Topic 8 Meeting customers’ needs: retirement and estate planning

Question 1

1. Statistics show that 80 per cent of people now live to state pension age, and those who do collect their pension receive it on average for 12 years longer than did pensioners in the early 1950s. True or false?

Answer 1

• FALSE - Statistics show that 90 per cent of people now live to state pension age, and those who do collect their pension receive it on average for eight years longer than did pensioners in the early 1950s.

Question 2

1. Amelie earns £35,000 as a sales manager. What are the maximum pension contributions she and her employer can make to a personal pension for her during the 2019/20 tax year without Amelie incurring a tax charge?

Answer 2

Amelie can make a contribution of £35,000 and receive tax relief on the whole payment.Heremployercanmakeacontributionof£5,000ortopuphercontribution to £40,000 if it is lower than£35,000.

Question 3

1. Aisha was born on 1 January 1961. What is the earliest age at which she can take her personal pension benefits?

Answer 3

Aisha can take her benefits from the age of55.

Question 4

1. Wilfred has a personal pension fund worth £150,000. He has opted for ‘flexi‑access’ regarding his benefits. What are the rules that apply?

Answer 4

• Wilfred could take 25 per cent of his fund (or the part of his fund he has decided to crystallise at that point) as a tax-free lump sum and then withdraw the balance of the fund (or part) as a regular income, with withdrawals added to his income and taxed at his marginal rate(s).
• Alternatively, he could take the 25 per cent tax-free cash and defer taking the income until a time of his choosing.
• If he opts for flexi-access he will be subject to a reduced annual allowance of £4,000 for further contributions.

Question 5

1. Explain the ‘accrual basis’ for defined‑benefit pension schemes.

Answer 5

The accrual basis is the rate at which the pension builds up during service. For example, a 1/50th accrual rate means that benefits build up at the rate of 1/50th final salary for each year ofservice.

Question 6

1. Which type of pension arrangement would allow Toby, a sole trader, to use his pension to buy the building from which his business operates?

Answer 6

A self-invested personal pension plan (SIPP) would enable Toby to use his pension to buy the building

Question 7

Assuming a fund value of £200,000 in the scheme in question 6, what is the maximum value of the property it could buy?

Answer 7

The scheme can borrow 50 per cent of the fund value, which is £100,000. When combinedwiththefunditself,thiswouldprovideforamaximumpurchaseof

£300,000.

Question 8

1. David’s employer is now required to auto‑enrol qualifying staff into a pension scheme. David has his own personal pension and would prefer not to join the employer’s scheme. He must join his employer’s scheme under auto‑enrolment rules. True or false?

Answer 8

FALSE - Although David’s employer must arrange a qualifying scheme, David can choose to opt out.

Question 9

Amy has been a member of a contracted‑out defined‑benefit pension scheme for 20 years.

James has been self‑employed all his career.

Karen has been employed all her career on a good salary, but has taken no action about state pensions.

All three reach state pension age in July 2019 and have sufficient qualifying years.

Who is most likely to receive the flat‑rate pension of £168.60? What is likely to be the pension entitlement situation of the other two?

Answer 9

• James has been self-employed all his career, and so will not have been contracted out. This means he will receive the full flat-rate pension.
• Amy has been a member of a contracted-out defined-benefit pension scheme for 20 years, which means her entitlement to the flat-rate pension will be reduced.
• Karen has been employed all her career on a good salary, but has taken no action about state pensions. This means that Karen has not contracted out and her total benefit is likely to be higher than the flat-rate pension.

Question 10

1. Andrew and Samidha have taken out a joint‑life second‑death whole‑of‑life assurance policy in trust to address their potential inheritance tax liability of £120,000. What effect will the policy have on their liability?

Answer 10

The policy will not reduce the tax payable but will provide a lump sum to pay it and so preserve theestate.