Section 1 - Pensions In Context

Question 1

What was introduced in the 1995 Pension Act

Answer 1

• Regulatory and compensation schemes established
• Minimum funding requirement introduced

Question 2

What was introduced in the 1999 pensions act

Answer 2

Minimum Income Guarantee (MIG) introduced

Question 3

What was introduced in the 2001 pensions act

Answer 3

• Stakeholder pensions introduced; employers had to offer employees access
• FRS17 - companies must report pension scheme deficit / surplus in accounts

Question 4

What was introduced in the 2003 pensions act

Answer 4

• State Pension Credit introduced

Question 5

What was introduced in the 2004 pensions act

Answer 5

• Pension Protection Fund (PPF) introduced for DB schemes of insolvent employers

Question 6

What was introduced in the 2006 pensions act

Answer 6

• A-Day Pension simplification
• Introduced annual and lifetime allowances
• Pension age discrimination outlawed

Question 7

What was introduced in the 2012 pensions act

Answer 7

• Reduction in lifetime allowance
• Contracting out abolished in DC schemes
• Auto-enrolment introduced

Question 8

What was introduced in the 2015 pensions act

Answer 8

• Taxation of Pensions Act 2014 and Finance Act 2015 introduced flexible ways of taking benefits from DC schemes
• Money Purchase Annual Allowance (MPAA) introduced
• Pension Wise introduced

Question 9

What was introduced in the 2016 pensions

Answer 9

• New (or single-tier) State pension replaced most of the previous State pensions
• Contracting out abolished
• Tapered annual allowance (TAA) introduced

Question 10

What was introduced in the 2018 pensions act

Answer 10

• State Pension Age for Men and Women 65 since December 2018

Question 11

What was introduced in the 2020 pensions act

Answer 11

• State Pension Age for Men and Women 66 since December 2018

Question 12

What was introduced in the 2021 pensions act

Answer 12

• PPF compensation cap removed following Hughes v PPF judgement
• New rules introduced requiring due diligence from trustees of transferring schemes

Question 13

What was introduced in the 2023 pensions act

Answer 13

• Abolition of lifetime allowance announced
• Annual allowance increased to £60,000
• Increases to the MPAA and TAA threshold
• Lump Sum Allowance (LSA) introduced
• Lump Sum & Death Benefits Allowance (LSDBA) introduced
• abolition of life time allowance

Question 14

Challenges facing pensions

Answer 14

• Ageing population/people are living longer
• Closure of defined benefit (DB) schemes
• Insufficient pension savings

• Scandals
- Opting out of DB schemes
- Robert Maxwell
- Equitable Life

• Falling stock markets, gilt yields, and until recently annuity rates
• Complexity of pensions

Question 15

Pension demographics

Answer 15

• Ageing population and increasing longevity
• Proportion of those retired is growing whilst working population reducing
• Annuity rates falling until recently due to increasing life expectancy and reducing gilt yields
• Introduction of pension flexibilities has seen fewer people buying annuities and more using drawdown

Question 16

Corporate pensions environmental factors

Answer 16

• Auto-enrolment - employers must comply or have equivalent pension arrangement
• Decline of the defined benefit scheme due to cost as a result of increased longevity and falling annuity rates
• Contracting out for DB schemes was abolished in 2016 so increased NICs for employers and members
• Where a DB scheme is wound up usually replaced by a DC alternative such as a group personal pension - no guarantees and all investment risk borne by member
• Pension savings also affected by changes in employment trends - no more job for life’
• Several different periods of employment/self-employment and perhaps unemployment mean paid up plans resulting in lower income in retirement than if had been in one pension scheme entire working life

Question 17

Incentives to invest in a pension

Answer 17

• Income tax relief on contributions
• Employer contributions - business expense
• Fund exempt from income tax and
CGT
• PCLS - tax free up to lump sum allowance
• Drawdown flexibility since April 2015
• Can pass DC funds to anyone
• More favourable tax treatment of death benefits before age 75
• Income tax/NICs exemption, to cover the first €500 of pensions advice provided by an employer to an employee (any excess subject to income tax and NICs).
• DC members can withdraw £500 in a tax year - ‘pensions advice allowance’ tax free. Maximum 3 payments over member’s lifetime.

Question 18

Disincentives to invest in pensions

Answer 18

• Tax free cash limited
• Limited tax relief on contributions
• Benefits cannot be taken before minimum pension age (currently 55) unless ill-health or protected pension age
• Complex
• Viewed as expensive
• General mistrust of
• Affordability/people have other priorities
• Belief that State will provide
• Long time away so not prioritised

Question 19

Main features of a state pension

Answer 19

Those who reached SPA before 6 April 2016 may get:
• Basic State pension
• State Graduated Pension Scheme 1961 - 1975
• State Earnings Related Scheme (SERPs) 1978 - 2002
• State Second Pension (SP) 2002 - 2016

On 6 April 2016, the new State pension came into force
• Those people reaching SPA on or after this date will not receive the above
• Instead receive the new State pension
• Existing benefits accrued will be taken into account/as will contracted out periods

Question 20

Main features of a defined benefit (final salary)

Answer 20

• Guaranteed proportion of final salary at retirement
• Public or private sector
• Superior benefits

• Factors:
- Pensionable service
- Pensionable remuneration
- Accrual rate

• Commutation factor (private sector schemes):
- Pension reduced when taking tax free cash

Question 21

Main features of a defined contribution (money purchase)

Answer 21

• Benefits dependent on size of fund and annuity rates (if annuity being purchased)
• Occupational or individual arrangement
• Pensions flexibility introduced in April 2015
• Governed by trust (occupational) or subject to a contract (individual)
• Scheme property held by trustees on behalf of members where there is a trust

• Pensions flexibility introduced in April 2015
-Individuals can take as little or as much as they like from minimum pension age (currently 55) or earlier if in ill-health or has a protected pension age

Question 22

What options are available to a DC pension at retirement age

Answer 22

A member of a DC scheme can take 25% PCLS and use balance to provide an income:
- A lifetime annuity
- A scheme pension
- A drawdown pension
- UFPLS (a lump sum from uncrystallised funds)

Capped drawdown continues only for those already in capped drawdown, flexi-access drawdown - no restrictions on amount taken

Question 23

How do death benefits work on pensions

Answer 23

• Death benefits can be paid to anyone the member chooses - a dependant or nominee (if not a dependant)
• Successor is someone nominated by a dependant or a nominee to continue to receive dependant’s or nominee’s FAD (then known as a successor’s FAD)
• If they stay in drawdown funds can be passed again on their death