Retirement Topic 6 - Other Pension Issues Flashcards
When leaving an employer, you should rarely transfer your pension but instead leaver them all open and continue to fund them.
A transfer of pensions may advisable when:
- A new plan has lower ongoing charges
- Avoid restrictions on original fund
- Consider improving flexibility
For people now, they may leave these defined-benefit schemes earlier without any accrued benefits. Early leavers have 3 options:
- If they leave before completing 2 years membership, they can have their contributions refunded without interest, which is paid back with a tax charge of 20% up to £20,000
- If they have completed three months, they can opt in to leave their pension in the pot until retirement date (called preserved pension, revalued between date of leaving and retirement date)
- If they have at least 3 months, you can ask to transfer your pension to another pension of your choice
Reasons a client may want to transfer a pension
- Consolidate pension benefits
- Achieve freedom from old employer
- Investment choice and flexibility
- Flexibility of benefits
- Desire for personal and private arrangements
- Possibility of improved benefits
- Option to retire early
What are Retained benefits
accrued benefits in an old pension
If you want to transfer your benefits, you can transfer them to:
- New occupational scheme
- Personal or stakeholder pension
- Section 32 buyout plan
Transferring to a new employer’s scheme can be done in 2 ways:
- If the scheme is a defined-benefit scheme, you can use the cash equivalent to buy ‘years’ or guaranteed benefits in the new scheme
- Cash equivalent can be transferred into a defined-contribution scheme and be put in a separate pot
Transfer club
arrangement where certain schemes agree to transfer benefits from one scheme to another. If both schemes are in the club, the transfer is made seamlessly and nothing is lost. Public sector schemes are a good example of this.
Transfer to personal pension or stakeholder pension key points
- Transfer can be made to standalone plan or regular contributions
- These plans provide no guarantees with final benefits
- Benefits can be taken from 55 which is earlier than other schemes
- These plans can accept a number of transfers
- Holder can control investments and receive higher growth
Advantages of transferring to personal or stakeholder pension
- No further employment contact or involvement
- The holder owns the plan
- Fund growth may be higher
- Greater flexibility over benefits
- Personal investment control
- No risk of underfunding or scheme winding up
Disadvantages of transferring to personal or stakeholder pension
- Loss of guarantees and future increases
- If annuity is purchased benefits are dependent on annuity rates which will be lower in the future
- Loss of share of any future surpluses
Critical yield
the growth rate needed from a personal pension to match the benefits of a defined-benefit scheme.
If there is a transfer request from a defined benefit scheme of more than £30k, the scheme trustee must
see evidence that they have sought independent advice
Trivial commutation
a lump sum that can be taken after age 55 as long as the value of the personal and occupational pensions does not exceed £30k. This is an alternative to the UFPLS and can be used for all defined-benefit schemes and for any defined-contribution schemes that are already in payment (as these are not eligible for UFPLS)
From 2008, employers were obliged to start auto enrolment. Overall minimum contribution is… Employers must pay a minimum contribution of…, and the employee must pay at least…
8%, 3%, 4% (the extra 1% comes from the tax relief)
The pensions regulator is in charge of ensuring employers… and if not they face a fixed penalty notice of £…, and £…for every day thereafter that they do not meet their obligations.
Meet their obligations, £50k, £10k
Insured investment plans as alternative reitrement funding
Plans like an endowment or an investment bond can be good and can provide income/growth over the long term. Endowments usually result in less growth and have less freedom but investment bonds require a single premium which requires lots of spare capital. Annual limits and charges apply to both.
Retirement funds can be achieved by releasing equity in a main residence in 3 ways:
- Downsizing
- Lifetime mortgage on the property
- Arranging a home reversion scheme
Lifetime mortgages
- Owner takes out a new interest-only mortgage on the property
- Interest rolls up and is paid when the holder dies
- Holder lives in the house until then with no regular payments
- Owner may be able to release between 20 and 50% of the property value depending on how old they are
Home reversion plans
- For much older homeowners, typically over 70
- This is where they will release a large sum of the property value to a reversion provider
- The provider will pay the cash sum to the homeowner but the homeowner has a lifelong lease on the property and can live in it until they die
- When they die, the reversion provider sells the house and keeps the proceeds they own, and the family gets the rest
- Amount released is usually 50-60% of the property value
