7 - Secured Pension Benefits

Question 1

What are the main options for people with DC schemes to access their pension at retirement age?

Answer 1

• Can purchase a scheme pension
• Can buy a lifetime annuity
• Can enter flexi-access drawdown
• Use some or all of their fund to provide an UFPLS

Question 2

Up to how much in a pension would qualify for a small pot payment?

Answer 2

£10k

Question 3

How many small pots payments can be taken from non-occupational pension schemes?

Answer 3

3

Question 4

If a lump sum is made after September 2016, what conditions need to be met for it to qualify to be a trivial commutation?

Answer 4

• Member hasn’t received a trivial commutation before
• Value doesn’t exceed £30k
• Lump sum paid when member reaches min pension age or is in ill health

Question 5

What is the max that can be paid as a trivial commutation?

Answer 5

£30k

Question 6

What are the 2 occasions where a trivial commutation lump sum death benefit can be paid?

Answer 6

1) A survivor commutes a survivor’s pension – Needs to be paid to dependant/ nominee and needs to extinguish survivor’s entitlement to receive pension/ lump sum death benefits under scheme
2) Member dies within guarantee period of pension they’re receiving and recipient of guarantee wishes to commute remaining payments – No restrictions on who can receive payment, anyone entitled to the guarantee payments can commute them for a trivial commutation but it extinguishes entitlements under scheme in question

Question 7

In what two ways can a scheme pension be paid?

Answer 7

From schemes assets or by insurance co

Question 8

What is a benefit and drawback from paying straight from the scheme?

Answer 8

Benefit - No immediate outflow from scheme, funds stay invested
Drawback - If members live for longer than expected then scheme will have to pay out

Question 9

If the scheme pension is secured through an insurance co then who would the policy be in the name of?

Answer 9

The scheme trustees

Question 10

When the scheme pension is secured through an insurance co how does this affect the payment, and how does it differ fform being in the name of the member?

Answer 10

When secured through insurance co, payments would go from insurer – scheme – member

if in name of the member then would go directly from insurer – member

Question 11

How would a scheme pension be classified according to HMRC?

Answer 11

A scheme pension according to HMRC is one which is paid for the life of the member, paid at least annually and can’t be reduced

Question 12

What are some circumstances where the scheme pension can redice its annual payments?

Answer 12

there are 11 circumstances where the scheme can reduce the annual payments or stop them including: it’s being paid on ill-health grounds and member is no longer ill, rate is being reduced as a consequence of a pensions haring order

Question 13

What arew the 3 ways in which scheme pensions can provide benefits on the death of the member?

Answer 13

• I) A dependant’s scheme pension
• II) A guarantee period
• III) A lump sum benefit

Question 14

For A dependant’s scheme pension, is any choice given to deferred whether income comes from scheme’s assets or insurance co when its a DB scheme?

Answer 14

No

Question 15

Do dependan’t scheme pensions have to be paid for life?

Answer 15

No

Question 16

For how long is the guarantee period when a scheme pension is passed down after the member dies?

Answer 16

10 years

Question 17

What are 2 condistions when the guaranteed payments can stop when a scheme pension is passed down?

Answer 17

if recipient gets married, reaches 18 or enters full time education

Question 18

What type of client would a lifetime annuity be most suitable for?

Answer 18

suitable for people who have a low attitude to risk & little capacity for loss – also if they can expect to live for longer than others

Question 19

How do flexible lifetimne annuities differ from conventional lifetime annuities?

Answer 19

Conventional lifetime annuities are those which have a level income or rises by a set amount each year/ An income that varies by indexation or with profits etc. – flexible annuities are annuities which decrease by any method set out in the contract – the only way in which conventional/ flexible annuities differ is by the way income is received

Question 20

What are the 3 ways a lifetime annuity can provide a benefit following death of a member?

Answer 20

1) Survivor’s annuity
2) Guarantee period
3) Annuity protection

Question 21

For a lifetime annuity, what are the 2 exceptions for the guartantee period?

Answer 21

a) Now no 10 year limit on guarantee period and instead a limit is imposed in the terms of the agreement b) Tax on income payments depends on age of member when they die

Question 22

If a survivor wants to transfer lifetime annuities between insurance cos do they have an obligation to accept?

Answer 22

No

Question 23

What are 2 factors which affect annuity rates?

Answer 23

i) Long term bond yields – Insurers will invest their money in to gilts, so therefore the rate offered depends on gilt yields at the time
ii) Factors specific to annuitant – This includes age and expected longevity as well as health and lifestyle

Question 24

Which statement relating to a dependant’s scheme pension is INCORRECT?

a.
It can be commuted for a cash lump sum on the grounds of triviality.

b.
It does not need to start as soon as the member dies.

c.
It can include a guarantee period.

d.
It does not have to be paid for the life of the dependant.

Answer 24

c.
It can include a guarantee period.

