Topic 10 (Pension Products) Flashcards
What are the 2 main types of private pension?
- Occupational schemes
2. Personal pensions
What are the 2 main ways in which pension schemes can be set up?
- Defined-benefit schemes
(Offered by SOME employers) - Defined-contribution schemes
(Offered by employers or set up as individual pension arrangements)
How can a UK resident receive income tax relief?
Must be under 75 and can receive it at their highest marginal rate on annual contributions to occupational/private pension schemes, up to a max. of the higher of 100% of UK earnings of £3,600
What is Marginal rate of tax?
The highest rate someone can pay on their income
What is annual allowance reduction?
If an individual has income in excess of 150,000 the annual allowance is reduced
(£1 of allowance is lost for each £2 of income over 150,000)
What is the limit on amount that can be saved into pensions each year?
£40,000
What is a Lifetime allowance?
The total amount that an individual may holding tax privileged pension schemes at the point when benefits are taken, without incurring a tax charge
2019/20 = £1,055,000
What is a Money purchase annual allowance? (MPAA)
When a pension scheme member draws benefits from their pension using flexiaccess drawdown it takes an uncrystallised funds pension lump sum
2019/20 MPAA= £4,000
What is the tax treatment on personal pensions?
Tax relief is given at source and claimed VIA individual self assessment
What is the tax treatment of a pension fund?
No capital gains tax and no income tax on savings or dividend income
What is an annual allowance?
The maximum amount that can be contributed to a pension during a tax year without a tax charge being applied
What is a defined benefit scheme?
When the pension benefits the individual will receive a specified from the outset
What is a defined contribution scheme?
Where an agreed level of contributions is paid but the benefits that the individual ultimately receives depend on the performance of the investments into which the contributions are paid
What is the pension commencement lump sum?
The Sum that may be taken at retirement tax free
What are the 2 main types of occupational schemes?
- Final salary (defined benefit)
2. Money purchase (defined contribution)
How is pension benefit calculated for a final salary occupational scheme?
The pension benefit is calculated as a % of the employees final salary
Give key features of a month purchase occupational scheme…
- is an agreed contribution which is invested for each member
- at retirement, the fund built up is used to buy pension benefits
Why are final salary schemes worse than money purchase schemes?
Final salary schemes are more expensive to run
What is the tax arrangements on tax efficient pensions?
Don’t pay CGT, pay no income tax on savings income and no higher rate income tax on dividend income
What are Additional Voluntary contributions? (AVC)
- money purchase schemes with a limited choice of funds
- additional contributions to an occupational scheme
What is a Free-standing additional voluntary contribution (FSAVC)
- A money purchase fund provided by a separate pension provider
- they offer a wider range of investment funds than AVCs but are more expensive
What is ‘auto-enrolment’ for workplace pensions?
Where employers must enrol ‘eligible’ workers in a qualifying workplace pension and contribute a specified minimum amount to the scheme
What is the criteria for auto-enrolee this?
-not already in a pension
-aged 22+
-earns more than £10,000
-works in the Uk
-a minimum of 8% of an employees earnings will be paid into the scheme
(3% employer, 4% employee, 1% tax relief)
What is NEST?
National employment savings trust
Established to support the workplace pension provisions
What is a personal pension?
Are individual arrangements provided by financial services companies such as life assurance companies, banks and building societies
What is a group personal pension? (GPP)
A collection of individual personal pension plans all administered by an insurance company on behalf of the single employer
What is a self-invested personal pension? (SIPP)
A pension that gives access to a wider range of investment options that would be available through a conventional personal pension
What is a stakeholder pension?
A pension that is targeted at lower paid individuals
Why do financial advisors steer away from stakeholder pensions?
They are seen as not profitable
What are the 2 phases of retirement planning?
- An accumulation phase
(Savings are made into a pension to build up a fund) - A decumulation phase
(Where benefits are drawn)
What is a public sector/public services scheme?
A scheme operated by the Government
Provides a promise of pension benefits (provided from government funds)
How are benefits taken from pensions?
Defined benefit - has the option to take a pension commencement lump sum
Defined contribution - the fun remains invested, it is referred to as ‘uncrystallised’, when benefits are taken is is ‘crystallised’
What are the option for money purchase schemes?
- up to 25% tax free lump sum
- taxable lump sum
- annuity
- flex-access drawdown
- uncrystallised funds pension lump sum
What pensions are money purchase schemes?
All personal/stakeholder pensions
What is annuity purchase?
Involves the payment of a lump sum from the pension fund in exchange for an income
One benefit is it promises a guaranteed rate of income
What is a Flexi-Access drawdown? (FAD)
If involves drawing the pension fund after any pension commencement lump sum has been taken and reinvesting it into a fund to provide income
What is a uncrystallised funds pension lump sum? (UFPLS)
Where the pension fund remains invested and none of the fund is drawn or reinvested
No pension commencement lump sum is drawn
What was CAPPED drawdown?
Was an option where income benefits were drawn direct from a designated drawdown fund with an upper limit (cap) on the amount that could be drawn
What was a FLEXIBLE drawdown?
This form of drawdown allowed unlimited withdrawals
Been converted to FAD
Describe a defined benefit scheme when death occurs?
Before retirement = a lump sum death benefit is available, there might be a partners pension, paid from the scheme to the spouse of the deceased
After retirement = continue to pay the pension income for a period of time
Describe a defined contribution scheme when death occurs?
Before retirement = pension fund can be used to provide income and/or lump sum benefits
After retirement = provides benefits to spouse such as:
- continuing scheme pension
- continuing lifetime annuity
- continuing drawdown income
