Secured Pension Options Flashcards

1
Q

What changes were implemented on 6 April 2015 regarding withdrawals from defined contribution pensions?

A

Since 6 April 2015, individuals can take as much or as little as they wish from their defined contribution pensions once they have reached the normal minimum pension age (currently age 55) or earlier if they meet the ill-health provisions or have a protected pension age.

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2
Q

What are the conditions under which commutation on the grounds of triviality can occur?

A

This can occur provided the value of all their benefits does not exceed £30,000 and the payment extinguishes the member’s rights under the scheme.

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3
Q

Can a dependant or survivor commute benefits they receive upon the member’s death?

A

Yes, it is possible for a dependant or survivor to commute benefits they receive upon the member’s death, including a guarantee, subject to a maximum value of £30,000.

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4
Q

What provisions exist for the payment of ‘small pots’ in addition to the benefits payable via trivial commutation?

A

It may be possible to pay ‘small pots’ of £10,000 or less in addition to the benefits payable via trivial commutation.

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5
Q

Can a scheme pension be an option under both defined benefit and defined contribution schemes?

A

A scheme pension is the only option under a defined benefit scheme and can be provided by a defined contribution scheme only if the member was first given the option of a lifetime annuity.

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6
Q

How often must a scheme pension be paid and can it include a guarantee?

A

A scheme pension must be paid at least annually and may include a guarantee of up to ten years, which will be paid as a continuing income.

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7
Q

How is a scheme pension taxed?

A

A scheme pension is taxed as the recipient’s pension income via PAYE.

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8
Q

What is a lifetime annuity and how is it available in respect of defined contribution schemes?

A

The option of a lifetime annuity is available in respect of all defined contribution schemes. It is a contract bought from an insurance company in return for the payment of a lump sum. The annuitant has complete choice about the options they choose to include.

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9
Q

Is there a limit to the length of the guarantee period a lifetime annuity may include?

A

There is no limit to the length of the guarantee period a lifetime annuity may include.

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10
Q

How can the value of a conventional lifetime annuity and a flexible annuity change, and what is the implication of taking an income from a flexible annuity?

A

A conventional lifetime annuity can only decrease in value within limits prescribed by HMRC. A flexible annuity can decrease by a greater amount, but taking an income from a flexible annuity is a trigger event for the MPAA (Money Purchase Annual Allowance).

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11
Q

How is a lifetime annuity taxed?

A

A lifetime annuity is taxed as the member’s pension income via PAYE.

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12
Q

What determines the income in a with-profit annuity and a unit-linked annuity?

A

For a with-profit annuity, the annuitant selects an anticipated bonus rate upon which their income will be based. For a unit-linked annuity, the initial income is converted into a number of notional units, and the annuitant selects the anticipated growth rate at outset.

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13
Q

How can the level of income from an annuity be affected by the underlying assets?

A

The level of income can fluctuate in line with the performance of the underlying assets.

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14
Q

What is an impaired life or enhanced annuity, and to whom does it offer a better rate?

A

An impaired life or enhanced annuity offers a better annuity rate to those who have a lower than average life expectancy due to lifestyle or health issues.

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15
Q

Q1: In what circumstances can defined benefit pension benefits or an ‘in payment money purchase in-house scheme pension’ be converted to a lump sum?

A

A1: On the grounds of triviality, under certain circumstances.

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16
Q

Q2: What are the conditions that a member must meet to request the commutation of their pension benefits on the basis of triviality?

A

A2: The total value of all their benefits should not exceed £30,000, and the payment should extinguish the member’s rights under the scheme.

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17
Q

Q3: Can benefits received by a dependant or survivor upon the member’s death be commuted?

A

A3: Yes, they can commute benefits, including a guarantee, up to a maximum value of £30,000.

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18
Q

Q4: What is the threshold for the ‘small pots’ provision and how does it relate to trivial commutation?

A

A4: ‘Small pots’ refers to pension amounts of £10,000 or less. They can be paid in addition to the benefits available through trivial commutation.

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19
Q

Q5: From which date could individuals freely access amounts from their defined contribution pensions once reaching the normal minimum pension age?

