Flexible Income Options

Question 1

What does UFPLS allow a member of an uncrystallised defined contribution pension to do?

Answer 1

UFPLS allows a member to access some or all of the pension as a lump sum without having to designate funds to drawdown.

Question 2

How is a typical UFPLS payment taxed?

Answer 2

Typically, 25% of the UFPLS payment is tax-free, and the balance is taxed as the member’s pension income via PAYE.

Question 3

What does an UFPLS payment trigger?

Answer 3

An UFPLS payment triggers the MPAA (Money Purchase Annual Allowance).

Question 4

What are the prerequisites for a member to avail UFPLS?

Answer 4

A member must have reached normal minimum pension age, meet the ill-health requirements, or have reached their protected pension age.

Question 5

What condition must members under age 75 meet to make an UFPLS payment?

Answer 5

Members under age 75 must have sufficient lifetime allowance available to cover the whole UFPLS payment.

Question 6

What restrictions are placed on UFPLS payments for members aged 75 and over?

Answer 6

Members aged 75 and over must have some lifetime allowance available. They can take an UFPLS in excess of this amount, but the tax-free element will be restricted to 25% of their remaining lifetime allowance.

Question 7

What happens to the funds once an UFPLS payment has been taken concerning IHT purposes?

Answer 7

Once an UFPLS payment has been taken, the funds are included in the member’s estate for Inheritance Tax (IHT) purposes.

Question 8

In which cases can an UFPLS not be taken?

Answer 8

An UFPLS cannot be taken where the member has primary and/or enhanced protection, scheme-specific tax-free cash that entitles them to a PCLS in excess of 25% of the fund, or a lifetime allowance enhancement factor and the available portion of the member’s lump-sum allowance is less than 25% of the proposed UFPLS.

Question 9

Can additional funds be designated to an existing capped drawdown pension?

Answer 9

Yes, providing the scheme rules allow, additional funds can be designated to an existing capped drawdown pension. When this happens, the basis amount must be immediately recalculated.

Question 10

How many forms of drawdown pensions are there and what are they?

Answer 10

There are two forms of drawdown pensions: capped drawdown and flexi-access drawdown.

Question 11

Can new capped drawdown pensions be set up after 6 April 2015?

Answer 11

No, no new capped drawdown pensions can be set up since 6 April 2015, but members already in it can continue.

Question 12

How is the basis period amount for a capped drawdown pension calculated?

Answer 12

The basis period amount is calculated based on the member’s age in whole years, the long-dated gilt yield on the 15th of the month prior to the month of calculation, and the corresponding GAD rate.

Question 13

What are the income limitations of capped drawdown pensions?

Answer 13

The maximum income available from the capped drawdown pension in a pension year is 150% of the basis amount. There is no minimum income.

Question 14

What changes in the reference period occur for members aged under 75 in a capped drawdown pension?

Answer 14

Members aged under 75 will have a three-year reference period, changing to an annual reference period on the policy year-end date following the member’s 75th birthday.

Question 15

What is the timeframe for the scheme administrator to recalculate the basis amount at the end of a reference period?

Answer 15

When recalculating the basis amount at the end of a reference period, the scheme administrator has a 60-day window to carry out the calculation, which ends on the start date of the new reference period.

Question 16

Does taking an income from capped drawdown trigger the MPAA?

Answer 16

No, taking an income from capped drawdown does not trigger the MPAA.

Question 17

What drawdown option is available for someone not already in capped drawdown on 5 April 2015?

Answer 17

Flexi-access drawdown is the only drawdown option available to someone not already in capped drawdown on 5 April 2015.

Question 18

How much can a member withdraw from a flexi-access drawdown fund?

Answer 18

It allows the member to take as much or as little as they wish from the fund, including the option to withdraw the whole fund as a lump sum.

Question 19

How is income taken from a drawdown fund taxed?

Answer 19

Income taken from a drawdown fund is taxed as the recipient’s pension income via PAYE.

