Section 1 - Pensions In Context Flashcards
What was introduced in the 1995 Pension Act
• Regulatory and compensation schemes established
• Minimum funding requirement introduced
What was introduced in the 1999 pensions act
Minimum Income Guarantee (MIG) introduced
What was introduced in the 2001 pensions act
• Stakeholder pensions introduced; employers had to offer employees access
• FRS17 - companies must report pension scheme deficit / surplus in accounts
What was introduced in the 2003 pensions act
• State Pension Credit introduced
What was introduced in the 2004 pensions act
• Pension Protection Fund (PPF) introduced for DB schemes of insolvent employers
What was introduced in the 2006 pensions act
• A-Day Pension simplification
• Introduced annual and lifetime allowances
• Pension age discrimination outlawed
What was introduced in the 2012 pensions act
• Reduction in lifetime allowance
• Contracting out abolished in DC schemes
• Auto-enrolment introduced
What was introduced in the 2015 pensions act
• 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
What was introduced in the 2016 pensions
• New (or single-tier) State pension replaced most of the previous State pensions
• Contracting out abolished
• Tapered annual allowance (TAA) introduced
What was introduced in the 2018 pensions act
• State Pension Age for Men and Women 65 since December 2018
What was introduced in the 2020 pensions act
• State Pension Age for Men and Women 66 since December 2018
What was introduced in the 2021 pensions act
• PPF compensation cap removed following Hughes v PPF judgement
• New rules introduced requiring due diligence from trustees of transferring schemes
What was introduced in the 2023 pensions act
• 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
Challenges facing pensions
• 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
Pension demographics
• 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
Corporate pensions environmental factors
• 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
Incentives to invest in a pension
• 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.
Disincentives to invest in pensions
• 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
Main features of a state pension
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
Main features of a defined benefit (final salary)
• 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
Main features of a defined contribution (money purchase)
• 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
What options are available to a DC pension at retirement age
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
How do death benefits work on pensions
• 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