A

A5: From 6 April 2015.

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20
Q

Q6: What is the current normal minimum pension age at which individuals can take from their defined contribution pensions?

A

A6: Age 55.

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21
Q

Q7: Apart from reaching the normal minimum pension age, when else can individuals access their defined contribution pensions earlier?

A

A7: If they qualify under ill-health provisions or have a protected pension age.

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22
Q

Q1: What is a scheme pension?

A

A1: A scheme pension is a pension paid directly from a registered pension scheme or payable by an insurance company selected by the scheme administrator.

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23
Q

Q2: In what scenario is a scheme pension the only option?

A

A2: A scheme pension is the only option under a defined benefit scheme.

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24
Q

Q3: When can a defined contribution scheme provide a scheme pension?

A

A3: It can only be provided if the member was first given the option of a lifetime annuity.

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25
Q

Q4: What body sets the requirements a scheme pension must meet?

A

A4: HMRC.

26
Q

Q5: Who determines the benefits of a scheme pension if paid by a defined benefit scheme?

A

A5: The scheme rules.

27
Q

Q6: How often must a scheme pension be paid?

A

A6: At least annually.

28
Q

Q7: What is the maximum guarantee period for a scheme pension?

A

A7: Up to ten years.

29
Q

Q8: How is a scheme pension taxed?

A

A8: As the recipient’s pension income via PAYE.

30
Q

Q9: What is a lifetime annuity in the context of defined contribution schemes?

A

A9: It is a contract bought from an insurance company in return for a lump sum payment. The annuitant has complete choice about the options they include.

31
Q

Q10: What is the limit on the guarantee period for a lifetime annuity?

A

A10: There is no limit.

32
Q

Q12: What event does taking income from a flexible annuity trigger?

A

A12: It is a trigger event for the MPAA.

33
Q

Q11: By what limit can a conventional lifetime annuity decrease in value?

A

A11: Only within limits prescribed by HMRC.

34
Q

Q14: For a with-profit annuity, what determines the income?

A

A14: The annuitant selects an anticipated bonus rate upon which their income will be based.

35
Q

Q15: How is the initial income determined for a unit-linked annuity?

A

A15: The initial income is converted into a number of notional units, and the annuitant selects the anticipated growth rate at outset.

36
Q

Q16: What is the nature of an impaired life or enhanced annuity?

A

A16: It offers a better annuity rate to those with a lower than average life expectancy due to lifestyle or health issues.

37
Q

What are the two main factors that affect annuity rates offered by insurance companies?

A

Longevity expectations and long-term bond yields.

38
Q

Which option, when added to an annuity, would typically cause the greatest reduction in the starting income?

a.
Escalation.

b.
Guarantee.

c.
Annuity protection.

d.
Spouse’s pension.

A

a.
Escalation.

39
Q

Mary receives an index linked scheme pension from her previous employer’s defined benefit scheme. The income commenced in March 2006 at a rate of £900 p.a. and she is currently receiving £1,150 p.a. What would be the value of Mary’s scheme pension if she commutes it for a trivial commutation lump sum?

a.
£28,750.

b.
£22,500.

c.
£18,000.

d.
£23,000.

A

b.
£22,500.

40
Q

Chu hu’s uncrystallised defined contribution pension arrangements consist of an executive pension plan [EPP] valued at £15,000, a stakeholder pension plan valued at £8,000 and a personal pension plan [PPP] valued at £18,000. Chu hu, who is 58, would like to take as many of these funds as possible as small pots payments and should be aware that:

a.
the EPP can be split into two smaller funds of less than £10,000 each and she can take these as two separate small pots.

b.
she cannot take any small pots payments until she reaches the age of 60.

c.
any small pots that she takes will not be tested against her lifetime allowance.

d.
the PPP can be split into two smaller funds of less than £10,000 each and she can take these as two separate small pots.

e.
taking a small pots payment will trigger the money purchase annual allowance.

f.
the stakeholder pension fund can be commuted for a small pots payment.

