Unit 1 Topic 10 - Pension products Flashcards

1
Q

What tax reliefs are available on pensions?

A

Anyone under 75 can receive income tax relief on annual contributions up to a maximum of the higher of 100% of UK earnings or £3,600.

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2
Q

What is the annual allowance and earnings limit before tax is applied on pension contributions?

A

Annual allowance 2019/20 of £40,000. If the combined total of contributions exceeds this figure, tax is charged on the excess.

If an individual has income in excess of £150,000, the annual allowance is reduced: £1 is lost for each £2 of income over £150,000 down to a minimum of £10,000.

Unused annual allowance from the previous three tax years can be used.

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3
Q

What is the Lifetime allowance on pensions?

A

Lifetime allowance of £1,055,000 (2019/20) at point when benefits are taken.

Lifetime allowance tax charge of 55% on lump sums and 25% on income taken from pension pot.

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4
Q

What is Money purchase annual allowance on pension?

A

Applies when pension scheme member draws benefits using flexi-access drawdown income, or takes an uncrystallised funds pension lump sum.

MPAA is £4,000.

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5
Q

What is the ‘marginal rate’ of tax?

A

A person’s highest marginal rate of tax is the highest rate that they pay on their income.

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6
Q

When and how can benefit be taken from pensions?

A

Benefits can generally be taken from the normal minimum pension age, which is currently age 55 (expected to rise to 57 in 2028).

When benefits are drawn the member can usually take up to 25% of the fund as a tax-free cash sum referred to as a pension commencement lump sum (PCLS).

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7
Q

What are the rules on drawing benefits from a Defined-benefit scheme pension?

A

The balance over and above any tax-free cash must be used to provide an income, typically as a scheme pension direct from the pension fund.

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8
Q

What are the rules on drawing benefits from a Defined-contribution scheme?

A
  • The balance once tax-free cash has been taken can be used to provide income in the form of an annuity or flexible access drawdown (FAD).
  • An alternative is to take an uncrystallised funds pension lump sum (UFPLS).
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9
Q

What is an Annual allowance for pensions?

A

Maximum amount that can be contributed to a pension during a tax year without a tax charge being applied.

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10
Q

What is a Lifetime allowance for pensions?

A

The total amount that an individual may hold in tax-privileged pension schemes at the point where benefits are taken, without incurring a tax charge.

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11
Q

What is a Defined-benefit scheme?

A

A scheme in which the pension benefits the individual will receive are specified from the outset. Also referred to as a final salary scheme.

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12
Q

What is a Defined-contribution scheme?

A

A scheme in which 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.

Also referred to as a money-purchase scheme.

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13
Q

What is a Pension commencement lump sum?

A

The sum (up to 25% of the individual’s pension fund) that may be taken at retirement tax-free.

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14
Q

What is a Defined benefit occupation scheme?

A

The employee may receive a pension that is calculated as a percentage of final salary (the salary at or near retirement).

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15
Q

What is a Defined contribution occupation scheme?

A

An agreed contribution is invested for each member. On retirement, the accumulated fund is used to purchase benefits.

The scheme member has more control over how their contributions are invested.

Depends on investment performance.

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16
Q

What are the main private pension arrangements?

A
  • Additional voluntary contributions (AVCs)
  • Free-standing additional voluntary contributions (FSAVCs)
  • Personal/stakeholder pension plans (PPP/SHPs)
17
Q

What are Additional voluntary contributions?

A

Additional contributions to an occupational scheme. Most AVCs operate as money-purchase arrangements and the employee will only have a limited choice of funds.

Contributions to AVCs are deducted from gross salary and the employee therefore receives full tax relief at the same time.

18
Q

What are Free-standing additional voluntary contributions (FSAVCs)?

A
  • Money-purchase funds provided by a separate pension provider.
  • FSAVCs are available from a range of financial institutions, including insurance companies, banks and building societies.
  • Tax relief at the basic rate of 20% is claimed by the pension provider and added to the individual’s pension fund. Higher and additional rate taxpayers need to claim additional relief separately through their income tax self-assessment.
  • Tend to be more expensive than AVCs because employer is not bearing the costs.
19
Q

What is NEST?

A

National Employment Savings Trust is a trust-based occupational pension scheme established to support the workplace pension provisions; it can be used by an employer either alongside or instead of its own occupational pension scheme.

20
Q

What are the criteria for auto-enrolment into workplace pension scheme?

A

Employee:

  • 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
21
Q

What are the contributions and tax relief on workplace pensions?

A

By April 2019 a minimum of 8% of an employee’s earning will have to be paid into the scheme.

Employee contribution 4%
Employer contribution 3%
Tax relief 1%

22
Q

What is personal pension?

A

Personal pensions are individual arrangements provided by financial services companies such life assurance companies, banks and building societies.

All forms of non-occupational pensions are arranged on a defined contribution basis.

Contributions receive basic-rate tax relief at source even for non taxpayers. Others need to claim additional relief.

23
Q

What is a group personal pension?

A

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

As there are a number of members, the insurance company normally offers a discount on the set up and management charges.

24
Q

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

A

A SIPP is a personal pension arrangement that gives access to a wider range of investment options than would be available through a conventional personal pension (eg commercial property).

25
Q

What is a stakeholder pension?

A

Type of personal pension with the following characteristics:

  • Charges cannot exceed 1.5% of the fund value per annum for the first 10 years of the term and cannot exceed 1% after that time
  • Entry and exit charges are not permitted.
  • The minimum contribution required cannot be more than £20.
26
Q

What are the two phases of retirement planning?

A
  • Accumulation phase where savings are made into a pension to build up a fund
  • A decumulation phase when benefits are drawn.
27
Q

What are the major ways of taking benefits from a personal/stakeholder pension?

A
  • Uncrystallised funds pension lump sum.
  • Up to 25% tax-free lump sum
  • Flexi-access drawdown
  • Annuity
28
Q

What is an Annuity purchase?

A

Involves the payment of a lump sum from the pension fun in exchange for an income.

29
Q

What is a Flexi-access drawdown?

A

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

  • The pension fund is moved to a designated drawdown account.
  • The planholder can take 25% of the value of their pension fund as tax-free cash sum.
30
Q

What is an Uncrystallised funds pension lump sum?

A

Opting for an uncrystallised funds pension lump sun means the pension fund remain invested.

The member is able to use their pension fund the draw a series of lump sum payments from the fund to meet their income/capital needs.

When a UFPLS is taken, the money purchase annual allowance (MPAA) is triggered.

31
Q

What is the Money purchase annual allowance (MPAA)?

A

MPAA applied to a defined-contribution (money-purchase) schemes (FAD/UFPLS).

Annual allowance of £4000.

32
Q

What death benefits are available on Defined-benefit scheme?

A

Death in service lump sum (multiple of earnings/lump sum)
On death after retirement:
- continue to pay pension income for a period of time, a ‘guaranteed period’ or
- pay a spouse’s/dependant’s pension as a propertion of the pension that was being paid to the member.

33
Q

What death benefits are available on Defined-contributions pensions?

A

On death before crystallisation the pension fund can be use to provide income and/or lump sum benefits.

On death after retirement:

  • continuing scheme pension
  • lifetime annuity continuing for an agreed period post death
  • lifetime annuity paying an annuity protection lump sum.
  • continuing drawdown income.