Chapter reference 7C1E

Question 25

How will an annuity protection lump sum payment from a occupational defined contribution scheme pension be taxed if the member is aged 74 at date of death? a. It will be taxed as the recipient's pension income via PAYE. Chapter reference 7C1E b. It will be taxed at 55%. c. It will be taxed at 45%. d. It will be paid tax free.

Answer 25

d. It will be paid tax free. Chapter reference 7C1E

Question 26

member wishes to commute their pension benefits valued at £28,000 on the grounds of triviality. Why have they been informed this is not possible? Question 1Select one: a. The benefits are valued at less than £30,000. b. The benefits they wish to commute are uncrystallised. c. The member has not yet reached age 65. d. The benefits are held in an executive pension plan.

Answer 26

d. The benefits are held in an executive pension plan.

Question 27

Harriet is in receipt of a dependant’s pension following the death of her husband, Simon, in May 2024. The scheme agreed to commute the dependant’s pension for a trivial commutation lump-sum death benefit, but at the point her benefits were due to be paid the scheme informed her that they were valued at £32,000. Harriet should be aware: a. She cannot take this benefit as a trivial commutation lump-sum death benefit as the payment will exceed the triviality limit of £30,000. b. She can take £30,000 as a trivial commutation lump-sum death benefit but the remaining £2,000 will have to be forfeited. c. She can take £30,000 as a trivial commutation lump-sum death benefit and will have an unauthorised payment charge applied to £2,000. d. 2024She can take this benefit as a trivial commutation lump-sum death benefit but she will have an unauthorised payment charge applied to the whole payment.

Answer 27

c. She can take £30,000 as a trivial commutation lump-sum death benefit and will have an unauthorised payment charge applied to £2,000.

Question 28

Following the death of his wife at the age of 67, Quentin, aged 70 started to receive a guaranteed payment in respect of her lifetime annuity in January 2017. The remaining payments are valued for triviality purposes at £26,000. If Quentin commutes the remaining payments for a trivial commutation lump-sum death benefit, how will this payment be taxed? a. 25% will be paid tax free and the remainder will be taxed as his pension income via PAYE. b. The whole payment will be taxed as his pension income via PAYE. c. The whole payment will be taxed at 45%. d. The whole payment will be paid tax free.

Answer 28

b. The whole payment will be taxed as his pension income via PAYE

Question 29

Dominic is aged 58. In September 2024 he takes benefits from his pension plans for the first time when he takes a small pots payment from a personally held stakeholder pension valued at £8,000. In December 2024 he takes a further small pots payment, this time from an executive pension plan valued at £10,000. Dominic should be aware that, under the current regulations, he can take: a. Only one more small pots payment. b. Only two more small pots payments from non-occupational schemes. c. Only two more small pots payments from occupational schemes. d. An unlimited number of small pots payments.

Answer 29

b. Only two more small pots payments from non-occupational schemes He has taken one small pots payment from a non-occupational scheme (the stakeholder – the EPP is an occupational pension) and the current rules only permit a maximum of three such payments from non-occupational funds

Question 30

Saul, aged 58, and his brother Reuben, aged 48, are both married. They are both 50% directors of a private limited company and are the only members of the small self-administered scheme (SSAS) that the company sponsors. The only contributions paid to the scheme are employer contributions. The trustees of the scheme have agreed that Saul can start drawing an income from the assets of the scheme in the form of a scheme pension. Which ONE of the following statements is correct? a. Saul will receive the income free of all income tax as he is under the age of 75. b. It is only possible for Saul to receive an income from the scheme because he has ceased employment with the company. c. If in future tax years the company contributes more than £10,000 to the SSAS Saul will have to pay an annual allowance tax charge. d. When Saul dies only Reuben is eligible to receive any death benefit in respect of his pension.

Answer 30

c. True. The scheme has less than twelve members (i.e. less than eleven other members) and the income is being paid directly from the scheme’s assets. Therefore, the MPAA rules are triggered.

Question 31

Terrence died recently. He included a spouse’s pension when he set up his lifetime annuity. His widow, Heather, should be aware that, in setting up the spouse’s annuity: a. She can include a five year guarantee if she wishes. b. It can be transferred to another provider. c. She can include a survivor’s pension to benefit her sister. d. It is non-commutable except under the rules of triviality.

Answer 31

b. It can be transferred to another provider. d. It is non-commutable except under the rules of triviality

Question 32

Karen, aged 67, is married to John. She wishes to purchase a lifetime annuity with her pension fund in August 2024. In respect of this, which of the following are correct? a. She must purchase an income that escalates by the lesser of RPI and 2.5% p.a. b. The maximum guarantee period she can select is ten years. c. Her income will be determined by unisex rates. d. She can opt to include annuity protection. e. She must include a 50% spouse’s pension

Answer 32

c. Her income will be determined by unisex rates. - As she is purchasing her annuity after 21 December 2012, she will receive a unisex rate. d. She can opt to include annuity protection