Chapter 1 - Context of Pension Planning

Question 1

In recent years, the fastest population increase has been in the number of people
aged:
a. Under 16.
b. Under 35.
c. 65 to 75.
d. 85 and over.

Answer 1

The correct answer is d. The fastest population increase has been in the number of
people aged 85 and over.

Question 2

Paul reached his State Pension age in March 2016. He had always been self-
employed. Which State Pensions, if any, did Paul build up an entitlement to?

a. No State Pension.
b. Basic State Pension only.
c. Basic State Pension and SERPS only.
d. Basic State Pension, SERPS and the S2P.

Answer 2

The answer is b. Since Paul has always been self-employed, and retired before April
2016, he has only built up an entitlement to the Basic State Pension.

Question 3

Millicent is about to retire and take benefits from her company’s group personal
pension plan. Which of the following factors will be used to determine the level of
pension she receives in retirement?

a. The size of her fund.
b. Her final pensionable remuneration.
c. Her final pensionable remuneration.
d. The scheme’s accrual rate

Answer 3

The answer is a. A group personal pension plan is a defined contribution arrangement and the size of her fund will determine (to some extent) the amount of income she receives in retirement. If she chooses to purchase a lifetime annuity, then current
annuity rates will also have an impact.

Question 4

Albert, who reached State Pension age in November 2015, was employed for his entire working life since the age of 16. He was never a member of a contracted out pension scheme. Which State Pensions are being paid to Albert?

Answer 4

Albert reached the age of 65 in November 2015 and therefore was employed since 1966. He will have built up an entitlement to the Basic State Pension as well as the three earnings related State schemes, i.e. the Graduated pension scheme, SERPS
and the S2P.

Question 5

Prior to 6 April 2016, which additional State Pension could be accrued by the employed, carers and some long-term disabled people who had broken work records?

a. State Second Pension.
b. Basic State pension.
c. State Earnings Related Pension Scheme.
d. State Graduated Pension Scheme.

Answer 5

a.
State Second Pension.
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and/or
State Second
Pension (S2P)
Replaced SERPS in
2002 and applies to the
employed, carers and
some people with
long-term disabilities
who have broken work
records.

Question 6

An individual born in June 1963 will have a State Pension Age of:

a. 68.
b. 66.
c. 67.
d. 65.

Answer 6

c. 67.
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• Until April 2010 the State Pension age (SPA) was 65 for men and 60 for women, but women’s SPA was gradually increased from 60 to 65 over an eight year period, which ended on 6 November 2018.
• Since December 2018, the SPA for both men and women started to rise again and reached age 66 in October 2020.
• Further legislation has been implemented to increase the SPA to age 67 for both men and women by 2028.
• In addition, the SPA must be reviewed in each parliament. It is estimated that each review could lead to a further one year increase in SPA, meaning that a 16 year old today could have a SPA of 77 or 78

Question 7

How many years of National Insurance Contributions must be paid [or have been credited] for an individual to qualify for the full new State pension?

a. 35.
b. 40.
c. 30.
d. 45.

Answer 7

a. 35.

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Question 8

A company runs a defined benefit scheme that was contracted out prior to 6 April 2016. How, if at all, has the abolition of contracting out affected the National Insurance Contributions [NICs] payable by the employer and the employees?

a. The employer’s NICs have increased, but there has been no change to the employees’ NICs.

b. There has been no change to the employer’s NICs, but the employees’ NICs have increased.

c. Both the employer and the employees’ NICs have reduced.

d. Both the employer and the employees’ NICs have increased.

Answer 8

d. Both the employer and the employees’ NICs have increased.

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• On 6 April 2016, the new State Pension was introduced and on the same date contracting out for defined benefit schemes was abolished.
• Both employers and members of such schemes now need to pay increased National Insurance contributions (NICs).
• It is expected that this will result in even more defined benefit schemes being closed.

Question 9

How frequently will the State Pension Age be reviewed?

a. At least once during each Parliament.

b. Every ten years.

c. Every two years.

d. Every five years.

Answer 9

a. At least once during each Parliament.
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• Further legislation has been implemented to increase the SPA to age 67 for both men and women by 2028.
• In addition, the SPA must be reviewed in each parliament. It is estimated that each review could lead to a further one year increase in SPA, meaning that a 16 year old today could have a SPA of 77 or 78.

Question 10

What is an example of a ‘hybrid’ scheme?

a. Small self-administered scheme.

b. Section 32 contract.

c. Targeted money purchase scheme.

d. Executive pension plan.

Answer 10

c. Targeted money purchase scheme.

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• You may have come across various ‘types’ of pension arrangement, e.g. personal pensions, stakeholder pensions, executive pensions, small self-administered schemes (SSASs), self- invested personal pensions (SIPPs) etc. These are all defined contribution schemes.
• Some defined contribution schemes are ‘hybrid’ schemes, e.g. a targeted money purchase scheme. This type of scheme is funded to provide a specific amount of benefit at retirement, typically a proportion of final salary.

