3 - Retirement Planning - (24/80)

Question 1

Government Role in Pensions

Answer 1

Increasing State Pension Age
New State Pension
Auto-enrolment
LISA
ISA allowance increases

Question 2

Defined Benefit Accrual Rate

Answer 2

Multiplication factor of salary depending on years of service

Typically 1/60 or 1/80

i.e. 20 years service can equal 20/60 or 33% of final salary

Question 3

Pension Tax Incentives

Answer 3

Income tax relief on contributions
No income tax/CGT on growth
Tax-free PCLS (25%)

Pension taxed at marginal income rates on crystallisation, not CGT

Question 4

Basic State Pension

Answer 4

£137.60 per week

For men born before April 1951
For women born before April 1953
Changed in 2016

Question 5

How to qualify for State Pension

Answer 5

Claim 4 months before SPA

SPA = 65
67 in 2028
68 in 2039

10 years of NIC to qualify, 35 years to get full

Question 6

New State Pension

Answer 6

£179.60 per week

For men and women born after April 1951

Receive higher of BSP and NSP

Requires 35 years of NIC for full amount

Question 7

Defined Benefit Lump Sum

Answer 7

Public sector gives lump sum as well as income

Private sector allows you to give up some income for a lump sum through commutation

Question 8

Defined Benefit Advantages and Disadvantages

Answer 8

A:
Clear income
Keeps up with inflation
Helps retention
No employee risk

D:
Scheme/employer take risk
Must appoint trustees, actuaries etc
Scheme have to pay to compensate retirees
Lost if employer goes bust

DB favours employees

Question 9

Defined Contribution Advantages and Disadvantages

Answer 9

A:
Clear end date
Good performance = more pension
Lower employer costs and risk
Access to pot at 55

D:
Members carry risk
Poor performance = less pension
Unclear final benefits
Can run out

DC favours employers

Question 10

Pension Annual Allowance

Answer 10

Annual allowance = £40,000 or £3,600 if no income
Tapers down by £1 for every £2 over £240,000 - down to £4,000 min
Can carry forward 3 years’ unused

Personal pensions use ‘relief at source’ - have to claim tax back beyond basic rate
Employer pensions use net pay

Question 11

Pension Lifetime Allowance

Answer 11

LTA = £1,070,100
Comes into effect after a ‘benefit crystallisation event’ (BCE)
LTA hits after 75

Can be inherited tax free if under 75

Going over the LTA:
Income = 25%, then hit by income tax
Lump sum = 55%

DB value = annual pay x 20

Question 12

Lifetime Allowance Protections

Answer 12

Used to protect those with pots over the LTA when the government reduces it

Primary = factor of [Value - LTA / LTA] multiplied by the LTA, e.g. can go from £1.5m to £1.8m
Enhanced = unlimited LTA, but no further contributions allowed
Fixed = old LTA still applies
Individual = old LTA, but can't have primary also-

Question 13

Pension Taxation on Death

Answer 13

If under 75 = beneficiaries receive tax-free
If over 75 = taxed at beneficiaries’ income rates

Can take pension tax-free before 55 if in ill health (have <12 months to live)

Question 14

Benefit Crysallisation Events (BCEs)

Answer 14

Cause LTA charges to trigger

Cashing out pension
Unused funds after 75/death
Lump sums
Payments e.g. fees, errors
Taking an income
Transferring funds overseas

Question 15

Pension Benefits Refund

Answer 15

DB = <2 years
DC = <30 days

First £20k taxed at 20%, rest at 50%

Question 16

Small Pension Pots and Trivial Commutation

Answer 16

Small pots (DC) = no tax on 3 pots under £10,000 each

Trivial commutation (DB) = Commute pension tax free if total value under £30,000

Question 17

Money Purchase Annual Allowance (MPAA)

Answer 17

Forces annual pension contribution allowance down from £40,000 to £3,600

Triggered by taking pension, getting income, going into drawdown etc.

