Secured Pension Options

Question 1

What changes were implemented on 6 April 2015 regarding withdrawals from defined contribution pensions?

Answer 1

Since 6 April 2015, individuals can take as much or as little as they wish from their defined contribution pensions once they have reached the normal minimum pension age (currently age 55) or earlier if they meet the ill-health provisions or have a protected pension age.

Question 2

What are the conditions under which commutation on the grounds of triviality can occur?

Answer 2

This can occur provided the value of all their benefits does not exceed £30,000 and the payment extinguishes the member’s rights under the scheme.

Question 3

Can a dependant or survivor commute benefits they receive upon the member’s death?

Answer 3

Yes, it is possible for a dependant or survivor to commute benefits they receive upon the member’s death, including a guarantee, subject to a maximum value of £30,000.

Question 4

What provisions exist for the payment of ‘small pots’ in addition to the benefits payable via trivial commutation?

Answer 4

It may be possible to pay ‘small pots’ of £10,000 or less in addition to the benefits payable via trivial commutation.

Question 5

Can a scheme pension be an option under both defined benefit and defined contribution schemes?

Answer 5

A scheme pension is the only option under a defined benefit scheme and can be provided by a defined contribution scheme only if the member was first given the option of a lifetime annuity.

Question 6

How often must a scheme pension be paid and can it include a guarantee?

Answer 6

A scheme pension must be paid at least annually and may include a guarantee of up to ten years, which will be paid as a continuing income.

Question 7

How is a scheme pension taxed?

Answer 7

A scheme pension is taxed as the recipient’s pension income via PAYE.

Question 8

What is a lifetime annuity and how is it available in respect of defined contribution schemes?

Answer 8

The option of a lifetime annuity is available in respect of all defined contribution schemes. It is a contract bought from an insurance company in return for the payment of a lump sum. The annuitant has complete choice about the options they choose to include.

Question 9

Is there a limit to the length of the guarantee period a lifetime annuity may include?

Answer 9

There is no limit to the length of the guarantee period a lifetime annuity may include.

Question 10

How can the value of a conventional lifetime annuity and a flexible annuity change, and what is the implication of taking an income from a flexible annuity?

Answer 10

A conventional lifetime annuity can only decrease in value within limits prescribed by HMRC. A flexible annuity can decrease by a greater amount, but taking an income from a flexible annuity is a trigger event for the MPAA (Money Purchase Annual Allowance).

Question 11

How is a lifetime annuity taxed?

Answer 11

A lifetime annuity is taxed as the member’s pension income via PAYE.

Question 12

What determines the income in a with-profit annuity and a unit-linked annuity?

Answer 12

For a with-profit annuity, the annuitant selects an anticipated bonus rate upon which their income will be based. For a unit-linked annuity, the initial income is converted into a number of notional units, and the annuitant selects the anticipated growth rate at outset.

Question 13

How can the level of income from an annuity be affected by the underlying assets?

Answer 13

The level of income can fluctuate in line with the performance of the underlying assets.

Question 14

What is an impaired life or enhanced annuity, and to whom does it offer a better rate?

Answer 14

An impaired life or enhanced annuity offers a better annuity rate to those who have a lower than average life expectancy due to lifestyle or health issues.

Question 15

Q1: In what circumstances can defined benefit pension benefits or an ‘in payment money purchase in-house scheme pension’ be converted to a lump sum?

Answer 15

A1: On the grounds of triviality, under certain circumstances.

Question 16

Q2: What are the conditions that a member must meet to request the commutation of their pension benefits on the basis of triviality?

Answer 16

A2: The total value of all their benefits should not exceed £30,000, and the payment should extinguish the member’s rights under the scheme.

Question 17

Q3: Can benefits received by a dependant or survivor upon the member’s death be commuted?

Answer 17

A3: Yes, they can commute benefits, including a guarantee, up to a maximum value of £30,000.

Question 18

Q4: What is the threshold for the ‘small pots’ provision and how does it relate to trivial commutation?

Answer 18

A4: ‘Small pots’ refers to pension amounts of £10,000 or less. They can be paid in addition to the benefits available through trivial commutation.