A

c.
any small pots that she takes will not be tested against her lifetime allowance.

d.
the PPP can be split into two smaller funds of less than £10,000 each and she can take these as two separate small pots.

f.
the stakeholder pension fund can be commuted for a small pots payment.

41
Q

Ross, who is 58 and in good health, has six paid up defined contribution pension arrangements all valued at less than £10,000. Four are non-occupational pension schemes and two are from unrelated occupational pension schemes. Which of these schemes, if any, can he choose to commute for small pots payments?

a.
All of them.

b.
Three of the non-occupational schemes and both of the occupational schemes.

c.
Any three of them.

d.
None of them as he cannot take any small pots payments until he reaches the age of 60.

A

b.
Three of the non-occupational schemes and both of the occupational schemes.

42
Q

What would be the potential advantages to a defined benefit scheme of paying a scheme pension from the scheme assets rather than securing an income with an annuity provider?

a.
The administration is easier.

b.
Dependants may die sooner than expected.

c.
The loss of longevity risk.

d.
No immediate outflow of capital.

e.
Investment risk is reduced.

A

b.
Dependants may die sooner than expected.

d.
No immediate outflow of capital.

43
Q

What is the impact on a with-profit annuity with an anticipated bonus rate of 4% if the life office actually declares a bonus of 3%?

a.
The annuitant will have to repay the difference between the anticipated bonus rate and the declared bonus rate for the year.

b.
The life office will insist that annuitant switches into a conventional annuity.

c.
There will be no impact on the income.

d.
The income in the following year will be reduced to reflect that the bonus declared is lower than anticipated.

A

d.
The income in the following year will be reduced to reflect that the bonus declared is lower than anticipated.

44
Q

What is the maximum guarantee period that a lifetime annuity set up in the current tax year can provide?

a.
Twenty years.

b.
Five years.

c.
Ten years.

d.
It is unlimited, but in practice it is determined by the terms of the annuity contract.

A

d.
It is unlimited, but in practice it is determined by the terms of the annuity contract.

45
Q

Michael’s wife, Sandra, died in May 2023 at the age of 76 and Michael is paid a small dependant’s annuity that commenced in June 2023. If he wishes to commute this on the grounds of triviality:

a.
he cannot commute the benefits as Sandra died after reaching the age of 75.

b.
any trivial commutation lump sum death benefit must be paid out within two years of Sandra’s death.

c.
he must be at least 60 in order to commute this benefit.

d.
the maximum trivial commutation lump sum death benefit that can be paid is £30,000 per scheme.

e.
the commutation must extinguish his entitlement to benefits under this scheme.

A

d.
the maximum trivial commutation lump sum death benefit that can be paid is £30,000 per scheme.

e.
the commutation must extinguish his entitlement to benefits under this scheme.

46
Q

Luke has reached the normal pension age of his defined benefit scheme and wishes to ‘phase in’ the receipt of his scheme pension. He should be aware that HMRC:

a.
does not permit a scheme pension payable from a defined benefit scheme to be ‘phased in’ unless the member is in ill-health.

b.
permits this and his scheme must offer him this facility.

c.
permits this but his scheme may not offer this facility.

d.
does not permit a scheme pension payable from a defined benefit scheme to be ‘phased in’ under any circumstances.

A

c.
permits this but his scheme may not offer this facility.

47
Q

On 1 June 2018, Les used his pension fund of £480,000 to purchase a single life, level lifetime annuity of £2,000 per month gross, payable monthly in advance, which included 50% annuity protection. Les died on 15 May 2023 at the age of 74. How much will his beneficiaries receive?

a.
£66,000.

b.
£120,000.

c.
£360,000.

d.
£198,000.

A

b.
£120,000.

48
Q

Gordon, aged 63, dies with an uncrystallised personal pension. His nominated beneficiaries are his wife Sarah and their son Richard. What should Sarah and Richard be aware of in relation to any survivor’s annuity that may be purchased using these funds?

a.
Any survivor’s pension purchased by Sarah cannot include annuity protection.

b.
Both Sarah and Richard can use part of the fund to purchase a survivor’s annuity.

c.
The survivor’s annuity income will be tax free.

d.
Sarah could receive a pension commencement lump sum prior to receiving a survivor’s annuity.

e.
Any survivor’s annuity purchased by Sarah cannot provide any further benefits for Richard when she dies.

f.
Sarah could use the personal pension to purchase a survivor’s annuity with a five year guarantee period.

