U1: T10 - PENSION PRODUCTS Flashcards
Pat has been employed by Telephonics plc for just over 35 years and has been a member of the company’s 1/60th pension scheme for the whole of that period. His salary is now £81,000 and he is due to retire next month.
What will his pension entitlement be?
a) £54,000.
b) £28,350.
c) £47,250.
d) £81,000.
The correct answer is c) £47,250.
Answer a) is not correct because £54,000 represents 40/60ths of his final salary, which is what Pat could have earned under the scheme had he worked for Telephonics for 40 years, not 35.
Answer b) is not correct because £28,350 represents 35 per cent of his final salary, not 35/60ths.
Answer d) is not correct because, although he can pay in to his pension a maximum of 100 per cent of his UK earnings, his pensionable service does not justify that level of pension.
Marta is 37 and pays 3 per cent of her salary into a pension scheme each month. The benefit that she will receive at retirement depends solely on the investment performance of the fund.
Marta’s pension scheme is:
a) a defined‐benefit personal pension.
b) a final‐salary occupational pension.
c) a defined‐benefit occupational pension.
d) a defined‐contribution occupational or personal pension.
Answer is d)
Marta’s scheme is a defined‐contribution scheme, which could be either an occupational or a personal pension.
Explain what is meant by the term ‘lifetime allowance’.
The lifetime allowance is the total amount that an individual may hold in retirement benefits at the point where the benefits are crystallised without incurring a tax charge.
What rate of tax relief is applied to contributions to an individual’s pension plan?
a) Basic, higher or additional rate depending upon the contributor’s marginal rate of tax.
b) Always basic rate.
c) Always higher rate.
d) Basic, higher or additional rate depending upon the pension provider’s own rules.
a) Basic, higher or additional rate depending upon the contributor’s marginal rate of tax.
Contributions to AVCs (Additional Voluntary Contributions) are deducted from gross income.
True or false?
True
Which of the following statements is correct?
An individual may be auto‐enrolled in a workplace pension scheme providing they:
a) were born in and are currently working in the UK.
b) are aged between 18 and 55.
c) earn in excess of £10,000 a year.
d) are not liable to higher‐rate tax.
c) Individuals must earn in excess of £10,000 per year to be auto‐enrolled into a workplace pension scheme.
FULL CRITERIA:
The criteria for auto‐enrolment are that the employee:
A)is not already in a pension at work;
B) is aged 22 or over;
C) is under state pension age;
D) earns more than £10,000;
E) works in the UK.
Since April 2015 personal pension providers have been obliged to allow scheme members to access their retirement benefits in the form of an uncrystallised funds lump sum if the member wishes to do so.
True or false?
False.
Pension providers are not obliged to offer this facility, although scheme members are free to move to a different provider if they wish to access their funds in this way.
Which of the following in relation to stakeholder pensions is correct?
a) Charges must not exceed 2 per cent of the fund.
b) There must not be any entry or exit charges.
c) The minimum monthly contribution is £50.
d) The maximum contribution is £3,600 per annum in all cases.
b) There must not be any entry or exit charges.
FULL CRITERIA:
A) Charges cannot exceed 1.5 per cent of the fund value per annum for the first ten years of the term and cannot exceed 1 per cent after that time.
B) Entry and exit charges are not permitted.
C) The minimum contribution required cannot be more than £20.
John is using an uncrystallised funds lump sum to provide his pension benefits. The amount of each payment he takes that is free of tax is:
a) 50 per cent.
b) 100 per cent.
c) 25 per cent.
d) Nil.
c) 25 per cent of each UFPLS payment is tax‐free.
What previous form of income drawdown was converted to flexi‐access drawdown from 6 April 2015?
Flexible drawdown arrangements were all converted to FAD on 6 April 2015.
Nicky is 60 years old and has a low appetite for risk. She is considering options for taking benefits from her pension fund and would like to be able to receive a guaranteed income, with her pension fund no longer exposed to any investment risk.
Which method of providing retirement benefits should Nicky take?
An annuity provides a guaranteed income and there is no investment risk, so this would be a suitable option for Nicky.
Which of the following are criteria for auto-enrollment for Workplace pensions?
- Already has a pension at another firm
- Is not already in a pension at work
- Is aged 23 or over
- Is aged 22 or over
- Is under state pension age
- Is not already in a pension at work
- Is aged 22 or over
- Is under state pension age
If Sally is a non-UK resident with UK earnings is she eligible for a UK pension
Yes.
You can be a UK resident or a non-UK resident with UK earnings.
Is a state-pension means tested?
No it’s not means-tested - it is linked to National Insurance records
Up to what age are you still eligible for a UK pension?
You must be under the age of 75
What is the standard annual pension allowance?
£40,000
What is the threshold beyond which a person’s annual Pension tax relief allowance is reduced?
£1 of allowance reduced for every £2 of income over £260,000
What is the Lifetime allowance threshold?
£1,073,100.
Limits the amount of money that can be held within a pension fund.
If the value of a person’s pension benefit exceeds the lifetime allowance. WHEN are they taxed?
AT THE POINT when benefits are taken a tax charge will be applied
When is the Lifetime Allowance tax charge taken?
AT THE POINT when benefits are taken if the pension fund exceeds £1,073,100.
If the lifetime allowance tax charge is applicable and the person takes the excess as a LUMP SUM, what tax rate is applicable?
55%
If the lifetime allowance tax charge is applicable and the person takes the excess as INCOME, what tax rate is applicable?