Question 19

Q5: From which date could individuals freely access amounts from their defined contribution pensions once reaching the normal minimum pension age?

Answer 19

A5: From 6 April 2015.

Question 20

Q6: What is the current normal minimum pension age at which individuals can take from their defined contribution pensions?

Answer 20

A6: Age 55.

Question 21

Q7: Apart from reaching the normal minimum pension age, when else can individuals access their defined contribution pensions earlier?

Answer 21

A7: If they qualify under ill-health provisions or have a protected pension age.

Question 22

Q1: What is a scheme pension?

Answer 22

A1: A scheme pension is a pension paid directly from a registered pension scheme or payable by an insurance company selected by the scheme administrator.

Question 23

Q2: In what scenario is a scheme pension the only option?

Answer 23

A2: A scheme pension is the only option under a defined benefit scheme.

Question 24

Q3: When can a defined contribution scheme provide a scheme pension?

Answer 24

A3: It can only be provided if the member was first given the option of a lifetime annuity.

Question 25

Q4: What body sets the requirements a scheme pension must meet?

Answer 25

A4: HMRC.

Question 26

Q5: Who determines the benefits of a scheme pension if paid by a defined benefit scheme?

Answer 26

A5: The scheme rules.

Question 27

Q6: How often must a scheme pension be paid?

Answer 27

A6: At least annually.

Question 28

Q7: What is the maximum guarantee period for a scheme pension?

Answer 28

A7: Up to ten years.

Question 29

Q8: How is a scheme pension taxed?

Answer 29

A8: As the recipient’s pension income via PAYE.

Question 30

Q9: What is a lifetime annuity in the context of defined contribution schemes?

Answer 30

A9: It is a contract bought from an insurance company in return for a lump sum payment. The annuitant has complete choice about the options they include.

Question 31

Q10: What is the limit on the guarantee period for a lifetime annuity?

Answer 31

A10: There is no limit.

Question 32

Q12: What event does taking income from a flexible annuity trigger?

Answer 32

A12: It is a trigger event for the MPAA.

Question 33

Q11: By what limit can a conventional lifetime annuity decrease in value?

Answer 33

A11: Only within limits prescribed by HMRC.

Question 34

Q14: For a with-profit annuity, what determines the income?

Answer 34

A14: The annuitant selects an anticipated bonus rate upon which their income will be based.

Question 35

Q15: How is the initial income determined for a unit-linked annuity?

Answer 35

A15: The initial income is converted into a number of notional units, and the annuitant selects the anticipated growth rate at outset.

Question 36

Q16: What is the nature of an impaired life or enhanced annuity?

Answer 36

A16: It offers a better annuity rate to those with a lower than average life expectancy due to lifestyle or health issues.

Question 37

What are the two main factors that affect annuity rates offered by insurance companies?

Answer 37

Longevity expectations and long-term bond yields.

Question 38

Which option, when added to an annuity, would typically cause the greatest reduction in the starting income?

a.
Escalation.

b.
Guarantee.

c.
Annuity protection.

d.
Spouse’s pension.

Answer 38

a.
Escalation.

Question 39

Mary receives an index linked scheme pension from her previous employer’s defined benefit scheme. The income commenced in March 2006 at a rate of £900 p.a. and she is currently receiving £1,150 p.a. What would be the value of Mary’s scheme pension if she commutes it for a trivial commutation lump sum?

a.
£28,750.

b.
£22,500.

c.
£18,000.

d.
£23,000.

Answer 39

b.
£22,500.

Question 40

Chu hu’s uncrystallised defined contribution pension arrangements consist of an executive pension plan [EPP] valued at £15,000, a stakeholder pension plan valued at £8,000 and a personal pension plan [PPP] valued at £18,000. Chu hu, who is 58, would like to take as many of these funds as possible as small pots payments and should be aware that:

a.
the EPP can be split into two smaller funds of less than £10,000 each and she can take these as two separate small pots.

b.
she cannot take any small pots payments until she reaches the age of 60.

c.
any small pots that she takes will not be tested against her lifetime allowance.

d.
the PPP can be split into two smaller funds of less than £10,000 each and she can take these as two separate small pots.

e.
taking a small pots payment will trigger the money purchase annual allowance.

f.
the stakeholder pension fund can be commuted for a small pots payment.

