Retirement Planning Considerations Flashcards
Q: How are the investments used to meet a client’s needs determined?
A: They are determined by a number of factors including their attitude to risk; the timescale of the investment; their level of wealth; their past experience of investing; other investments they hold and any ethical or sustainability considerations they have.
Q: What does a client’s risk profile determine regarding their asset holdings?
A: A client’s risk profile will determine the mix of the four main asset classes they hold: cash, fixed interest, equities, and property.
Q: What is the purpose of a lifestyling option provided by some pension providers?
A: It automatically moves the investment mix of the pension fund away from equities and into fixed interest investments and cash as retirement approaches, to reduce risk.
Q: How can individuals exercise substantial control over the choice of investments in their pensions?
A: By establishing a member-directed personal pension arrangement (SIPP), individuals can have control over their investment choices in their pensions.
Q: What investment options do SIPPs offer?
A: SIPPs can invest in a portfolio of shares and bonds, purchase shares in one’s own business, or be invested directly into commercial property.
Q: How much can a SSAS invest in any one sponsoring employer?
A: A SSAS can only invest under 5% of scheme assets in any one sponsoring employer. However, this could equate to 100% of the employer’s shares. This restriction does not apply to a SIPP.
Q: What are the regulations regarding investment in taxable property by schemes, and what are the implications of investing in such properties?
A: Schemes should not invest in taxable property, which includes residential property and personal chattels like antiques, art, and cars, due to tax penalties that will apply if they decide to do so.
Q: Can SIPPs and SSASs borrow to finance an investment?
A: Yes, but not more than 50% of the scheme’s net assets. Any existing borrowing must be deducted from the fund before the maximum borrowing is calculated.
Q: What limitations are there on loans from a SSAS to the sponsoring employer?
A: A SSAS can loan no more than 50% of the scheme’s net assets to the sponsoring employer. A contract-based SIPP cannot loan money in this way.
Q: What options are available to a client when they crystallise their pension benefits?
A: Options include a PCLS, an UFPLS, flexi-access drawdown, a lifetime annuity, or a scheme pension.
Q: Why is a structured and well-defined advice process essential in retirement planning?
A: It is essential to determine the most appropriate recommendation to meet the client’s needs and objectives, considering the variety and complexity of options available.
Q: Can a defined contribution pension fund be passed onto a beneficiary who is not a spouse, civil partner, or dependant, and what are the tax implications if the member dies before the age of 75?
A: Yes, it can be passed to such a beneficiary, and the payments will be tax-free if the member dies before the age of 75.
Q: What should an adviser do when considering flexible retirement options for a client?
A: The adviser should ask a number of specific questions to help determine which options would be most suitable for the client in their individual circumstances.
Q: What unknown factors should be considered in retirement planning?
A: Unknown factors such as health, inflation, and family needs should be taken into account in retirement planning.
Q: Why should retirement planning arrangements incorporate flexibility?
A: To help meet any additional expenses arising from a sustained period of ill-health in later life.
Q: Why is cash flow modelling very important for a client in drawdown?
A: Cash flow modelling is crucial as drawdown involves more risks than a pension fund in the accumulation phase, requiring careful management and monitoring.
Q: When drawing an income from their pension fund, what should a cash flow model for a client take into account?
A: It should take into account a realistic range of returns, including periods of low or negative returns, to ensure sustained income.
Q: Why should a cash flow model be regularly ‘stress tested,’ and what significant factor should it account for?
A: It should be stress tested to anticipate various financial scenarios and should take inflation into account as it can significantly affect living standards over time.
Q: Why have reviews become even more important with the introduction of pension flexibilities and the facility to take large ad hoc withdrawals?
A: Reviews have become crucial due to the increased risk of depleting funds prematurely with the availability of large ad hoc withdrawals and various flexible options. Regular reviews help in monitoring and adjusting strategies as needed to ensure financial stability throughout retirement.
Q: What is the safe withdrawal rate in the context of pension portfolios?
A: The safe withdrawal rate is the highest percentage of a client’s initial pension portfolio, adjusted for inflation each subsequent year, which can be taken without the client running out of money over a period of 30 years.
Q: What do the pension flexibilities imply for a client who is not actually retiring?
A: They mean that income or capital can be taken as required by a client, even if they are not actually retiring, providing more flexibility in managing finances.
Q: On what factors does the best solution for a client depend regarding pension flexibilities?
A: The best solution depends on factors such as taxation consequences, income needs, the importance of certainty, any plans to make future contributions, and the importance of death benefits.
Q: How do the various pension options differ?
A: The various options have different benefits and drawbacks relating to income, death benefits, and other considerations such as cost and flexibility, requiring careful consideration and alignment with individual needs and preferences.
Q: When a client is planning to make significant contributions into a defined contribution pension arrangement, what actions will not trigger the MPAA?
A: Specific actions may vary based on regulations, but generally, the MPAA is designed to prevent excessive contributions, so actions in line with contribution limits and guidelines will typically not trigger the MPAA.
Q: What opportunities do clients have for IHT planning when using the drawdown pension option?
A: The drawdown pension option can provide significant IHT planning opportunities, allowing for more strategic management of wealth and potentially reducing inheritance tax liabilities.
Q: How can families use defined contribution pension savings in wealth management?
A: Families can use their defined contribution pension savings as vehicles for passing wealth down through the generations in a tax-efficient manner, optimizing wealth transfer and minimizing tax implications.
Q: How may the pension flexibility rules influence clients’ decisions regarding funding a pension and using other sources of income and capital in retirement?
A: The pension flexibility rules may make clients more likely to consider funding a pension and also to use other sources of income and capital in retirement, leaving a pension plan intact for future generations due to enhanced flexibility and strategic advantages.
Q: How can ISAs be an attractive alternative for financial planning, and what are the tax implications?
A: ISAs can be attractive as the funds are taxed in the same manner as pensions, and both income and capital can be taken tax-free from an ISA at any age an individual chooses.
Q: Who is eligible for a Lifetime ISA and what are the benefits?
A: A Lifetime ISA can be set up by investors aged between 18 and 40; it allows them to invest up to £4,000 per tax year and receive a 25% bonus from the Government.
Q: How do pension flexibilities relate to purchasing a buy-to-let property?
A: The pension flexibilities allow people to use some or all of their pension fund to purchase a buy-to-let property, enabling diversified investment options.
Q: What are the implications of taking out a buy-to-let mortgage on investment returns?
A: If a buy-to-let mortgage is taken out, the investment will be leveraged, which could lead to significantly enhanced returns due to increased capital exposure.
