Topic 10

Question 1

What is annual allowance

Answer 1

Maximum amount that can be contributed to a pension during a tax year without a tax charge being applied (currently £40,000)

Question 2

Can an individual carry forward any unused annual allowance

Answer 2

And the unused annual allowance from the previous 3 tax years to the current year can be carried forward

Question 3

What is lifetime allowance

Answer 3

The total amount that an individual may hold in tax privilege pension schemes at the point where the benefits are taken without incurring a tax charge

Question 4

What is a money purchase annual allowance

Answer 4

This applies where a pension scheme member draws benefits from their pension using flexy access drawdown income or takes an uncrystalized funds pension lump sum

Question 5

At what age can benefits typically be withdrawn from a pension

Answer 5

Currently 55
Expected to rise to 57 in 2028

Question 6

What is a pension commencement lump sum

Answer 6

A scheme member can usually take up to 25% of the fund as a tax free cash lump sum commonly referred to as a pension commencement lump some

Question 7

How can benefits be taken in a defined benefit scheme

Answer 7

The balance over and above any tax free cash must be used to provide an income typically as a scheme pension direct from the pension fund

Question 8

How can benefits be taken from a defined contribution scheme

Answer 8

The balance once tax free cash has been taken can be used to provide income in the form of;
Annuity
Flexible access drawdown (FAD)
Uncrystalised fund payment lump sum

Question 9

What is a pension commencement lump some

Answer 9

The sum up to 25% of the individual’s pension fund that may be taken at retirement tax free

Question 10

What are the 2 main types of occupational schemes

Answer 10

Define benefit
Defined contribution

Question 11

What is a collective defined contribution pension scheme

Answer 11

It is similar to a defined contribution scheme however Pensions will be paid out from a shared pot

This new type of scheme Offers the employer more more predictable costs and is more resilient against economic shocks

Question 12

What 3 ways can you top up a defined benefit scheme

Answer 12

Additional voluntary contributions
Free standing additional voluntary contributions
Personal/stakeholder pension plans

Question 13

What are additional voluntary contributions

Answer 13

These are additional contributions to an occupational scheme

Sometimes such contributions purchase additional years service in a final salary scheme however most operate as money purchase arrangements and the employee will only have a limited choice of funds

AVC’s are deducted from gross salary and the employee therefore receives full tax relief at the same time

Question 14

What are free standing additional voluntary contributions

Answer 14

These are an alternative To an AVC

An individual might choose to contribute to a free standing additional voluntary contribution money purchase fund provided by a separate pension provider

Contributions are made from taxed income, tax relief at the basic rate of 20% is claimed by the pension provider and added to the individual’s pension fund and additional rate taxpayers need to claim additional relief separately through the income tax self assessment

Question 15

What is auto enrolment

Answer 15

Employers must enrol eligible workers in their qualifying workplace pension and contribute a specified amount to the scheme

Question 16

What is the national employment savings trust (NEST)

Answer 16

Nest is an alternative to setting up or using their own pension scheme employers can meet their obligations by enrolling their employees in NEST

Nest is a trust based occupational pension scheme established to support workplace pension provisions it can be used by an employer either alongside or instead of its own occupational pension scheme

Nest offers a range of investment funds from which the member can choose and there are default fund selections for but fund selections for members who do not wish to make their own choice charges are capped benefits can be taken from age 55 and must be taken no later than age 75

Question 17

What is the criteria for auto enrolment

Answer 17

The criteria for auto enrollment are that the employee:
Is not already in a pension at work
Is age 22 all over
Is under state pension age
Earns more than 10000 pound
Works in the uk

Question 18

What is the minimum amount of an employee’s earnings that have to Be paid into the nest scheme

Answer 18

8% - this is made up from:

3% employer contribution
4% employee contribution
1% tax relief

Question 19

What is a personal pension

Answer 19

They are individual arrangements provided by financial services companies such as life assurance companies banks and building societies