Question 20

What is the implication of any withdrawal from a member’s flexi-access drawdown fund concerning the MPAA?

Answer 20

Any withdrawal from a member’s flexi-access drawdown fund is a trigger event for the MPAA.

Question 21

Can a member of capped drawdown convert their fund to a flexi-access drawdown fund, and what are the implications of doing so?

Answer 21

Yes, a member of capped drawdown can request that their scheme administrator converts their fund to a flexi-access drawdown fund. The MPAA rules will only apply once they take a payment from the flexi-access fund.

Question 22

What happens to a member of capped drawdown who takes income in a pension year in excess of 150% of the basis amount?

Answer 22

A member of capped drawdown who takes income in a pension year in excess of 150% of the basis amount automatically has their fund changed to a flexi-access drawdown fund and becomes subject to the MPAA.

Question 23

How can a short-term annuity be used in capped drawdown, and what is its maximum term?

Answer 23

A short-term annuity can be used in drawdown to provide an income and has a maximum term of five years.

Question 24

Can a member nominate someone to receive their drawdown funds in the event of their death?

Answer 24

Yes, a member can nominate a dependant or a nominee to receive their drawdown funds in the event of their death.

Question 25

Can a dependant or nominee nominate a successor to receive the drawdown funds, and is there a limit to how many times the funds can be passed on?

Answer 25

Yes, a dependant or nominee can nominate a successor to receive the funds in the event of their death. There is no limit to how many times the funds can be passed on.

Question 26

What are the death benefit options available in respect of a drawdown fund?

Answer 26

The death benefit options available in respect of a drawdown fund are a lump sum, continuing in drawdown, or purchase of a survivor’s annuity.

Question 27

Is it possible to transfer a drawdown pension between providers, and if so, under what conditions?

Answer 27

Yes, it is possible to transfer a drawdown pension between providers, subject to certain conditions being met.

Question 28

What are some of the risks associated with drawdown?

Answer 28

Drawdown is subject to a number of risks including mortality drag and investment risk.

Question 29

How can a member phase their benefits in regards to PCLS and annuity income?

Answer 29

A member can phase their benefits by using a combination of Pension Commencement Lump Sum (PCLS) plus annuity income.

Question 30

Is it possible to phase benefits using capped drawdown, and what are the conditions for it?

Answer 30

Yes, it is possible to phase benefits using capped drawdown as long as the capped drawdown fund was in place before 6 April 2015 and the rules of the scheme allow additional funds to be designated to the same arrangement.

Question 31

How does the use of PCLS impact the tax due on the income being taken?

Answer 31

In all cases, part of the income will be in the form of PCLS which is paid tax-free and so reduces the tax due on the ‘income’ being taken.

Question 32

What service did the Government launch to provide free and impartial guidance to members of the public wishing to access defined contribution pensions, and what is it a part of now?

Answer 32

The Government launched Pension Wise to provide free and impartial guidance to members of the public wishing to access defined contribution pensions to take advantage of the new flexibilities. It is now part of MoneyHelper.

Question 33

What does COBS provide guidance on regarding open market options statements?

Answer 33

COBS provides guidance on what should be included within an open market options statement and when such a statement must be provided.

Question 34

What requirement does the FCA enforce concerning providers of guaranteed income quotes and open market options?

Answer 34

The FCA requires providers of guaranteed income quotes to show whether a higher income can be obtained if the client exercises an open market option. Information on this is included in COBS 19.9.

Question 35

Is there a requirement in COBS to nudge clients towards pensions guidance such as Pension Wise?

Answer 35

Yes, there is a requirement in COBS to nudge clients towards pensions guidance, such as Pension Wise.

Question 36

Where can one find the list of warnings that must be included within the suitability report according to COBS?

Answer 36

The list of warnings that must be included within the suitability report can be found in COBS 9.4.

Question 37

What do Critical yield A and Critical yield B represent?