Question 11

Why has an increasingly mobile workforce had an adverse effect on the level of pension savings?

a. Most people experience a period of unemployment when no pension benefits are being accumulated.

b. Most employers enforce a one year waiting period to join an employer sponsored pension arrangement.

c. People’s salaries tend to be lower due to the number of times they change employment.

d. Many people stop and start pension contributions as they change employments.

Answer 11

d. Many people stop and start pension contributions as they change employments.
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Question 12

The Government initiative that has had the greatest impact on increasing the level of private pension saving in the UK over recent years is the:

a. removal of the age allowance.

b. introduction of auto-enrolment.

c. equalisation and increase of the State Pension Age for both men and women.

d. introduction of the new State Pension.

Answer 12

b. introduction of auto-enrolment.

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Question 13

Which flexible income option is NOT available to someone approaching retirement, whose only pension arrangement is an uncrystallised personal pension?

a. Flexi-access drawdown.

b. Lifetime annuity.

c. Capped drawdown.

d. Uncrystallised funds pension lump sum.

Answer 13

c. Capped drawdown.
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• The amount of income that can be drawn each year is subject to limits set by the Government Actuary’s Department (GAD).
• Note: it is no longer possible to set up a new capped drawdown plan, though individuals who have already designated funds into one can continue in it. They have the option of changing to flexi-access drawdown.

Question 14

Harry and Edward both used personal pension funds valued at £250,000 to purchase a lifetime annuity on a single life basis with no escalation. Harry receives £22,500 p.a. but Edward only receives £13,500 p.a. because Harry purchased his lifetime annuity in:

a. 1990, whereas Edward purchased his lifetime annuity in 2000.

b. 2000, whereas Edward purchased his lifetime annuity in 2022.

c. 2022, whereas Edward purchased his lifetime annuity in 2000.

d. 1990, whereas Edward purchased his lifetime annuity in 2022.

Answer 14

b. 2000, whereas Edward purchased his lifetime annuity in 2022.

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Impact on annuities

The impact of increasing life expectancy on annuity rates can be demonstrated by looking at a male, aged 65, looking to buy a single life annuity:

• At the start of the 1990s he could achieve an annuity rate in excess of 15%, so a pension fund of £100,000 could provide an annual income in excess of £15,000 p.a.
• By 2000 the annuity rate he could achieve had reduced to around 9% and by early 2022 it had fallen again to around 5.4%, meaning that the same £100,000 pension fund would now only provide an income of around £5,400 p.a.
• Until April 2015 someone with a defined contribution fund usually purchased a lifetime annuity to provide their income in retirement. The number of people purchasing lifetime annuities has fallen since the introduction of the pension flexibilities.
• However, many people still choose to purchase a lifetime annuity to provide their income in retirement.

Question 15

What would act as an incentive for someone to contribute to a defined contribution pension plan?

a. They can nominate anyone they wish to receive the benefits when they die.

b. Their employer will take on the investment risk.

c. Any dividends received by the fund are only taxed at 8.75%.

d. These plans have no investment charges applied to them.

Answer 15

a. They can nominate anyone they wish to receive the benefits when they die.

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Question 16

What was NOT replaced by the new State Pension when it was introduced in April 2016?

a. State Second Pension.

b. State Guarantee Credit.

c. Basic State Pension.

d. State Savings Credit.

Answer 16

b. State Guarantee Credit.

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• In April 2016 all of the previous State Pensions (apart from the State Guarantee Credit) were replaced by the new State Pension (also known as the single-tier State Pension). To be eligible to receive the full new State Pension an individual must pay (or be credited with) National Insurance contributions (NICs) for 35 years.

Question 17

Which two key demographic trends have had a significant impact on the provision of the State Pension in the UK?

a. Reducing life expectancy and a reduction in the retired population as a percentage of the total population.

b. Reducing life expectancy and an increase in the retired population as a percentage of the total population.

c. Increasing life expectancy and an increase in the retired population as a percentage of the total population.

d. Increasing life expectancy and a reduction in the retired population as a percentage of the total population.

Answer 17

c. Increasing life expectancy and an increase in the retired population as a percentage of the total population.

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Question 18

On the death of a member with a defined contribution plan, the tax treatment of the death benefits will be most favourable if:

a. the member dies after the age of 75.

b. all of the fund has already been crystallised.

c. all of the fund is yet to be crystallised.

d. the member dies before the age of 75.

Answer 18

d. the member dies before the age of 75.

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Incentives

In order to encourage saving via a pension, the Government offers the following incentives:

• income tax relief on contributions made by individuals;

• contributions made by employers are treated as a business expense for corporation tax or income tax purposes;

• the investment profits of the fund are exempt from income tax and CGT;

• the ability to take part of the proceeds as a tax-free cash lump sum, known as the pension commencement lump sum;

• the ability for members to take benefits from defined contribution schemes when and how they wish as a result of the flexibilities introduced in April 2015; and

• the ability to pass defined contribution pension funds to any beneficiary that the member chooses and more favourable tax treatment of death benefits, particularly where the member (or subsequent beneficiary) dies before the age of 75.