Contributions receive basic rate tax relief at source even for none tax payers

Hire or additional rate taxpayers need to claim additional relief separately through self assessment

Question 20

What is a group personal pension

Answer 20

A collection of individual personal pension plans all administered by an insurance company on behalf of a single employer

Question 21

What is a self invested personal pension (SIPP)

Answer 21

These are personal pension arrangements that give access to a wider range of investment options than would be available through a conventional personal pension

For example it may be possible to hold a direct shareholding or commercial property within a sipp

Question 22

What is a stakeholder pension

Answer 22

It is a type of personal pension

They were designed to encourage those at lower earning levels to start pension provisions

Question 23

What are the key standards that a product must meet in order to be designated a stakeholder pension

Answer 23

Charges cannot exceed 1.5% of the fund value per annum for the 1st 10 years of the term and cannot exceed 1% after that time

Entry and exit charges are not permitted

The minimum contribution required cannot be more than 20 pound

Question 24

What are the 2 retirement planning phases

Answer 24

Accumulation phase - When savings are made into a pension to build-up a fund

Deccumulation phase - When benefits are drawn

Question 25

What is annuity purchase

Answer 25

Annuity purchase involves the payment of a lump sum from the pension fund in exchange for an income

Question 26

What is Flexi access drawdown (FAD)

Answer 26

This involves drawing the pension fund After any pension commencement lump sum has been taken and reinvestigate into a fund to provide income fund to provide income the fund remains invested so there is potential for further growth but there is also risk that the fund value might fall and consequently income levels may not be maintained

Withdrawals can be structured however the member wishes as smaller regular payments to provide an income or as larger perhaps one of payments

Any payment beyond the pension commencement lump some it’s tax if some is taxable care must be taken not to trigger a large tax charge

Question 27

Flexy access draw down bullet points

Answer 27

The pension fund is moved to a designated drawdown account

The plan holder can take 25% of the value of their pension fund as a tax free cash sum

While only tax free cash is taken the applicable annual allowance will remain at the full amount

Access to income can be for a lump sum and/or flexible income and is subject to the marginal rate of income tax

The balance of the fund remains invested

Benefits in excess of the 25% tax free cash are subject to income tax

Once any benefits in excess of the tax free cash are drawn the MPAA is triggered

Question 28

What is a Uncrystalized funds pension lump sum

Answer 28

This means the pension fund remains invested

the member is able to use a pension fund to draw a series of lump sum payments from the fund to meet their income or capital needs

Question 29

Uncrystallised funds pension lump sum (UFPLS) bullet points

Answer 29

The pension fund is not moved into a drawdown account

No pension commencement lump sum is drawn

The member simply draws lump sums from their pension as they require with the balance remaining in the pension fund

25% of each payment is tax free with the balance subject to income tax

When a uncrystalised funds pension lump sum is taken the MPAA is triggered

Question 30

What is the money purchase annual allowance (MPAA)

Answer 30

This limits the extent to which people can effectively gain 2 lots of tax relief on pension contributions when drawing funds via FAD or UFPLS

Once an individual has started accessory funds via fad income or UFPLS instead of being able to receive tax relief on pension contributions up to the full annual allowance they have an MPAA (Lower pension allowance)

Question 31

What are the pre and post death benefits of a defined benefit scheme

Answer 31

Pre -
Is death in service lump sum
And/ or Spouses and/or dependence pension paid from the scheme to the spouse civil partner or dependence of the deceased

Post - Continue to pay the pension income for a period of time a ‘guaranteed period,

Or

Pay a spouse/dependence pension as a proportion of the pension that was being paid to the member

Question 32

What are the pre and post death benefits from a defined contribution scheme

Answer 32

Pre - The pension fund can be used to provide income and/or lump some benefits

Post - Continuing scheme pension
Lifetime annuity continuing for an agreed period Post death
Lifetime annuity paying an unusual protection lump she lump some this would be the balance of the balance of the funds used to buy the innuity as as compared with how much had already been paid out as income at date of death
Continue in drawdown income