Answer 37

Critical yield A shows the growth rate needed on the drawdown investment sufficient to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity. Critical yield B shows the growth rate needed to provide and maintain a selected level of income.

Question 38

What does the FCA’s Finalised Guidance FG21/1 stipulate about the treatment of vulnerable customers?

Answer 38

The FCA’s Finalised Guidance FG21/1 stipulates that firms are required to take account of the needs of vulnerable customers and ensure that they suffer no harm or disadvantage as a result of their vulnerabilities.

Question 39

What does the FCA’s introduction of the Consumer Duty, effective from 31 July 2023, require of firms?

Answer 39

The FCA’s introduction of the Consumer Duty from 31 July 2023 requires firms to put the consideration of the needs of consumers and a focus on good outcomes for them at the heart of everything they do.

Question 40

Gail, who will reach her 75th birthday on 10 November 2023, has funds held in a capped drawdown pension arrangement. If the last triennial review took place on 1 September 2022, what is the latest date her current reference period can end?

a.
31 August 2024.

b.
9 November 2026.

c.
9 November 2023.

d.
31 August 2025.

Answer 40

a.
31 August 2024.

Question 41

The review of a capped drawdown pension is due on 1 August this year. The re-calculation of the basis amount can be carried out within a ‘window’ that ends on 1 August. How long is this ‘window’?

a.
50 days.

b.
60 days.

c.
30 days.

d.
40 days.

Answer 41

b.
60 days.

Question 42

Daniel, who is 62, has two uncrystallised defined contribution pension arrangements. These are an executive pension plan [EPP] valued at £110,000 with a protected tax free cash entitlement of £45,000 and a personal pension plan [PPP] valued at £650,000. From which of these plans, if any, can he take an uncrystallised funds pension lump sum?

a.
Both of them.

b.
The EPP only.

c.
The PPP only.

d.
Neither of them.

Answer 42

c.
The PPP only.

Question 43

What rules apply if a member under the age of 75 designates additional funds into an existing capped drawdown fund that places newly designated funds into the same arrangement?

a.
A new pension year will start on the date that further funds are designated into the arrangement.

b.
If the basis amount increases, the higher maximum income will only apply from the start of the next pension year.

c.
The three year reference period will remain the same.

d.
The basis amount will be immediately recalculated.

e.
The 60-day window can be used when recalculating the basis amount.

Answer 43

c.
The three year reference period will remain the same.

d.
The basis amount will be immediately recalculated.

Question 44

Nina, aged 66, is about to transfer her capped drawdown arrangement, which has a pension year running from 1 May to 30 April and a reference period that started on 1 May 2022 and ends on 30 April 2025. The transfer takes place on 1 August 2023. Her new capped drawdown arrangement will have a pension year running from:

a.
1 May to 30 April and a reference period that will end on 30 April 2025.

b.
1 May to 30 April and a reference period that will end on 31 July 2026.

c.
1 August to 31 July and a reference period that will end on 31 July 2026.

d.
1 August to 31 July and a reference period that will end on 30 April 2025.

Answer 44

a.
1 May to 30 April and a reference period that will end on 30 April 2025.

Question 45

Rachel designated funds into a flexi-access drawdown pension in May 2023 and died, aged 73, in July 2023. Her nominated beneficiary is her grandson Ralph, aged 22. If Ralph designates the fund into a survivor’s flexi-access drawdown fund in September 2023:

a.
he is Rachel’s successor.
Incorrect
Incorrect, chapter reference 8B4

b.
any withdrawals that he takes will be taxable as his pension income under PAYE.

c.
the funds held within the survivor’s flexi-access drawdown fund are outside of his estate for inheritance tax purposes.

d.
he can take as much or as little from the fund as income as he wishes.

e.
the funds held within the survivor’s flexi-access drawdown fund can be passed on to a successor on his death.

