fees, surveys/valuations, stamp duty land tax (in England and Northern Ireland), agent/broker fees, etc. * Loan interest paid by the SIPP is not a deductible expense because the SIPP is exempt from tax. * If the property is untenanted for a period, loan payments will still need to be paid from the SIPP, reducing the total return

Answer 155

Pension arrangements should be reviewed on a regular basis to be agreed with the client. The following aspects should form part of such a review * revisiting retirement objectives * assessing the pension plan performance to date and whether changes are needed to the investments or funding level * noting changes in the client’s circumstances; * if the client is within ten years of taking benefits, considering a consolidation plan, whereby the funds are gradually moved to more cautious funds over time * revisiting the asset allocation.

Answer 156

The lifetime allowance is no longer in affect as of April 2024. However, it may still be used to calculate the maximum amount of tax-free cash an individual can withdraw from their pension. Taking the LTA of £1,073,000, any amount over this will be charged at a rate of: * 25% for funds taken as income * 55% as a lump sum

Answer 157

* £10,000 * The annual allowance is tapered for earnings + pension contributions above £240,000 * This minimum amount may occur where an individual's earnings combined with their contributions for the year (and assuming they have no AA to carry over from the past three years) exceed this threshold significantly

Answer 158

* No * One of the main reasons pension contributions were not increased as much as the government had hoped

Answer 159

1. Times the years of service by the accural rate 2. Times this number by the final salary or career average. 3. If a PCLS is being taken, times the lump sum by the commutation ratio and take this away from 2.

Answer 160

* A pension scheme that combines aspects of both DB and DC arrangements. * Provides benefits similar to a DB scheme, though not guaranteed. * Less risky and easier to predict than DB schemes for employers * Less longevitiy and investment risk for employees

Answer 161

* The basic state pension * Pensions already in receipt * Certain Overseas, War, or disability pensions * Small pensions under the rules of triviality

Answer 162

These are bought with a lump sum and provide a guaranteed income for life or for a fixed period.

Answer 163

These are typically bought with the funds from a defined contribution pension pot at retirement and are designed to provide a regular income for life **most common form of annuity**

Answer 164

These offer higher payments to individuals with shorter life expectancies due to health conditions or lifestyle factors.

Answer 165

- Compulsory purchase annuity (purchased through proceeds from DC scheme) - Life annuity

Answer 166

- Compulsory purchase annuity (purchased through proceeds from DC scheme) - Life annuity

Answer 167

- 1/80 - bonus of 3/80

Answer 168

Typically public sector pension schemes. There is not a 'fund' whereby employers and employees contribute which is then invested. Instead the benefit is provided by HM treasury

Answer 169

2.5% each year before

Answer 170

Defined benefit schemes - final salary is usually 1/80 - career average is usually 1/60

Answer 171

1. Their annual entitlement x 20 2. Add any lump sum entitlement