Retirement Topic 5 – Occupational Pension Schemes

Question 1

Common factors of occupational schemes since A-day:

Answer 1

• Scheme does not state a normal retirement date for members
• Contributions offer tax relief for employer and employee
• PCLS can be taken on retirement
• Pensions paid taxed as income
• Funds grow free from UK taxes
• Death benefits normally do not form part of the estate

Question 2

Unfunded pension scheme

Answer 2

‘pay as you go’ scheme, where the benefits are paid into the fund only when the benefits are taken, this is more for government-based occupations (teachers, civil service etc.). Money is taken from the public purse to pay benefits.

Question 3

Funded pension scheme

Answer 3

rely on investments and contributions

Question 4

Non-contributory

Answer 4

when only the employers contribute

Question 5

Contributory

Answer 5

when the employer and employee contribute

Question 6

For investment options within an occupational pension fund, there are 3 main variations

Answer 6

• Insurance company funds
• Managed funds
• Self-administered funds

Question 7

Typical elements around rules of joining a defined-benefit scheme

Answer 7

• Minimum age for membership – usually between 18-21
• Period of service before employee can join (probation) usually no more than a year
• Rules can define categories of eligible people and what benefits they can get
• Some schemes may separate part-time or temporary employees
• Memberships cannot be compulsory, but auto-enrolment schemes must enrol and employee can opt out if they wish

Question 8

Contracting-out was no longer possible after

Answer 8

2016

Question 9

Retirement benefits for defined-benefit schemes will be decided by 3 factors:

Answer 9

• Employee’s length of service
• The scheme accrual rate – the rate at which benefits in the scheme build up
• The employee’s ‘scheme pay’ which is how much of the employee’s pay will be used, whether it is just basic pay or additional pay too

Question 10

What does NRD stand for

Answer 10

Schemes will set a normal retirement date (NRD) which is the date at which benefits can be taken without penalty. You make take benefits after 55, but for each year that benefits are paid before the NRD, 5% is taken off the benefits accrued.

Question 11

Death-in-service benefits - Lump sum

Answer 11

• Since A-day there is no limit on the lump sum
• But it is taxable if the member died before 75 and the total of their pensions and the lump sum is over the lifetime allowance, the excess is charged at 55%

Question 12

Key facts of employer sponsored AVCs:

Answer 12

• Scheme trustees may require 12 months’ notice of intention to pay AVCs
• AVCs do not need to be paid on a regular basis and can be varied in amount and regularity
• Contributions are deducted from gross salary
• Employee unlikely to be offered much choice of investment fund
• AVC benefits can be taken independently from the main scheme

Question 13

Advantages of AVCs:

Answer 13

• Low cost
• All of the pension held with 1 source
• Immediate tax relief
• Added years can provide guarantees

Question 14

Disadvantages of AVCs:

Answer 14

• Often limited investment choice
• Employer will know individuals funding level
• AVCs are tied to the main scheme

Question 15

Public sector schemes are

Answer 15

defined-benefit schemes for employers of the government

Question 16

Public sector schemes fall into 3 categories

Answer 16

• Unfunded schemes – example is the civil service scheme, there is no fund and funds are withdrawn as and when
• Notionally funded scheme – examples are teacher and NHS funds, and this is where employer and employee pay contributions to treasury and are treated as if they are invested in gilts. Benefits paid as they fall due
• Funded schemes – Local Government Pension Scheme (LGPS) funded by both employer and employee with contributions invested

Question 17

Defined-contribution schemes

Answer 17

• Much better for employers as their contributions are always the same and they can plan for it in advance
• Employer decides how much to put in
• When member cashes in, the scheme will provide an income – whatever is in the fund is what is available, no other benefits
• The scheme will usually buy an annuity with the money in the fund
• Scheme obliged to provide an annual pension statement which includes a statutory money-purchase illustration, which shows future fund growth and income

Question 18

Advantages of defined-contribution schemes

Answer 18

• Easy for members to understand
• Usually better value for short-term members
• Able to offer known outgoings for employer

Question 19

Disadvantages of defined-contributions schemes

Answer 19

• No underlying benefit promises
• Employee has risk of investments underperforming
• Members benefits will be affected by fund value on day of retirement and annuity rates
• No guarantee of level of benefits payable

Question 20

What is an EPP

Answer 20

Executive pension plan (EPP) is a defined-contribution occupational pension scheme designed to meet the needs of small to medium-sized companies. Subject to exactly the same rules as any occupational scheme

Question 21

Small self-administered schemes (SSAS)

Answer 21

• Used by business owners/directors for small/medium sized companies
• Essentially group pension scheme for fewer than 12 people
• Used mostly to buy the company’s premises through the scheme so that any income or gains that arise from the building are sheltered from any tax
• Can borrow up to 50% of its net assets in order to help purchase a commercial property
• Assets bought for personal benefit – residential property – will be subject to extra charges as in a self-invested personal pension (SIPP)

Question 22

Group personal pensions

Answer 22

• Simpler way for employers to set up a workplace pension
• Each policy is a separate pension just within a group
• If it is to be used as a qualifying workplace pension then minimum contributions must be achieved
• Main advantages are the lower running costs and simplicity