Answer 45

c.
the funds held within the survivor’s flexi-access drawdown fund are outside of his estate for inheritance tax purposes.

d.
he can take as much or as little from the fund as income as he wishes.

e.
the funds held within the survivor’s flexi-access drawdown fund can be passed on to a successor on his death.

Question 46

What are the advantages of phasing retirement using a flexi-access drawdown pension rather than annuity purchase?

a.
A lower level of risk.

b.
Access to all of the pension commencement lump sum at outset.

c.
Greater income flexibility.

d.
More tax efficient ‘income’.

e.
No need to select the format of survivors’ benefits at outset.

f.
Lower costs.

Answer 46

c.
Greater income flexibility.

d.
More tax efficient ‘income’.

e.
No need to select the format of survivors’ benefits at outset.

Question 47

Ben, aged 56, recently took an uncrystallised funds pension lump sum from his personal pension plan in order to gift £60,000 to his son. Ben should be aware that the money purchase annual allowance:

a.
will not be triggered and the gift will be a potentially exempt transfer for inheritance tax purposes.

b.
will be triggered and the gift will be a potentially exempt transfer for inheritance tax purposes.

c.
will not be triggered and the gift will be a chargeable lifetime transfer for inheritance tax purposes.

d.
will be triggered and the gift will be a chargeable lifetime transfer for inheritance tax purposes.

Answer 47

b.
will be triggered and the gift will be a potentially exempt transfer for inheritance tax purposes.

Question 48

Warren, died recently aged 75, leaving a widow also aged 75. At the time of his death he had been drawing a retirement income using phased annuity purchase. The death benefits payable will consist of:

a.
a spouse’s pension, if his widow selects one, on any of the annuities he has purchased.

b.
a tax free lump sum of 25% of the uncrystallised rights.

c.
a lump sum payment net of income tax at the recipient’s marginal rate if annuity protection was selected by Warren when the annuities were purchased.

d.
a tax free lump sum of any crystallised rights.

e.
the remainder of any guarantee included in any of the annuities purchased.

Answer 48

c.
a lump sum payment net of income tax at the recipient’s marginal rate if annuity protection was selected by Warren when the annuities were purchased.

e.
the remainder of any guarantee included in any of the annuities purchased.

Question 49

One of the FCA’s four drivers of vulnerability is capability; examples of the characteristics of vulnerability under this heading would include:

a.
low knowledge or confidence in managing finances.

b.
caring responsibilities.

c.
mental health condition or disability.

d.
over-indebtedness.

e.
no or low access to help and support.

f.
learning difficulties.

Answer 49

a.
low knowledge or confidence in managing finances.

e.
no or low access to help and support.

f.
learning difficulties.

Question 50

When preparing a drawdown illustration for a client that illustrates critical yields, an adviser should be aware that:

a.
a type B critical yield shows the growth rate needed to provide and maintain a selected level of income.
Correct
Correct, chapter reference 8C2A

b.
standardised tables must be used for type A illustrations.
Incorrect
Incorrect, chapter reference 8C2A

c.
type B illustrations must be accompanied by a type A illustration.
Correct
Correct, chapter reference 8C2A

d.
the critical yield takes into account both mortality drag and the additional costs of drawdown.

e.
type A illustrations must show annuity purchase at the client’s selected pension age.

Question 51

When preparing a drawdown illustration for a client that illustrates critical yields, an adviser should be aware that:

a.
a type B critical yield shows the growth rate needed to provide and maintain a selected level of income.

b.
standardised tables must be used for type A illustrations.

c.
type B illustrations must be accompanied by a type A illustration.

d.
the critical yield takes into account both mortality drag and the additional costs of drawdown.

e.
type A illustrations must show annuity purchase at the client’s selected pension age.

Answer 51

a.
a type B critical yield shows the growth rate needed to provide and maintain a selected level of income.

c.
type B illustrations must be accompanied by a type A illustration.

d.
the critical yield takes into account both mortality drag and the additional costs of drawdown.

