Topic 10 Flashcards
What is a pension
A pension is used to supply a steady income to those who are retired from the workforce.
These pension can be state provided however this is not always sufficient for individuals due to the longer living ages and increase costs of living therefore there are tax reliefs for those to invest into pensions
What is the lifetime allowance been replaced with
This has been replaced with lump sum allowance at a cap of £268,275 for each individual as well as the lump sum and death benefit allowance which is set at £1,073,100 across a lifetime.
What are the two types of pensions
Defined benefits pension is from the employer which is costly to the individual as a they will have to pay into it when they are working
The second is defined contribution, this is the investment into funds and investments which offers flexibility but puts the risk onto the individual.
What are the tax reliefs and allowances on pensions
Tax reliefs are subject to some criteria in the uk firstly the eligibility of the individual will have to be looked at which is being a UK earner under the age of 75 and the relief is granted by the highest tax bracket the individual is in.
The allowance is set at a maximum rate and then is adjusted for the highest earners. The cap is at £260,000 and those whom earn above £1 is taken off for every £2 earned.
For example if an individual earns £300,000 then from the max which is £60,000, it would be reduced by £20,000 as the individual earns £40,000 above the threshold.
All allowances not used within three years can be carried forward and if the money is taken out of the pension for flexibility the allowance reduction will be in place.
how and when can benefits be taken
The access age is 55 raising to 57 in 2028
The withdrawal of 25% can be tax free but is subject to lump sum amount barriers
The defined benefit scheme is guarenteed income released at the age
The defined contribution is flexible with either guaranteed income, partial withdraws or full withdraws with the lump sum barriers activated.
What are occupational schemes and how are they beneficial
These are employer based pensions with similar structures to before where defined benefits is a guaranteed income based on either career average salary or the salary which is ended on.
Defined contributions are the investment into funds with the performance being the determining factor of received income .
Benefits of this is usually that the employers will have to match or contribute to the pension with expertise help and they are with tax reliefs.
What are the key characteristics of defined benefits
This is the income based benefits from employers which can be seen in three ways one being years that were served to the company another being the average salary and a fixed accrual rate e.g. 1/60th or 1/80th per year of service.
This type of pension offers security through a guaranteed income as well as the employers taking the risk as they need to ensure funds are there regardless of performance and it is inflation adjusted making sure that the purchasing power is always there.
This scheme can be very costly to employers so therefore they might not be offered anymore.
What are the options to supplement pensions
1.Additional voluntary contributions- Theses are additional contributions made on top of the occupational schemes. the defined contribution additional voluntary contributions depend on performance for payouts but have immediate tax reliefs as well as employers subsidising the costs.
- Free standing additional voluntary contributions- this is contributions made outside of the employer which will offer wider range of investments and financial independence. However the costs and burdens are bared by the individual.
- personal pension stakeholder plans- They are flexible and can be accessed outside of workplace schemes and also can be carried from employers therefore it is portable as well as having tax reliefs on the contributions.
What are the key characteristics of collective defined contributions
This is a hybrid between the defined income and contribution as with this type of pension every employees and employers pool their money together in order to invest and all are payed out equally regardless of contributions and time in the company.
The benefits for the employee is that there is a much less risk involved compared to benefit contributions as there is more guarantee as well as predictability. For employers there is also less risk and liability compared to benefit income.
Royal mail is the first to use this type of pension in the UK.
Describe the characteristics of auto enrolment in workplace pensions
This is a workplace pension approved by the gov in 2012 to auto enroll employees into a pension scheme. The requirements are that they must 22 or older as well as earning over 10,000 annually, they must also work in the uk and not already be in a pension scheme.
They can opt out of this pension however the auto enroll occurs every three years so they will have to renew.
The minimum contribution in total is 8% of total wages which is split 4% employee 3% employer and 1% tax relief. If more is wanted than the employee must make the contributions.
If employees so opt out there is the national employment saving trust which is out of the work place and allows a wider range of investments as well as low chargers with an earlier access age (55).
What are personal pensions and their types
They are contributions which are offered by financial services to anyone under the age of 75 and are tax efficient which are basic rates of reliefs.
There are three types of personal pensions which are:
- Group personal pension plans, thees are employer based individual pension plans which have many benefits such as being portable from job to job as well as being deducted from gross pay as a direct debit and have lower charges through employer.
- Self invested personal pensions, these are for more experienced investors whom have confidence in managing their own portfolios which gives them greater investment variety
- stakeholder pensions, this was introduced in 2001 for those with lower incomes to encourage investment into their retirement by reducing the costs typically at 1.5% for the first 10 years the 1% after. There is also no entry or exit costs as well as there being a minimum contribution of £20.
What are the key characteristic of defined contribution
Defined contribution schemes are investments made by the investor/employee and sometimes the employer depending on the scheme with no guaranteed payout it will heavily depend on the performance of the investments.
The key characteristic of a defined contribution is the investments which are made by either the group or individual giving greater returns or steady income depending on the risk of the investment such as an equity fund or a cash fund or a fixed interest or bond fund.
The management of the fund will depend on if the contribution is independent such as a personal pension which is fully controlled and managed by the investor or an occupational pension which is less flexible and will be managed by employers.
This type of pension can be risky as it depends on the performance of the funds as well as the contribution meaning how much is invested into the pension or the with-drawl of the funds as the use of the funds can decrease the value of the investment and the return.
How are defined benefits payments taken
Usually these pensions will be taken tax free from a lump sum as well as regular payments
What options are given for defined contribution pensions to be taken
one way would be the same as the defined benefits where 25% is tax free lump sum and the the rest as a regular income or another lump sum which is subject to tax
Another can be annuity which is a financial product that can provide an guaranteed income for its client but will stop the investment at the time of use therefore there is no further growth of the investment.
There can be different types such as an inflation adjusted annuity or a single life annuity and a fixed term annuity. These annuities can be shopped around for on the open market to find the best deal giving the investor flexibility.
Another way can be a flexi draw down account which is an account which is used to take the 25% as a lump sum to give regular payments while also keeping the remaining investment in the fund for growth. This type of account may be risky as the investment can be at risk of market loss as well as the tax implication of 25% still being applicable. any further withdrawal may trigger the money purchase annual allowance.
Uncristilised funds pension lump sum. This is the drawdown account but without the account money is moved from the funds when needed and all the same tax implications apply.
What is an annual allowance and money purchase annual allowance
annual allowance is set at 60,000 anything above will be taxed and the money purchase annual allowance is for direct contributions as soon as they are accessed from flexi drawdown or the uncrystallised funds pension lump sum lowers the annual limit to 10,000 but is still 60,000 for direct benefits.