A

a.
Any survivor’s pension purchased by Sarah cannot include annuity protection.

b.
Both Sarah and Richard can use part of the fund to purchase a survivor’s annuity.

c.
The survivor’s annuity income will be tax free.

e.
Any survivor’s annuity purchased by Sarah cannot provide any further benefits for Richard when she dies.

49
Q

Trevor, aged 66, and his wife Louise, aged 63, each have personal pension funds valued at £200,000. They are both in excellent health and since they plan to use their funds to purchase lifetime annuities they should be aware that:

a.
they could both set up lifetime annuities with a guarantee period at the end of which a 50% spouse’s pension would commence.

b.
the maximum guarantee period that Trevor can choose is nine years.

c.
only Trevor can include annuity protection.

d.
if they both include a 50% spouse’s pension Louise’s starting income will be reduced by less than Trevor’s.

e.
if they both set up a single life annuity Trevor will receive a higher starting income than Louise.

A

a.
they could both set up lifetime annuities with a guarantee period at the end of which a 50% spouse’s pension would commence.

d.
if they both include a 50% spouse’s pension Louise’s starting income will be reduced by less than Trevor’s.

e.
if they both set up a single life annuity Trevor will receive a higher starting income than Louise.

50
Q

Last year Roy, aged 66, received a pension commencement lump sum of £3,000 and a scheme pension of £1,000 p.a. from a defined benefit pension scheme. He now wishes to commute this income for a trivial commutation lump sum. What value will be placed on Roy’s benefits for trivial commutation purposes?

a.
£25,000.

b.
£23,000.

c.
£28,000.

d.
£20,000.

A

b.
£23,000.

51
Q

George receives a small pension income from a previous employer’s defined benefit scheme and has an uncrystallised executive pension plan [EPP] valued at £11,000. He wishes to commute both of these contracts on the grounds of triviality. George should be aware that:

a.
he must have available lifetime allowance.

b.
he will be entitled to receive 25% of the value of the defined benefit scheme pension tax free.

c.
he will not be able to commute the EPP on the grounds of triviality.

d.
the value of both pensions combined must not exceed £30,000.

e.
he must have reached his 65th birthday.

A

a.
he must have available lifetime allowance.

c.
he will not be able to commute the EPP on the grounds of triviality.

d.
the value of both pensions combined must not exceed £30,000.

52
Q

How are a member’s benefits valued for the purposes of trivial commutation?

a.
Where an income commenced after 5 April 2006 any associated pension commencement lump sum must be taken into account.

b.
If a defined contribution fund is uncrystallised, the amount of the fund is the value for trivial commutation purposes.

c.
Where an income started before 6 April 2006, the amount of income on the nominated date is used to calculate the value for trivial commutation purposes.

d.
Income that was being received on 5 April 2006 is valued by a factor of 20.

e.
Uncrystallised defined benefit rights are valued using a factor of 20, plus any pension commencement lump sum if this is paid in addition to the pension.

f.
Where an income started before 6 April 2006 any tax free cash that was taken is ignored.

A

a.
Where an income commenced after 5 April 2006 any associated pension commencement lump sum must be taken into account.

b.
If a defined contribution fund is uncrystallised, the amount of the fund is the value for trivial commutation purposes.

e.
Uncrystallised defined benefit rights are valued using a factor of 20, plus any pension commencement lump sum if this is paid in addition to the pension.

f.
Where an income started before 6 April 2006 any tax free cash that was taken is ignored.

53
Q

When taking benefits from an employer’s defined benefit scheme:

a.
any dependants’ pensions payable on death before age 75 cannot be greater than the member’s pension income.

b.
the member can ask the trustees to pay the income via a drawdown pension.

c.
the income will escalate in payment each year by no less than the statutory minimum.

d.
the pension income will be in the form of a lifetime annuity.

e.
the scheme rules will determine the level of dependant’s benefits included.

f.
the member could decide to phase in their scheme pension, if the scheme offers this facility.