Question 52

Under the Conduct of Business Sourcebook rules a suitability report on a drawdown pension contract must contain a number of specific risk factors, including:

a.
inflation may erode the value of the fund in real terms.

b.
the loss of guarantees following designation into drawdown.

c.
the levels of income provided may not be sustainable.

d.
the investment returns may be less than those shown on the illustrations.

e.
there may be tax implications.

Answer 52

c.
the levels of income provided may not be sustainable.

d.
the investment returns may be less than those shown on the illustrations.

e.
there may be tax implications.

Question 53

The Conduct of Business Sourcebook sets out rules that apply to open market options statements. These rules state that:
(More than one option applies):

a.
financial promotions for a pension decumulation product can be included when the client is reminded about the open market options statement.

b.
the firm must recommend that the client seeks appropriate guidance or advice to understand their options at retirement.

c.
the firm must tell the client what sum of money will be available to exercise open market options at least eight weeks before the client’s intended retirement date.
Incorrect

d.
the firm must remind the client about the open market options statement at least six weeks before the client’s intended retirement date.

Answer 53

b.
the firm must recommend that the client seeks appropriate guidance or advice to understand their options at retirement.

d.
the firm must remind the client about the open market options statement at least six weeks before the client’s intended retirement date.

Question 54

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Question text
Tania died recently, aged 66, with a capped drawdown pension fund valued at £560,000. What death benefit options are available to her civil partner, Hayley, who is aged 58?

a.
Hayley can take the entire fund as a lump sum.

b.
Hayley can take a pension commencement lump sum of £140,000 and designate the balance into a flexi-access drawdown pension.

c.
Hayley can designate the fund into a dependant’s capped drawdown fund.

d.
Hayley can designate the fund into a dependant’s flexi-access drawdown fund.

e.
The fund can be used to purchase Hayley a dependant’s annuity.

Answer 54

a.
Hayley can take the entire fund as a lump sum.

d.
Hayley can designate the fund into a dependant’s flexi-access drawdown fund.

e.
The fund can be used to purchase Hayley a dependant’s annuity.

Question 55

How must the cost of a pension annuity be expressed on a guaranteed annuity quote provided to a client?

a.
As a percentage of the purchase price, net of any adviser charges.

b.
As a single monetary value, net of any adviser charges.

c.
As a percentage of the purchase price with any adviser charges shown as a separate figure.

d.
As a single monetary value with any adviser charges shown as a separate figure.

Answer 55

b.
As a single monetary value, net of any adviser charges.

Question 56

If Si Woo takes an income using phased annuity purchase, he should be aware that:

a.
the income in the early years is predominantly made up of annuity payments.

b.
further income can be taken at any time.

c.
the annuity element of each income payment will be taxable as Si Woo’s pension income.

d.
he cannot continue to phase annuity purchase after age 75.

e.
the amount of fund to be crystallised is determined by the level of income required and the prevailing annuity rate.

Answer 56

b.
further income can be taken at any time.

c.
the annuity element of each income payment will be taxable as Si Woo’s pension income.

e.
the amount of fund to be crystallised is determined by the level of income required and the prevailing annuity rate.

Question 57

If Sally were to transfer her capped drawdown pension arrangement to a new provider:

a.
her maximum income under the arrangement will be reviewed upon transfer and a new reference period will begin.

b.
she can transfer this drawdown pension plan into an existing drawdown pension plan that she has with a different provider.

c.
she must transfer the entire drawdown pension fund.

d.
she can tell the scheme administrator that on transfer the fund is to become a flexi-access.

e.
the receiving scheme will adopt the scheme year of the ceding scheme.

Answer 57

c.
she must transfer the entire drawdown pension fund.

d.
she can tell the scheme administrator that on transfer the fund is to become a flexi-access.

e.
the receiving scheme will adopt the scheme year of the ceding scheme.