Question 19

An individual’s defined benefit pension scheme has closed to future accrual and they are now a member of their employer’s group personal pension plan [GPP]. What new risks, if any, does the individual now face?

a. Investment risk only.

b. No new risks.

c. Annuity risk only.

d. Investment and annuity risk.

Answer 19

d. Investment and annuity risk.

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Question 20

What is the guidance service called that was set up by the government in 2015 to help those wishing to access their retirement savings?

a. The Money Advice Service.

b. Citizens Advice.

c. Pension Wise.

d. The Financial Ombudsman Service.

Answer 20

c. Pension Wise.

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Question 21

What pension option pays an income for life, but can be reduced in circumstances set out in the contract?

a. Capped drawdown pension.

b. Scheme pension.

c. Flexible lifetime annuity.

d. Flexi-access drawdown pension.

Answer 21

c. Flexible lifetime annuity.
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Question 22

In terms of the amount that an individual can pay into a pension scheme and the tax relief available on that contribution, there are:

a. no limits on the contributions that can be paid but there are limits on the tax relief available.

b. no limits on the contributions that can be paid nor on the tax relief available.

c. no limits on the tax relief available but there are limits on the level of contributions that can be paid.

d. limits on both the contributions that can be paid and the tax relief available.

Answer 22

a. no limits on the contributions that can be paid but there are limits on the tax relief available.

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Question 23

Increased life expectancy has contributed towards the trend away from which type of pension scheme?

a. Section 32 plans.

b. Executive pension plans.

c. Small self-administered schemes.

d. Defined benefit schemes.

Answer 23

d. Defined benefit schemes.

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Question 24

Ajay is about to retire and take benefits from his employer’s defined benefit scheme. The calculation of the pension he will receive will NOT take into account:

a. the scheme’s underlying investment returns.

b. the scheme’s accrual rate.

c. Ajay’s final pensionable remuneration.

d. Ajay’s pensionable service in the scheme.

Answer 24

a. the scheme’s underlying investment returns.

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The benefits that a defined benefit scheme will provide will be based on the following three factors:

• pensionable service: this is usually the employee’s period of membership in the scheme;

• pensionable remuneration: this is the definition of salary that is used to calculate the member’s benefits; and

• the accrual rate: the rules of the scheme will determine the rate at which benefits accrue, e.g. 1/60th of pensionable remuneration for each year of pensionable service.

As well as a pension, a defined benefit scheme will also provide a tax-free cash lump sum, known as the pension commencement lump sum (PCLS) at retirement. The rules of the scheme will determine how much tax-free cash can be accrued for each year of service.

Question 25

What typically is the main reason cited for the lack of savings made into pensions?

a. High charges on pension contracts.

b. Lack of affordability.

c. Lack of access to a defined benefit scheme.

d. Mistrust of the industry.

Answer 25

b. Lack of affordability.

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Attitudes to saving

One reason for the lack of pension provision may be people’s attitude towards saving.

• Affordability is often cited as the main reason for saving insufficient for retirement. People have many demands on their income and other needs may take priority, e.g. bringing up children, buying a house or more pressing financial needs, such as life assurance.

• Many people believe, incorrectly, that the State Pension will give them an adequate standard of living in retirement.

• For many retirement seems a long time away and so saving into a pension feels low priority. Unfortunately, the cost of providing an adequate standard of living in retirement increases with age, so the longer someone waits before starting to save, the larger the monthly contributions will need to be.

Question 26

How are the investment profits taxed within a pension fund?

a. Exempt from income tax and capital gains tax.

b. Exempt from income tax, but subject to capital gains tax.

c. Subject to income tax and capital gains tax.

d. Subject to income tax, but exempt from capital gains tax.

Answer 26

a. Exempt from income tax and capital gains tax.

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Question 27

A limited company contributes 5% of each employee’s salary into a group personal pension plan. How will these contributions be treated for the purposes of tax relief?

a. As salary sacrifice payments, which will reduce the salary the employee pays income tax on.

b. As employee contributions, which will be relievable against the employee’s income tax bill.

c. As employer contributions, which will be relievable against the company director’s income tax bill.

d. As employer contributions, which will be relievable against the company’s corporation tax bill.

Answer 27

d. As employer contributions, which will be relievable against the company’s corporation tax bill.

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Question 28

1.1 As well as life expectancy, annuity rates are based on expected returns from which type of underlying investment?

Answer 28

Annuity rates are based on life expectancy and expected returns from gilts.

Question 29

1.2 State Pensions are funded on a ‘pay as you go’ basis. What does this mean?

Answer 29

‘Pay as you go’ means that the National Insurance contributions of the current working population pay for today’s pensioners’ State Pensions.

Question 30

1.3 Outline four taxation incentives associated with a pension scheme.

Answer 30

In order to encourage saving via a pension, the following incentives are offered:
• income tax relief on contributions made by individuals;
• contributions made by employers are treated as a business expense for
corporation tax or income tax purposes;
• the investment profits of the fund are exempt from income tax and capital gains
tax; and
• the ability to take part of the proceeds as a tax-free cash lump sum, known as
the pension commencement lump sum.