25% tax charge and then the remaining income is subject to income tax
After you draw down from your pension fund, can you reinvest back into the pension fund?
Yes, £4,000 per tax year - this is the Money purchase annual allowance
What are the 4 different ways to benefit from a pension?
1) A Pension commencement lump sum (PCLS)
2) Flexi-access drawdown (FAD)
3) Uncrystallised funds pension lump sum (UFPLS)
4) Annuity (secure income)
Under PCLS - what percent of your pension can you crystallise tax-free?
25%
After a PCLS, which of the following is not an option for the remaining lump sum?
- Flexi-access drawdown (FAD)
- Annuity (secure income)
- Uncrystallised funds pension (UFP)
- Uncrystallised funds pension (UFP) - not an option
You can carry forward any unused annual allowance from the previous:
1) 1 tax year
2) 2 tax years
3) 3 tax years
3) 3 tax years
For pension benefits in excess of the lifetime allowance, a lump sum withdrawal of the excess attracts higher charges than funds taken as income or withdrawals.
True or false
True
What is the minimum pension age?
55 (expected to rise to 57 in 2028)
Which of the following is a criteria for auto-enrollment of an employee workplace pension?
A) Aged 21 or over
B) Under the state pension age
C) Earns more than £20,000
C) Works in EMEA
B) Under the state pension age
The criteria for auto-enrolment are that the employee:
. is not already in a pension at work;
. is aged 22 or over;
. is under state pension age;
. earns more than £10,000;
. works in the UK.
All forms of non-occupational pensions are arranged on a defined-contribution basis.
True or false?
True
What does SIPP stand for?
Self-Invested Personal Pension (SIPP)
For a stakeholder pension which of the following facts is NOT true:
A) Charges cannot exceed 1.5 per cent of the fund value per annum for the
first ten years of the term and cannot exceed 1 per cent after that time.
B) Entry and exit charges are not permitted.
C) The minimum contribution required cannot be more than £30.
C) The minimum contribution required cannot be more than £20.
A money purchase pension is which?
A) Defined-Benefit
B) Defined-Contribution
B) Defined-Contribution
Caroline is 38 and earns £25,000 a year as a department manager for a large firm. What is the maximum contribution that could be paid into her personal pension to give her maximum tax relief and avoid any tax penalties?
a) £25,000 from Caroline only.
b) Up to £25,000 between Caroline and her employer.
c) £25,000 from Caroline and £15,000 from her employer.
d) £40,000 from Caroline only.
c) £25,000 from Caroline and £15,000 from her employer.
Caroline can pay in an amount up to her salary, and her employer can top it up to the annual allowance amount.
Alisha is just in the higher-rate tax band. She has a personal pension plan valued at £40,000 and wants to take all of it as one lump sum on her sixtieth birthday next month. How much of the withdrawal will be tax free?
a) It will all be taxable.
b) £30,000.
c) £20,000.
d) £10,000.
d) £10,000.
25% of the pension can be taken as a tax-free lump sum (£40,000 x 25% = £10,000).
Which method of providing a personal pension income is free from investment risk?
a) Taking regular withdrawals using the uncrystallised funds pension lump sum option.
b) Flexi-access drawdown.
c) Taking the 25% pension commencement lump sum and leaving the balance in the fund.
d) Purchasing an annuity.
d) Purchasing an annuity.
When does the Money Purchase Annual Allowance apply to pension contributions? If the plan holder:
a) earns more than the income threshold.
b) takes benefits before the scheme retirement date.
c) takes benefits through the uncrystallised funds pension lump sum option.
d) uses the fund to purchase an annuity.
c) takes benefits through the uncrystallised funds pension lump sum option.
Which statement best describes the uncrystallised funds pension lump sum option on a personal pension?
a) Each withdrawal will be tax free.
b) Each withdrawal is taxed as income in the owner’s hands.
c) 25% of each withdrawal is tax free, with the balance taxed as income.
d) The whole fund must be taken, with 25% as a tax-free lump sum.
c) 25% of each withdrawal is tax free, with the balance taxed as income.
The ‘direct pay’ arrangement is where a personal scheme member pays the contributions directly to the pension provider.
a) True b) False
b) False
It is where the employer collects the employee’s contribution from their pay and passes it on to the pension provider.
Ali has been a member of his company’s 1/50th defined-benefit pension for 20 years and is about to retire. His pensionable salary is £30,000. What will Ali’s pension be?
a) £10,000.
b) £12,000.
c) £15,000.
d) £30,000.
b) £12,000.
20/50th of £30,000 = 20/50 x £30,000 = £12,000.
Which of the following is true regarding the NEST scheme?
a) Contributions can only be made into the default fund.
b) The minimum contribution per employee is 10% of earnings.
c) Benefits can be taken from age 55.
d) It cannot run alongside an existing occupational scheme.
c) Benefits can be taken from age 55.
NEST = National Employment savings Trust
Which type of pension scheme is most likely to allow an individual to hold a direct investment in commercial property?
a) A personal pension.
b) A defined-contribution occupational pension.
c) A self-invested personal pension.
d) A stakeholder pension.
c) A self-invested personal pension.
In order to qualify for auto-enrolment, an employee must:
a) earn more than £5,000.
b) be under age 60.
c) opt-in to the scheme.
d) be aged at least 22.
d) be aged at least 22.
What is the maximum age that NEST pensioners can take benefits at?
A) 60
B) 65
C) 75
C) 75