Question 58

Sergio has an uncrystallised personal pension plan valued at £400,000. In the current tax year he wishes to receive an income of £15,000 net of basic rate tax via phased annuity purchase. What is the minimum amount that must be crystallised if the annuity rate applicable is 6%?

a.
£52,448.

b.
£54,151.

c.
£55,046.

d.
£50,847.

Answer 58

a.
£52,448.

Question 59

Parveena is about to designate funds into a drawdown pension arrangement from which she will take a regular income. If her drawdown illustration shows critical yield A is higher than critical yield B, this is because:

a.
the type A critical yield assumptions are set by the FCA and the assumptions for type B critical yields are set by the provider.

b.
she plans to take and maintain a lower income from the plan than could be obtained by an equivalent immediate annuity.

c.
type A critical yields must be client specific whereas type B critical yields are based on standardised tables.

d.
type A critical yields take into account the plan charges whereas type B critical yields do not.

Answer 59

b.
she plans to take and maintain a lower income from the plan than could be obtained by an equivalent immediate annuity.

Question 60

A short-term annuity must be payable by an insurance company and must be purchased using:

a.
funds held in a drawdown pension and be for a term not exceeding five years.

b.
uncrystallised funds and be for a term not exceeding five years.

c.
uncrystallised funds and be for a term not exceeding three years.

d.
funds held in a drawdown pension and be for a term not exceeding three years.

Answer 60

a.
funds held in a drawdown pension and be for a term not exceeding five years.

Question 61

Jennifer was receiving a dependant’s capped drawdown pension until her recent death at the age of 67. Her nominated beneficiary is her son, Scott, who is 35. Which income option is NOT available to Scott?

a.
Purchase an annuity.

b.
Designate the funds to a survivor’s flexi-access drawdown pension.

c.
Designate the funds to a survivor’s capped drawdown pension.

d.
Take the funds as a lump sum death benefit.

Answer 61

c.
Designate the funds to a survivor’s capped drawdown pension.

Question 62

Which type of retirement income option will be LEAST affected by mortality drag?

a.
Flexi-access drawdown.

b.
Phased drawdown.

c.
Phased annuity purchase.

d.
Capped drawdown.

Answer 62

c.
Phased annuity purchase.

Question 63

William intends to phase his retirement and is trying to decide between phased annuity purchase or phased flexi-access drawdown. In deciding between these he should bear in mind that:

a.
the investment risk under phased annuity purchase is slightly lower.

b.
there is greater flexibility of income levels under phased flexi-access drawdown.

c.
the money purchase annual allowance will be triggered if he uses phased flexi-access drawdown.

d.
phased flexi-access drawdown typically provides higher lump sum death benefits.

e.
the costs of phased annuity purchase tend to be slightly higher.

Answer 63

a.
the investment risk under phased annuity purchase is slightly lower.

b.
there is greater flexibility of income levels under phased flexi-access drawdown.

c.
the money purchase annual allowance will be triggered if he uses phased flexi-access drawdown.

d.
phased flexi-access drawdown typically provides higher lump sum death benefits.

Question 64

What is the current normal minimum pension age?

Answer 64

Currently, the normal minimum pension age is 55.

Question 65

What must a member with a protected pension age do if they take an UFPLS before the normal minimum pension age?

Answer 65

They must take all the benefits associated with that scheme.

Question 66

Does taking an UFPLS before the normal minimum pension age mean the whole fund must be taken as an UFPLS?

Answer 66

No, they could take part of the fund as an UFPLS and use the balance in other ways, such as purchasing a lifetime annuity or accessing flexi-access drawdown.

Question 67

Can a member use part of the pension to provide an UFPLS and leave the balance uncrystallised?

Answer 67

No, they cannot leave the balance uncrystallised.

Question 68

Apart from UFPLS, what other options are available for the balance of the fund?

Answer 68

The balance could be used to purchase a lifetime annuity or access flexi-access drawdown.

Question 69

Can an UFPLS be taken from crystallised funds?