Can’t be rolled forward

Question 18

Types of Non-Registered Pensions

Answer 18

Employer-Financed Retirement Benefit Schemes = separate to employer schemes

• > not corporation tax deductible
• > taxed on income and CGT

Qualifying Registered Overseas Pension Schemes = transferred from UK

• > exempt from UK tax; taxed in new jurisdiction
• > transfer is a BCE
• > no LTA cap

Qualifying Non-UK Pension Schemes = for British expats and non-doms

Question 19

Pension Law and Regulation - DB Transfers

Answer 19

Must take advice if value is over £30,000
Adviser must be qualified to advise on transfers
Records must be kept indefinitely

Question 20

Pension Law and Regulation - Employment Law

Answer 20

Can bring pension discrimination to a tribunal
Employees can opt out of AE but will be enrolled again every 3 years
Employers are allowed to dictate pension scheme rules e.g. min. age

Question 21

Pension Law and Regulation - Divorce

Answer 21

Valued as at the day of the divorce

Split = part of pension value goes to each partner (clean break)

Portion agreed/pension attachment order = % of future pension income (only when in retirement)

Can ‘offset’ pension against other assets -> partner takes all other assets but leaves pension

Question 22

Pension Law and Regulation - Bankruptcy

Answer 22

Pension assets are not handed to the bankruptcy trustee

Regular and state pension excluded from estate

Question 23

Pension Law and Regulation - Pension Protection Fund

Answer 23

Protects DB members when employer goes insolvent
100% of value if over retirement age
90% of value if under retirement age (up to £41,461 per year)
Cap increased by [3% x years served over 20] up to 100%
e.g. 24 years service = 12% higher cap = ~£46,400

Income increases by 2.5% per year

Question 24

Pension Law and Regulation - Financial Assistance Scheme

Answer 24

Helps DB members not covered by PPF
Covers shortfall of wound-up funds
90% of benefits up to £36,717

Question 25

Pension Law and Regulation - Trust vs Contract-Based

Answer 25

Trust-based = all DB funds, master trust DC funds = run by trust; net pay taxation
Contract-based = GPP etc. = contract directly between scheme and employee

Question 26

Auto-Enrolment requirements

Answer 26

> 22
< SPA
Earn >£10,000

Min. contribution = 8%
Employer min. = 3%

Question 27

Defined Benefit - Rules

Answer 27

Normal Retirement Age
Eligibility
Employer contribution levels
Accrual rate
Pensionable income (salary vs salary + bonus)

Question 28

Defined Benefit - Payments

Answer 28

Can top up with AVCs
Can add years of service or pay into a separate DC fund

Contributions must be paid into the scheme within 19 days
Must keep in line with the contribution schedule

Question 29

Defined Benefit - Retirement Options

Answer 29

Pension Commencement Lump Sum (separate or commuted)
Early/late retirement affects final pay
Ill health allows benefits <55 or NRA

Question 30

Defined Contribution - Types of DC Pension

Answer 30

GPP = Collection of personal pensions; lower admin costs; trust not needed
PPP = For self-employed; Stakeholder or Retirement Annuity Contract (pre-1988)
SIPP = Greater selection e.g. shares and property; can borrow against 50% of assets

Small Self-Administered Scheme = Occupational; <12 members and all must have a say in admin
-> Can borrow 50% against assets

Question 31

Taking a Retirement Income

Answer 31

Deferring state pension -> Earn 1% more for every 9 weeks deferred
-> Can apply to lump sum or income

DB -> Can take at 55 or at the scheme Normal Retirement Age (reduced if early)

DC = Income or lump sum

• > Uncrystallised Funds Pension Lump Sum (UFPLS) = all in one go or mini lump sums
• > Flexi-Access Drawdown = income
• > Annuity purchase

Question 32

Types of Annuity

Answer 32

Guaranteed = linked to gilts; low rates

With-profits = benefit from investment growth paid as bonuses
Unit-linked = linked to a fund; income varies
Flexible = decrease by agreed amount

Enhanced life = higher payments for smokers, obese etc.
Impaired life = higher payments for chronic illness

Question 33

NEST fees

Answer 33

0. 3% ongoing

1. 8% contributions

Question 34

Joint Tenants vs Tenants in Common

Answer 34

Joint Tenants = Passes to SURVIVOR

Tenants in Common = Passes to ESTATE