Section 8 (57-64)

Question 1

1. What is sequencing risk?

2. How can it be reduced?

Answer 1

1. Regular withdrawals amplify poor returns experienced in the early years of a drawdown plan which increases the possibility that the funds will run out soon.
2. • Take less income during periods of poor performance
   • Utilise rising equity glidepath strategy
   • Calculate and use a safe withdrawal rate
   • Use an investment strategy that has volatility protection

Question 2

Give reasons why a previous CETV might reduce

Answer 2

• A previous CETV was enhanced by trustees
• Scheme funding has deteriorated
• Life expectancy has reduced
• Higher equity returns leading to a higher discount factor
• Lower inflation leading to lower revaluation/lower projected pension/lower escalation and higher annuity rates al resulting in a lower capitalised value being required.

Question 3

What are advice requirements for GARs?

Answer 3

• Advice required where transfer value exceeds £30k
• If only safeguarded benefits are GARs then doesn’t require PTS involvement
• Personal recommendation required but no requirement for comparison set out n COBS
• Once GAR has expired, the benefits are no longer considered to be safeguarded

Question 4

What is a bridging pension?

Answer 4

• Additional amount of scheme pension paid to a member who draws their benefits before SPA
• Stops at the point member reaches SPA
• Enhancement will be tested against LTA

Question 5

What are the benefits and drawbacks of pension increase exchange?

Answer 5

Benefits:

• Higher initial income
• Higher PCLS
• Higher spouses pension
• Benefit those with reduced life expectancy or spend more in early years

Drawbacks:

• Member may live past ‘break even’ point
• Higher value tested against LTA
• May affect state benefits
• Inflation might be higher than expected
• May push member into higher tax bracket

Question 6

What is a safe withdrawal rate?

Answer 6

Quantity of money which can be withdrawn each year, for a given quantity of time, including adjustments for inflation, and will not lead to portfolio failure (where failure is defined at a 95% probability of depletion to zero at any time in the specified period).
- 4% indexed with inflation over a 30 year period

Question 7

What are the stress tests that should be used when cash flow forecasting?

Answer 7

1. Permanent loss of asset
2. Need to increase income
3. Large adhoc withdrawals
4. Inflation higher than forecast
5. Living longer than expected
6. Investment returns lower than forecast

About seeing how long the funds are going to last

Question 8

What are the effects of rising prices on real income over 20 years?

Answer 8

2% - 1/3
3.5% - 1/2
5% - 2/3