Answer 69

No, an UFPLS cannot be taken from crystallised funds.

Question 70

Can an UFPLS be taken from funds in a drawdown contract?

Answer 70

No, it cannot be taken from funds in a drawdown contract because they are considered crystallised funds.

Question 71

Is it possible to take an UFPLS from pension rights arising out of a pension credit received after a divorce?

Answer 71

No, it cannot be taken from pension rights arising out of a pension credit received from a pension sharing order following a divorce, especially where the relevant pension was already in payment (a disqualifying pension credit).

Question 72

Can a beneficiary receive death benefits in the form of an UFPLS?

Answer 72

No, this is because any uncrystallised benefits remaining when the member dies crystallise automatically upon their death.

Question 73

Are there both maximum and minimum income levels for withdrawals under capped drawdown?

Answer 73

Yes, there is a maximum income level, but the minimum income level is zero.

Question 74

How is the maximum income level for withdrawals under capped drawdown determined?

Answer 74

The maximum income level is set at 150% of the basis amount, which is an equivalent annuity that could be purchased with the member’s drawdown pension fund.

Question 75

What is the name of the tables used for determining the annuity rates when calculating the basis amount?

Answer 75

The tables are known as the GAD Tables, produced for HMRC by the Government Actuary’s Department.

Question 76

On what are the rates in the GAD Tables based?

Answer 76

The rates are based on 15-year gilt yields and a notional annuity that is level in payment, single life, payable monthly in arrears, and has no guarantee. For dependants under age 23, five-year gilt yields are used.

Question 77

What income can a member choose to take after their PCLS?

Answer 77

A member may choose to take no income at all, or any income up to 150% of the basis amount.

Question 78

Can a member carry forward any unused portion of the maximum GAD income to the next year?

Answer 78

No, the maximum income works on a ‘use it or lose it’ basis.

Question 79

What was the reference date for a new capped drawdown set up before 6 April 2015?

Answer 79

The reference date was the date on which funds were designated into the capped drawdown.

Question 80

How often is the basis amount recalculated for members below age 75?

Answer 80

For members below age 75, the basis amount is recalculated every three pension years.

Question 81

What events can end the three-year review period for capped drawdown before its usual end?

Answer 81

The three-year review period can end earlier if:
1. The member requests to end the reference period early, and it’s accepted by the scheme administrator.
2. The member informs the scheme administrator to convert it into a flexi-access drawdown fund.
3. The whole fund is used to purchase a secure income.
4. The member dies.
5. The member reaches age 75.

Question 82

What happens to the review period when the member reaches age 75?

Answer 82

When the member reaches age 75, the review period becomes annual at the start of the pension year following the member’s 75th birthday.

Question 83

Within what timeframe can the scheme administrator carry out the re-calculation of the basis amount?

Answer 83

The scheme administrator can perform the re-calculation within a 60-day ‘window’ ending on the new reference date.

Question 84

What is the date called that the scheme administrator uses within the 60-day window for re-calculation?

Answer 84

It is known as the nominated date.

Question 85

Which three factors does the scheme administrator need to know to perform the basis amount calculation?

Answer 85

1. The member’s age, in whole years, on the nominated date.
2. The yield on 15-year UK gilts on the 15th of the month prior to the nominated date.
3. The value of the drawdown pension fund on the nominated date.

Question 86

In what circumstance can the scheme administrator change the pension year for one or more capped drawdown arrangements?

Answer 86

If a member has multiple drawdown arrangements and reaches age 75, to simplify administration, the scheme administrator can change the pension year for one or more arrangements to match another arrangement’s pension year under the scheme, as long as both the member and the scheme administrator agree.

Question 87

When did flexi-access drawdown funds become available?

Answer 87

Flexi-access drawdown funds became available on 6 April 2015.

Question 88

What kind of drawdown fund was available before 6 April 2015?

Answer 88

Before 6 April 2015, members could use a flexible drawdown fund.

