2 : 2 Types of Pension Schemes Flashcards
(37 cards)
What’re the 3 main types of pension scheme?
- State
- Occupational
- Retirement annuity
What’re examples of the legislative and tax changes which blurred the distinctiveness of the three types of pension?
(2)
- Additional voluntary contributions (AVCs)
- ‘Contracting out’ of the State Earnings Related Pension Scheme (SERPS)
- From 1988, employers could also contribute to an individual’s personal pension.
What is automatic enrolment (auto-enrolment) and when was it introduced?
Where it became mandatory for employers to auto-enrol their eligible workers into a pension scheme.
2012.
What is the default retirement age?
There no longer is one.
While many schemes still have age 65 as the age of retirement, no one can be forced to take the pension at that age.
What is the limit to how much a person can put into a pension scheme?
There is no limit.
However, there are tax limits which result in a tax charge.
What is ‘aaccumulation’?
The process of building up a pension pot
What is ‘decumulation’?
The process of taking the pension benefits on retirement
How does the Old Basic State Pension (BSP) (Pre 6 April 2016) work?
Old SP applies to a man born before 6 April 1951 and a woman born before 6 April 1953. This pension can be deferred and the rules will apply to a person born before those dates even if they take the SP after 6 April 2016.
To get the full BSP, the individual requires a total of 30 qualifying years of NICs or credits. For 2018, the full pension is £125.95 per week. On top of this an individual may be eligible for the Additional State Pension (ASP). If an individual reached SPA before 6 April 2016 and started claiming BSP, they will automatically receive any ASP that they are eligible for; there is no need for any additional application. There is no fixed amount of ASP
How does the New State Pension (SP) (Post 5 April 2016) work?
It is a single tier (ie, just the one element) and applies to a man born on or after the 6 April 1951 and a woman born on or after the 6 April 1953. In 2018, the pension is £164.35 per week. Individuals will need ten qualifying years to get any SP and 35 qualifying years to get the full pension.
There are transitional provisions for those who have built up qualifying years or credits prior to 6 April 2016, to ensure that they will not receive a lower pension amount than they would have received under the previous system rules, so long as they meet the new ten-year minimum qualifying period.
Why are DB pensions falling out of favour with employers?
They’re seen by many employers as too expensive and is less flexible to a more mobile workforce.
What are the accounting treatments for pensions under Financial Reporting Standard 17 (FRS17)
(4)
- pension scheme assets are measured using market values
- pension scheme liabilities are measured using a projected unit method and discounted at a corporate bond rate (based on a bond with a credit rating of AA)
- the pension scheme surplus (to the extent it can be recovered) or deficit is recognised in full on the balance sheet
- the movement in the scheme surplus/deficit is analysed into: the current service cost and any past service costs;
What’re the 2 key structures of Work Place Schemes (WPSs)?
- defined benefit (also referred to occasionally as ‘final salary’)
- defined contribution (also referred to occasionally as ‘money purchase’).
How are WPSs mostly constituted?
As trusts
The benefits from DB schemes are a promise to pay a pension based on:
(3)
- the member’s years of service in the pension scheme
- the member’s final pensionable salary (or some derivation of this)
- the scheme’s accrual rate.
EG:
Gareth joined XYZ ltd when he was 44 and, having served a one-year probationary period, was allowed to join the company’s WPS. He is soon to retire at age 65, and has a salary of £33,000 pa plus £7,000 bonuses for sales.
The Occupational Pension Scheme is a ‘60th’ scheme that bases pensions on basic salary only.
His estimated pension benefit is therefore:
(£33,000 x 20) / 60 = £11,000 pa
What do some schemes, generally in the public sector such as the National Health Service (NHS) scheme lso provide?
A tax-free cash payment in addition to the pension entitlement
What is commutation?
When schemes allow tax-free cash to be taken, but only via commutation, ie, forsaking some annual pension for a lump sum amount.
Why is the funding of DB schemes is risky for employees?
Because the scheme promises the member a level of benefits that has to be met in the future. This can be a difficult objective to achieve, as the vagaries of long-term investments play a big role in the success or failure of the scheme funding, but the promise remains.
Who predominantly carries the risk?
By the employer, as they are committing themselves to a promise to pay for an unknown period of time, because they do not know how long the member will live, post retirement.
What are the strict rules that govern the safekeeping of pension funds for?
So that they are not used to prop up an ailing company (Maxwell pension scandal),
and
to try to ensure, as far as possible, that the scheme funding is sufficient to meet the liabilities.
Who does the ownership of the scheme assets lies with?
The trustees, who must safeguard the assets on behalf of the members.
Why are statutory increases in pension entitlements used in workplace DB schemes?
To ensure they at least match inflation
What are the advantages of a DB scheme?
4
- Member knows roughly what they will receive
- Member benefits from statutory revaluing to keep pace with inflation
- Helps retention of staff for an employer, particularly as such schemes are becoming rarer
- The member does not have any of the investment risk
What are the disadvantages of a DB scheme?
4
- Scheme carries all the investment risk
- Scheme must appoint trustees, actuaries and auditors and formalise costing structure
- Scheme must contribute to compensation schemes, adding to costs
- If the employer goes bust, the scheme may enter the Pension Protection Fund and the promised pension might be reduced
