Retirement Topic 4 – Personal Pension Schemes

Question 1

PPPs

Answer 1

Personal pension plans, for anyone who only has access to a state pension or for people who want to make extra contributions

Question 2

SHPs

Answer 2

Stakeholder pensions which are flexible, low-cost forms of pensions

Question 3

Personal Pension Schemes can be set up in 1 of 2 ways

Answer 3

• Under a master trust, where the provider appoints a trust company to act as scheme trustee
• Under a deed poll, where the provider is the scheme administrator with no need for trustee

Question 4

Stakeholder products must meet certain criteria, the most important being:

Answer 4

• Maximum charge on the plan may not be higher than 1.5% per year for the first 10 years, then 1% thereafter
• Minimum contribution cannot be higher than £20
• Plan must offer a life styling investment option (where funds are moved to less risky funds at least 5 years before the end of the term)
• Plan must be able to accept transfers from other pension plans

Question 5

Phased retirement

Answer 5

Many PP providers offer a phased retirement plan, where the fund is split into 100 or 1,000 segments and they are all entitled to their own PCLS. When benefits are taken, they can take from any number of segments that they wish.

Question 6

Other charges within unit-linked policies:

Answer 6

• Allocation rates – the amount that is invested by the provider. From this, it controls how much they are able to invest into units and how much they can control.
• Initial units and capital units – if reduced allocation rates are not used, then different types of units can be allocated which come with an additional fund management charge
• Policy fee – likely to be a monthly or annual policy fee to cover admin costs and is often included in the annual management charge
• Annual management charge (AMC) – either monetary amount or percentage of fund value

Question 7

2 times when benefits can be withdrawn before the minimum pension age:

Answer 7

• Special occupation e.g. footballers
• Ill-health

Question 8

When benefits are taken from a pension, this is called

Answer 8

benefit crystallisation event (BCE).

Question 9

Options to consider when buying an annuity:

Answer 9

• Single life or joint life
• Does the income need to be paid immediately or can it be deferred and how frequently must you receive payments
• Is annuity income to be fixed or increasing each year and increase by what
• Is a guarantee required – guarantee on payments after annuitant is dead
• Annuity protection – leftover cash value of the annuity after death to beneficiaries

Question 10

Unit linked annuities

Answer 10

• Small number of companies offer this
• Buy units in funds linked to equities
• Income is based off of the performance of the equities
• Base rate lower than normal annuity with the chance for growth

Question 11

With-profits annuities

Answer 11

• Pension fund invests in with-profits fund
• Applicant selects an anticipated bonus rate (ABR)
• The higher the ABR, the higher the initial income, but the more risk of it falling later on
• Providers normally offer a guaranteed minimum level which the annuity cannot drop below

Question 12

Enhanced and impaired life annuities

Answer 12

• Annuity rates based on life expectancy
• Enhanced offers higher rates for certain conditions or lifestyles e.g. smokers
• Impaired life offers higher rates for people with life-shortening conditions

Question 13

Flexi-access drawdown

Answer 13

• Members can choose whether they would like an income, to make lump sum withdrawals as and when or both
• Once 25% PCLS has been taken, lump sum withdrawals are subject to tax
• FAD triggers the money-purchase annual allowance and means that future annual contributions are limited to £4k

Question 14

Money-purchase annual allowance (MPAA)

Answer 14

• Made as a failsafe to stop members from finding loopholes around tax
• Limits contributions to £4k a year, number of triggers to set of the MPAA such as when a flexi-access withdraws its 25% PCLS or when a person takes an uncrystallised funds pension lump sum

Question 15

Advantages of a drawdown pension

Answer 15

• Annuity purchase can be delayed waiting for better rates; due to either age increasing or gilt rates increasing
• Allows for control over investments
• Further investment growth can be achieved
• Allows flexibility of income
• It allows for ready access to lump sums if necessary

Question 16

Disadvantages of a drawdown pension

Answer 16

• May be high charges for fund administration
• Risk of poor fund performance
• Annuity rates might not increase as you want them to
• Each withdrawal increases likelihood of individual outliving their income

Question 17

A list of things that SIPPs can invest in:

Answer 17

• Unit-linked or unitised with-profits insurance funds
• Unit trusts, OEICs, investment trusts
• Deposit accounts
• Equities
• Bonds
• Commercial property
• Derivatives

Question 18

For prohibited assets that are not on the list of investments that can be made into a SIPP, there is a tax liability of

Answer 18

40% to the individual and a surcharge of 15% to the scheme.

Question 19

Retirement annuity contracts (RAC)

Answer 19

annuities that stopped being issued in 1988. These offered much higher rates of return but had more restrictions on them. Are not very common anymore.

Question 20

Free standing additional voluntary contributions (FSAVC)

Answer 20

essentially an older version of personal pensions, the individual had to contribute through additional voluntary contributions or FSAVCs on top of their occupational pension. There were limits on contributions and they were strict from HMRC.

Question 21

list 5 of the Benefit Crystallisation events (BCEs) where a check is made against the individuals use of their Lifetime Allowance

Answer 21

Buying an annuity
Starting pension drawdown
Reaching age 75 in drawdown pension
Reaching age 75 with uncrystallised benefits
Taking PCLS