Section 4 (25-32)

Question 1

Retirement Annuity Contracts (RACs)

Answer 1

• Not possible to set up new contracts since 1988.
• Those with existing contracts can continue contributions
• Were available to self-employed who did not have employer schemes
• Member had option to take a tax-free cash lump sum of 3 x initial annuity. Now it is 25% PCLS
• Death benefits can be restrictive (e.g. return of contributions)
• Many RACs include GARs

Question 2

Executive Pension Plans (EPPs)

Answer 2

• Occupational money purchase scheme typically set up for one person
• If set up prior to 2006 then it may be possible to take 100% fund as PCLS
• Where available tax free cash exceeded 25% of the funds value at A Day then this higher percentage is automatically protected
• Some contracts include GARs

Question 3

Section 32 Buy-out

Answer 3

• Individual money purchase contracts used to hold benefits transferred out of a DB scheme as they allow preservation of GMP benefits
• Can include protected tax free cash
• Required to pay out, as a minimum, the GMP at retirement (even if investment performance doesn’t cover the cost)
• GMP valued at fixed rate in deferment (up to 8.5%)
• May not be able to take PCLS
• If GMP cannot be covered, insurance company cannot allow scheme to be transferred

Question 4

Describe how an increase in the inflation assumption using will impact the cash flow mode and potential suitability of transfer

Answer 4

• Inflation reduces spending power of income and higher income would be needed to be taken from the fund, which may lead to earlier fund depletion
• Higher returns may be needed to sustain fund value which would mean inappropriate levels of risk being taken
• Revaluation/escalation will be increased within DB pension
• The above may make the transfer less suitable

Question 5

State key documentation an adviser should retain on file for compliance purposes in respect of an advised pension transfer from a DB scheme

Answer 5

1. Fact find
2. Suitability report
3. TVAS
4. Ceding scheme info
5. Statement of entitlement
6. Supplementary DB transfer questionnaire
7. Disclosure documentation
8. Recommended plan research

Question 6

Potential death benefits from a DB scheme

Answer 6

1. Dependent’s pension
   - Must not be subject to a guarantee period
   - Cannot have pension/annuity protection
   - Cannot be surrendered (except under pension sharing)
   - Cannot provide any further benefit on dependent’s death
   - Not commutable (except triviality)
   - Where a scheme pension is paid to a child, this must cease at 23 (unless mentally/physically impaired)
   - Taxed as PAYE
2. Guarantee periods
   - Can only be guarantee for maximum of 10 years
   - Taxable as PAYE
   - Non commutable
3. Pension/annuity protection lump sums
   - Maximum lump sum on death is deemed original pension cost, less gross income payments made to the date of death
   - Before 75 tax free, after 75 PAYE
4. Lump sum
   - Lump sum paid is assessed against remaining LTA and any excess is charged at 55

Question 7

Potential death benefits from a DC scheme

Answer 7

Lump sum death benefits:

• Death before 75, no tax (this will not apply if not made within 2 year window)
• On death after 75, where payment is made directly to beneficiary, it will be taxable as income under PAYE

Question 8

Potential death benefits from a lifetime annuity

Answer 8

1. Survivor’s annuity
   - Must not be subject to a guarantee period
   - Cannot have pension/annuity protection
   - Cannot be surrendered (except under pension sharing)
   - Cannot provide any further benefit on dependent’s death
   - Not commutable (except triviality)
2. Guarantee periods
   - May be guaranteed for an period at the discretion of the annuity provider and no longer restricted to the previous limit of up to 10 years
3. Pension/annuity protection lump sums
   - Calculated as original annuity purchase price, less the sum of gross income payments made to member (taxable as PAYE if after 75)