Answer 40

c.
any small pots that she takes will not be tested against her lifetime allowance.

d.
the PPP can be split into two smaller funds of less than £10,000 each and she can take these as two separate small pots.

f.
the stakeholder pension fund can be commuted for a small pots payment.

Question 41

Ross, who is 58 and in good health, has six paid up defined contribution pension arrangements all valued at less than £10,000. Four are non-occupational pension schemes and two are from unrelated occupational pension schemes. Which of these schemes, if any, can he choose to commute for small pots payments?

a.
All of them.

b.
Three of the non-occupational schemes and both of the occupational schemes.

c.
Any three of them.

d.
None of them as he cannot take any small pots payments until he reaches the age of 60.

Answer 41

b.
Three of the non-occupational schemes and both of the occupational schemes.

Question 42

What would be the potential advantages to a defined benefit scheme of paying a scheme pension from the scheme assets rather than securing an income with an annuity provider?

a.
The administration is easier.

b.
Dependants may die sooner than expected.

c.
The loss of longevity risk.

d.
No immediate outflow of capital.

e.
Investment risk is reduced.

Answer 42

b.
Dependants may die sooner than expected.

d.
No immediate outflow of capital.

Question 43

What is the impact on a with-profit annuity with an anticipated bonus rate of 4% if the life office actually declares a bonus of 3%?

a.
The annuitant will have to repay the difference between the anticipated bonus rate and the declared bonus rate for the year.

b.
The life office will insist that annuitant switches into a conventional annuity.

c.
There will be no impact on the income.

d.
The income in the following year will be reduced to reflect that the bonus declared is lower than anticipated.

Answer 43

d.
The income in the following year will be reduced to reflect that the bonus declared is lower than anticipated.

Question 44

What is the maximum guarantee period that a lifetime annuity set up in the current tax year can provide?

a.
Twenty years.

b.
Five years.

c.
Ten years.

d.
It is unlimited, but in practice it is determined by the terms of the annuity contract.

Answer 44

d.
It is unlimited, but in practice it is determined by the terms of the annuity contract.

Question 45

Michael’s wife, Sandra, died in May 2023 at the age of 76 and Michael is paid a small dependant’s annuity that commenced in June 2023. If he wishes to commute this on the grounds of triviality:

a.
he cannot commute the benefits as Sandra died after reaching the age of 75.

b.
any trivial commutation lump sum death benefit must be paid out within two years of Sandra’s death.

c.
he must be at least 60 in order to commute this benefit.

d.
the maximum trivial commutation lump sum death benefit that can be paid is £30,000 per scheme.

e.
the commutation must extinguish his entitlement to benefits under this scheme.

Answer 45

d.
the maximum trivial commutation lump sum death benefit that can be paid is £30,000 per scheme.

e.
the commutation must extinguish his entitlement to benefits under this scheme.

Question 46

Luke has reached the normal pension age of his defined benefit scheme and wishes to ‘phase in’ the receipt of his scheme pension. He should be aware that HMRC:

a.
does not permit a scheme pension payable from a defined benefit scheme to be ‘phased in’ unless the member is in ill-health.

b.
permits this and his scheme must offer him this facility.

c.
permits this but his scheme may not offer this facility.

d.
does not permit a scheme pension payable from a defined benefit scheme to be ‘phased in’ under any circumstances.

Answer 46

c.
permits this but his scheme may not offer this facility.

Question 47

On 1 June 2018, Les used his pension fund of £480,000 to purchase a single life, level lifetime annuity of £2,000 per month gross, payable monthly in advance, which included 50% annuity protection. Les died on 15 May 2023 at the age of 74. How much will his beneficiaries receive?

a.
£66,000.

b.
£120,000.

c.
£360,000.

d.
£198,000.

Answer 47

b.
£120,000.

