Topic 10 (Pension Products)

Question 1

What are the 2 main types of private pension?

Answer 1

1. Occupational schemes

2. Personal pensions

Question 2

What are the 2 main ways in which pension schemes can be set up?

Answer 2

1. Defined-benefit schemes
   (Offered by SOME employers)
2. Defined-contribution schemes
   (Offered by employers or set up as individual pension arrangements)

Question 3

How can a UK resident receive income tax relief?

Answer 3

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

Question 4

What is Marginal rate of tax?

Answer 4

The highest rate someone can pay on their income

Question 5

What is annual allowance reduction?

Answer 5

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)

Question 6

What is the limit on amount that can be saved into pensions each year?

Answer 6

£40,000

Question 7

What is a Lifetime allowance?

Answer 7

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

Question 8

What is a Money purchase annual allowance? (MPAA)

Answer 8

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

Question 9

What is the tax treatment on personal pensions?

Answer 9

Tax relief is given at source and claimed VIA individual self assessment

Question 10

What is the tax treatment of a pension fund?

Answer 10

No capital gains tax and no income tax on savings or dividend income

Question 11

What is an annual allowance?

Answer 11

The maximum amount that can be contributed to a pension during a tax year without a tax charge being applied

Question 12

What is a defined benefit scheme?

Answer 12

When the pension benefits the individual will receive a specified from the outset

Question 13

What is a defined contribution scheme?

Answer 13

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

Question 14

What is the pension commencement lump sum?

Answer 14

The Sum that may be taken at retirement tax free

Question 15

What are the 2 main types of occupational schemes?

Answer 15

1. Final salary (defined benefit)

2. Money purchase (defined contribution)

Question 16

How is pension benefit calculated for a final salary occupational scheme?

Answer 16

The pension benefit is calculated as a % of the employees final salary

Question 17

Give key features of a month purchase occupational scheme…

Answer 17

• is an agreed contribution which is invested for each member
• at retirement, the fund built up is used to buy pension benefits

Question 18

Why are final salary schemes worse than money purchase schemes?

Answer 18

Final salary schemes are more expensive to run

Question 19

What is the tax arrangements on tax efficient pensions?

Answer 19

Don’t pay CGT, pay no income tax on savings income and no higher rate income tax on dividend income

Question 20

What are Additional Voluntary contributions? (AVC)

Answer 20

• money purchase schemes with a limited choice of funds

- additional contributions to an occupational scheme

Question 21

What is a Free-standing additional voluntary contribution (FSAVC)

Answer 21

• A money purchase fund provided by a separate pension provider
• they offer a wider range of investment funds than AVCs but are more expensive

Question 22

What is ‘auto-enrolment’ for workplace pensions?

Answer 22

Where employers must enrol ‘eligible’ workers in a qualifying workplace pension and contribute a specified minimum amount to the scheme

Question 23

What is the criteria for auto-enrolee this?

Answer 23

-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)

Question 24

What is NEST?

Answer 24

National employment savings trust

Established to support the workplace pension provisions

Question 25

What is a personal pension?

Answer 25

Are individual arrangements provided by financial services companies such as life assurance companies, banks and building societies

Question 26

What is a group personal pension? (GPP)

Answer 26

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

Question 27

What is a self-invested personal pension? (SIPP)

Answer 27

A pension that gives access to a wider range of investment options that would be available through a conventional personal pension

Question 28

What is a stakeholder pension?

Answer 28

A pension that is targeted at lower paid individuals

Question 29

Why do financial advisors steer away from stakeholder pensions?

Answer 29

They are seen as not profitable

Question 30

What are the 2 phases of retirement planning?

Answer 30

1. An accumulation phase
   (Savings are made into a pension to build up a fund)
2. A decumulation phase
   (Where benefits are drawn)

Question 31

What is a public sector/public services scheme?

Answer 31

A scheme operated by the Government

Provides a promise of pension benefits (provided from government funds)

Question 32

How are benefits taken from pensions?

Answer 32

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’

Question 33

What are the option for money purchase schemes?

Answer 33

• up to 25% tax free lump sum
• taxable lump sum
• annuity
• flex-access drawdown
• uncrystallised funds pension lump sum

Question 34

What pensions are money purchase schemes?

Answer 34

All personal/stakeholder pensions

Question 35

What is annuity purchase?

Answer 35

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

Question 36

What is a Flexi-Access drawdown? (FAD)

Answer 36

If involves drawing the pension fund after any pension commencement lump sum has been taken and reinvesting it into a fund to provide income

Question 37

What is a uncrystallised funds pension lump sum? (UFPLS)

Answer 37

Where the pension fund remains invested and none of the fund is drawn or reinvested

No pension commencement lump sum is drawn

Question 38

What was CAPPED drawdown?

Answer 38

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

Question 39

What was a FLEXIBLE drawdown?

Answer 39

This form of drawdown allowed unlimited withdrawals

Been converted to FAD

Question 40

Describe a defined benefit scheme when death occurs?

Answer 40

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

Question 41

Describe a defined contribution scheme when death occurs?

Answer 41

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