Question 89

Was there any condition for members to use the flexible drawdown fund prior to 6 April 2015?

Answer 89

Yes, members had to meet a minimum income requirement to use the flexible drawdown fund.

Question 90

What happened to those who were in flexible drawdown as of 5 April 2015?

Answer 90

Anyone who was in flexible drawdown as of 5 April 2015 had their fund automatically converted to a flexi-access drawdown plan on 6 April 2015.

Question 91

Does flexible drawdown still exist post 6 April 2015?

Answer 91

No, flexible drawdown no longer exists after 6 April 2015.

Question 92

Who can use funds held in their drawdown pension to purchase a short-term annuity?

Answer 92

A member, dependant, nominee, or successor can use funds held in their drawdown pension to purchase a short-term annuity, subject to the rules of the scheme.

Question 93

How is the income from a short-term annuity provided?

Answer 93

The income from a short-term annuity is provided by the insurance company rather than directly from the member’s drawdown pension.

Question 94

What are the HMRC requirements for an annuity to be considered a short-term annuity?

Answer 94

The annuity must:
1. Be purchased using funds held in a drawdown pension.
2. Be payable by an insurance company.
3. Have a term not exceeding five years.

Question 95

How does HMRC view reductions in the payment of a short-term annuity?

Answer 95

HMRC does not limit the circumstances in which a short-term annuity can be reduced in payment. An insurance company can set up a short-term annuity using the flexible annuity rules.

Question 96

What is the only ‘death benefit’ that can be included with a short-term annuity?

Answer 96

The only ‘death benefit’ that can be included with a short-term annuity is a guarantee period of no longer than five years.

Question 97

How does the death benefit rule change for a dependant’s, nominee’s, or successor’s short-term annuity?

Answer 97

A dependant’s, nominee’s, or successor’s short-term annuity cannot include any guarantee period.

Question 98

What is the maximum income limit for a short-term annuity bought using funds in a flexi-access drawdown?

Answer 98

There is no upper limit on the amount of income the annuity contract can pay.

Question 99

What happens if the income from a short-term annuity exceeds the recalculated maximum income under capped drawdown?

Answer 99

If the short-term annuity income exceeds the recalculated maximum income and cannot be decreased, the capped drawdown fund automatically becomes a flexi-access drawdown fund to avoid unauthorised payments charges.

Question 100

What is mortality drag in the context of a drawdown pension option?

Answer 100

Mortality drag is the loss of the mortality gain that applies to a policyholder who purchases an annuity. It’s essentially the extra return needed from the pension fund investments to offset the loss of the cross subsidy that exists within an annuity.

Question 101

How does mortality gain work for annuities?

Answer 101

When individuals purchase annuities, their funds are pooled together by the insurance company. Some annuitants die earlier than expected, so the insurer pays out less annuity income than anticipated. The extra funds that remain invested are the mortality gain, which the insurance company uses to enhance the rate offered to new annuity buyers. This is also referred to as ‘cross subsidy’.

Question 102

How does age affect mortality drag?

Answer 102

Mortality drag increases with age. The older the member, the greater the loss of cross subsidy and, therefore, the greater the return needed to compensate for its loss. Mortality drag especially increases around the age of 70.

Question 103

What is investment risk in relation to drawdown pensions?

Answer 103

Investment risk exists because the pension fund remains invested, meaning the value of the fund can fluctuate – it can decrease as well as increase.

Question 104

Why might the charges for drawdown be higher than those for an annuity?

Answer 104

Drawdown requires ongoing reviews and investment advice, leading to higher charges. These can include higher adviser fees, ongoing fund or investment manager charges, and charges for services like periodic reviews of GAD rates for capped drawdown pensions.

Question 105

How do fixed charges impact smaller funds in drawdown pensions?

Answer 105

Fixed charges have a more significant impact on smaller funds. Using drawdown to provide regular income is generally recommended only for larger fund sizes, often around £250,000 or more, depending on the adviser.