The Government introduced the Pension Act 2004
- What did this do for occupational schemes ?
The act introduced the ‘Pension Protection Fund’
- Ensuring members received some protection should their employer become insolvent when leaving behind a final salary scheme.
(So unable to provide them with the certain level of promised benefits)
What was introduced in 2003 to support low income pensioners?
State Pension Credit
Benefit that tops up income of the poorest pensioners
The Government introduced the Single Pension Tax Regime in 2006
What did this do?
Introduced an annual and the Lifetime Allowance (LTA)
(LTA has been further reduced since 2006)
(April 2016 - Annual allowances were further altered for high earners)
Automatic enrolment was introduced in 2012.
What did this mean?
All eligible workers who are not enrolled onto a qualifying pension scheme will be automatically enrolled onto a qualifying pension scheme with the minimum level of contribution each year.
What are the changes in PENSION FLEXIBILITIES made on the 6th April 2015, regarding ways pension benefits can be taken ?
Transfer rules were changed to ensure independent advice was obtained before considering a transfer out of a Defined Benefit Scheme.
Flexible benefit options apply to DC schemes.
Pension Wise was introduced to provide guidance to those wishing to access retirement savings.
What changes were made in April 2016 regarding state pensions and state pension age ?
April 2016 - New State Pension (aka single-tier state pension) (replaced previous state pensions)
- To be eligible an individual must pay (or be credited with) NI contributions for 35 years
What are the current State Pension Ages before October 2020 and before 2028?
Before October 2020 - 66yrs
Before 2028 - 67yrs
What challenges do the government face with pension savings ?
1) People are living longer
An issue why? - people pay tax & NI is falling in comparison to receiving state pension.
SP are on a ‘pay as you go basis’ - meaning current NI contributions pay for current SPs
2) Amount of Pension Savings
There is a shortfall between what we need and what we are saving
3) Companies are changing the type of scheme they offer
Many companies are closing their defined benefit schemes (final salary schemes) and replacing them with defined contribution schemes (money purchase schemes), where the risk is held by the member and all guarantees are lost.
4) Past pension scandals - damaged reputation of UK pensions industry
5) Failing stock markets, Gilt yields and annuity rates
- Falling stock markets and gilt yields have lowered annuity rates and therefore pension income
Annuity rates are based on gilt yields, so the fall in gilt yields have a dramatic impact
Yield - the return on the (unit) e.g Gilt yield - the return on a Gilt
6) Pensions are complex
What are the two key demographic trends in relation to pensions ?
1) Increase in the retired population as a % of the total population
2) People are living longer = increase on the cost of pension provision in the UK
Note - Increased life expectancy is one of the reasons to trend away from final salary schemes
What is the demographic trend impact on annuities ?
Annuity rates have dropped
e.g in 1990 a pension fund of £100,000 could achieve an annuity rate of 15% = an annual income of £15000p.a. In 2019 this is around 5.5% meaning £100,000 is now only £5.500p.a.
What impact has the introduction of personal pension flexibilities had on pensions ?
The number of people purchasing lifetime annuities has fallen since the introduction of the pension flexibilities such as drawdown.
Relying on investment arrangements that require ongoing review during their lifetime.
These options mean that the issue of longevity has become even more important, as there is a danger someone could run out of money during retirement.
What two major changes have the government introduced to promote pension saving ?
1) Introduced auto enrolment in October 2012
2) Introduction of pension flexibilities
What are the key differences between DC and DB schemes ?
DB - Pension is a % of the employers final salary at or close to retirement
Retirement income is unaffected by fluctuations in investment returns or annuity rates
DC - Pension is provided from a pension fund and the and the employee holds both investment and annuity risk (if purchased)
If the fund performs badly, pension income could be significantly reduced
What incentives do the government use to encourage saving via a pension ?
1) Income tax relief on contributions made by individuals
2) Contributions made by employers are treated as a business expense for corporation/income tax
3) Investment profits of the fund are exempt from income tax & CGT
4) Ability to take tax free lump sum (PCLS)
5) Ability for members to take benefits from DC schemes when and how they wish as a result of flexibilities (introduced April 2015)
6) The ability to pass DC pension funds to any beneficiary that the member chooses and more favourable tax treatment of death benefits, particularly where the members (or subsequent beneficiary) dies before the age of 75
When was ‘tax free pensions advice’ introduced, how much is at the allowance ?. How many in a lifetime?.
6th April 2017
£500 per tax year per employee (if exceeded, subject to income tax and NI contributions)
Maximum of three payments over a members lifetime
Disincentives to saving for a pension?
Limit to the amount of the fund that can be taken as a tax free cash (25%)
No limit to pension contributions, but limit to contributions eligible for tax relief
Benefits cannot be taken before 55
Considered complex, expensive due to charges, general mistrust due to past scandals and bad press
What are the two types of basic state pension ?
Basic State Pension (SPA before April 2016)
What and to who ? - Provided to any individual with an adequate NI contribution record
New State Pension aka Single Tier State Pension (After April 2016)
Replaced basic state pension, not entitled to additional state pension earnings. But any accrued will still be calculated for so no one loses out.
What are the additional state pension earnings someone can have on top of their basic state pension ?
State Graduated Pension Scheme - 1961-1965.
-First pension scheme to provide employers with additional earnings on top of the basic state pension.
State Earnings Relation Pension Scheme (SERPS) - 1978 - 2002
State Second Pension (S2P) - 2002 - 2016.
- replaced SERPS, applies to employed, carers and some people with long term disabilities who have broken work records.
What are the three main components of defined benefit schemes and what do they mean ?
Pensionable service - Employees period of membership in the scheme
Pensionable remuneration - Amount of salary used to calculate the members benefits
Accrual rate - The rate the benefits accuse (rules of scheme determine this) e.g 1/60th of pensionable remuneration for each year of pensionable service
What is a cash balance aka Targeted money purchase scheme?
A cash balance is a type of ‘money purchase scheme’, but with a mix between DB and DC, by promising a lump-sum payment at a specified age (usually the schemes retirement age).
What are the four flexible options to take income from a DC/money purchase scheme scheme ?
1) A lifetime annuity - The fund is used to purchase a contract from an insurance company and this will provide the member with income for the life.
Amount of income depends on - Annuity rate and size of fund
Flexible lifetime annuity - annual rate of income can be reduced each year by any amount
2) A scheme pension - Scheme administrator uses balance of the fund to secure an income for life for the member. This is similar to a lifetime annuity that the amount of income depends upon size of fund a scheme pension rates available.
3) A drawdown pension - Where income is drawn directly from the defined contribution fund.
2 types - Capped drawdown - amount of income drawn each year is set to limits but Government Actuarys Department (no longer possible to set one up)
Flexi Access Drawdown - no restrictions each year on the amount of income that can be drawn
4) Uncrystallised funds pension lump sum - lump sum taken from DC scheme from hick benefits are yet to be taken (known as an uncrystallised fund). up to 25% will be tax free, with the remaining taxable as the members earned income. The member can take as little or much as they like from the fund.