A

c.
the income will escalate in payment each year by no less than the statutory minimum.

e.
the scheme rules will determine the level of dependant’s benefits included.

f.
the member could decide to phase in their scheme pension, if the scheme offers this facility.

54
Q

A conventional lifetime annuity offers flexible withdrawals. The minimum and maximum amount of income that may be drawn must be reviewed at least every:

a.
three years.

b.
four years.

c.
five years.

d.
two years.

A

c.
five years.

55
Q

Gerald, aged 65, is married to Margo, aged 62. If he is about to purchase a lifetime annuity, which type of lifetime annuity will result in the lowest annual income for Gerald?

a.
A single life annuity that is level in payment with a ten year guarantee.

b.
A single life annuity, escalating at 5% p.a. with a five year guarantee.

c.
A level annuity with no guarantee and a 66% spouse’s pension.

d.
A level annuity with a ten year guarantee and a 50% spouse’s pension.

A

b.
A single life annuity, escalating at 5% p.a. with a five year guarantee.

56
Q

When transferring a lifetime annuity from one insurer to another insurer, the annuitant should be aware that:

a.
the annuitant can reshape the terms of the annuity.

b.
the current insurance company must comply with the annuitant’s wishes.

c.
the annuitant can choose to transfer to a flexible lifetime annuity contract.

d.
the two insurance companies involved will have to agree on the value of the annuity in question.

A

a.
the annuitant can reshape the terms of the annuity.

d.
the two insurance companies involved will have to agree on the value of the annuity in question.

57
Q

What death benefits may be included with a scheme pension from a defined benefit scheme?

a.
A death in service lump sum death benefit.

b.
A guarantee period of no more than ten years.

c.
An annuity protection lump sum.

d.
A spouse’s scheme pension.

e.
A nominee’s scheme pension.

A

b.
A guarantee period of no more than ten years.

d.
A spouse’s scheme pension.

58
Q

Laura has deferred benefits in two defined benefit schemes that she would like to commute on the grounds of triviality. She has no other pension arrangements and her nominated date is 1 June 2023 when the benefits in these two schemes were valued at £12,000 and £15,000. What rules should be considered before the proposed trivial commutation can go ahead?

a.
The commutation period will be a twelve month period that must start on 1 June 2023.

b.
Laura must have reached the age of 60.

c.
She can choose another nominated date and start the process again if she does not start to commute her benefits by 1 September 2023.

d.
These benefits can be commuted under the ‘small pots’ rules.

e.
Laura must have some available lifetime allowance.

A

c.
She can choose another nominated date and start the process again if she does not start to commute her benefits by 1 September 2023.

e.
Laura must have some available lifetime allowance.

59
Q

HMRC provides specific circumstances where a scheme pension may be reduced or stopped. These include a reduction in the scheme pension due to:

a.
a court order.

b.
abatement.

c.
forfeiture of entitlement permitted by regulations.

d.
the scheme administrator paying a lifetime allowance charge in relation to the member.

e.
the cessation of a bridging pension at the member’s State pension age.

f.
an earmarking order.

A

a.
a court order.

b.
abatement.

c.
forfeiture of entitlement permitted by regulations.

e.
the cessation of a bridging pension at the member’s State pension age.

60
Q

Gary died recently at the age of 68 having been in receipt of a scheme pension since he was 65. His scheme pension is guaranteed for the maximum permitted term and Gary’s only surviving relative is his sister, Louise. What benefits, if any, will Louise be entitled to under the scheme and for how long?

a.
She will not be entitled to any benefits under the scheme as she is not classed as a dependant.

b.
She will be entitled to Gary’s full pension for ten more years.

c.
She will be entitled to Gary’s full pension for seven more years.

d.
She will be entitled to Gary’s full pension for two more years.

A

c.
She will be entitled to Gary’s full pension for seven more years.