Question 48

Gordon, aged 63, dies with an uncrystallised personal pension. His nominated beneficiaries are his wife Sarah and their son Richard. What should Sarah and Richard be aware of in relation to any survivor’s annuity that may be purchased using these funds?

a.
Any survivor’s pension purchased by Sarah cannot include annuity protection.

b.
Both Sarah and Richard can use part of the fund to purchase a survivor’s annuity.

c.
The survivor’s annuity income will be tax free.

d.
Sarah could receive a pension commencement lump sum prior to receiving a survivor’s annuity.

e.
Any survivor’s annuity purchased by Sarah cannot provide any further benefits for Richard when she dies.

f.
Sarah could use the personal pension to purchase a survivor’s annuity with a five year guarantee period.

Answer 48

a.
Any survivor’s pension purchased by Sarah cannot include annuity protection.

b.
Both Sarah and Richard can use part of the fund to purchase a survivor’s annuity.

c.
The survivor’s annuity income will be tax free.

e.
Any survivor’s annuity purchased by Sarah cannot provide any further benefits for Richard when she dies.

Question 49

Trevor, aged 66, and his wife Louise, aged 63, each have personal pension funds valued at £200,000. They are both in excellent health and since they plan to use their funds to purchase lifetime annuities they should be aware that:

a.
they could both set up lifetime annuities with a guarantee period at the end of which a 50% spouse’s pension would commence.

b.
the maximum guarantee period that Trevor can choose is nine years.

c.
only Trevor can include annuity protection.

d.
if they both include a 50% spouse’s pension Louise’s starting income will be reduced by less than Trevor’s.

e.
if they both set up a single life annuity Trevor will receive a higher starting income than Louise.

Answer 49

a.
they could both set up lifetime annuities with a guarantee period at the end of which a 50% spouse’s pension would commence.

d.
if they both include a 50% spouse’s pension Louise’s starting income will be reduced by less than Trevor’s.

e.
if they both set up a single life annuity Trevor will receive a higher starting income than Louise.

Question 50

Last year Roy, aged 66, received a pension commencement lump sum of £3,000 and a scheme pension of £1,000 p.a. from a defined benefit pension scheme. He now wishes to commute this income for a trivial commutation lump sum. What value will be placed on Roy’s benefits for trivial commutation purposes?

a.
£25,000.

b.
£23,000.

c.
£28,000.

d.
£20,000.

Answer 50

b.
£23,000.

Question 51

George receives a small pension income from a previous employer’s defined benefit scheme and has an uncrystallised executive pension plan [EPP] valued at £11,000. He wishes to commute both of these contracts on the grounds of triviality. George should be aware that:

a.
he must have available lifetime allowance.

b.
he will be entitled to receive 25% of the value of the defined benefit scheme pension tax free.

c.
he will not be able to commute the EPP on the grounds of triviality.

d.
the value of both pensions combined must not exceed £30,000.

e.
he must have reached his 65th birthday.

Answer 51

a.
he must have available lifetime allowance.

c.
he will not be able to commute the EPP on the grounds of triviality.

d.
the value of both pensions combined must not exceed £30,000.

Question 52

How are a member’s benefits valued for the purposes of trivial commutation?

a.
Where an income commenced after 5 April 2006 any associated pension commencement lump sum must be taken into account.

b.
If a defined contribution fund is uncrystallised, the amount of the fund is the value for trivial commutation purposes.

c.
Where an income started before 6 April 2006, the amount of income on the nominated date is used to calculate the value for trivial commutation purposes.

d.
Income that was being received on 5 April 2006 is valued by a factor of 20.

e.
Uncrystallised defined benefit rights are valued using a factor of 20, plus any pension commencement lump sum if this is paid in addition to the pension.

f.
Where an income started before 6 April 2006 any tax free cash that was taken is ignored.

Answer 52

a.
Where an income commenced after 5 April 2006 any associated pension commencement lump sum must be taken into account.

b.
If a defined contribution fund is uncrystallised, the amount of the fund is the value for trivial commutation purposes.

e.
Uncrystallised defined benefit rights are valued using a factor of 20, plus any pension commencement lump sum if this is paid in addition to the pension.

f.
Where an income started before 6 April 2006 any tax free cash that was taken is ignored.

Question 53

When taking benefits from an employer’s defined benefit scheme:

a.
any dependants’ pensions payable on death before age 75 cannot be greater than the member’s pension income.

b.
the member can ask the trustees to pay the income via a drawdown pension.

c.
the income will escalate in payment each year by no less than the statutory minimum.

d.
the pension income will be in the form of a lifetime annuity.

e.
the scheme rules will determine the level of dependant’s benefits included.

f.
the member could decide to phase in their scheme pension, if the scheme offers this facility.

Answer 53

c.
the income will escalate in payment each year by no less than the statutory minimum.

e.
the scheme rules will determine the level of dependant’s benefits included.

f.
the member could decide to phase in their scheme pension, if the scheme offers this facility.

Question 54

A conventional lifetime annuity offers flexible withdrawals. The minimum and maximum amount of income that may be drawn must be reviewed at least every:

a.
three years.

b.
four years.

c.
five years.

d.
two years.

Answer 54

c.
five years.

Question 55

Gerald, aged 65, is married to Margo, aged 62. If he is about to purchase a lifetime annuity, which type of lifetime annuity will result in the lowest annual income for Gerald?

a.
A single life annuity that is level in payment with a ten year guarantee.

b.
A single life annuity, escalating at 5% p.a. with a five year guarantee.

c.
A level annuity with no guarantee and a 66% spouse’s pension.

d.
A level annuity with a ten year guarantee and a 50% spouse’s pension.

Answer 55

b.
A single life annuity, escalating at 5% p.a. with a five year guarantee.

Question 56

When transferring a lifetime annuity from one insurer to another insurer, the annuitant should be aware that:

a.
the annuitant can reshape the terms of the annuity.

b.
the current insurance company must comply with the annuitant’s wishes.

c.
the annuitant can choose to transfer to a flexible lifetime annuity contract.

d.
the two insurance companies involved will have to agree on the value of the annuity in question.

Answer 56

a.
the annuitant can reshape the terms of the annuity.

d.
the two insurance companies involved will have to agree on the value of the annuity in question.

Question 57

What death benefits may be included with a scheme pension from a defined benefit scheme?

a.
A death in service lump sum death benefit.

b.
A guarantee period of no more than ten years.

c.
An annuity protection lump sum.

d.
A spouse’s scheme pension.

e.
A nominee’s scheme pension.

Answer 57

b.
A guarantee period of no more than ten years.

d.
A spouse’s scheme pension.

Question 58

Laura has deferred benefits in two defined benefit schemes that she would like to commute on the grounds of triviality. She has no other pension arrangements and her nominated date is 1 June 2023 when the benefits in these two schemes were valued at £12,000 and £15,000. What rules should be considered before the proposed trivial commutation can go ahead?

a.
The commutation period will be a twelve month period that must start on 1 June 2023.

b.
Laura must have reached the age of 60.

c.
She can choose another nominated date and start the process again if she does not start to commute her benefits by 1 September 2023.

d.
These benefits can be commuted under the ‘small pots’ rules.

e.
Laura must have some available lifetime allowance.

Answer 58

c.
She can choose another nominated date and start the process again if she does not start to commute her benefits by 1 September 2023.

e.
Laura must have some available lifetime allowance.

Question 59

HMRC provides specific circumstances where a scheme pension may be reduced or stopped. These include a reduction in the scheme pension due to:

a.
a court order.

b.
abatement.

c.
forfeiture of entitlement permitted by regulations.

d.
the scheme administrator paying a lifetime allowance charge in relation to the member.

e.
the cessation of a bridging pension at the member’s State pension age.

f.
an earmarking order.

Answer 59

a.
a court order.

b.
abatement.

c.
forfeiture of entitlement permitted by regulations.

e.
the cessation of a bridging pension at the member’s State pension age.

Question 60

Gary died recently at the age of 68 having been in receipt of a scheme pension since he was 65. His scheme pension is guaranteed for the maximum permitted term and Gary’s only surviving relative is his sister, Louise. What benefits, if any, will Louise be entitled to under the scheme and for how long?

a.
She will not be entitled to any benefits under the scheme as she is not classed as a dependant.

b.
She will be entitled to Gary’s full pension for ten more years.

c.
She will be entitled to Gary’s full pension for seven more years.

d.
She will be entitled to Gary’s full pension for two more years.

Answer 60

c.
She will be entitled to Gary’s full pension for seven more years.