Chapter 2: Employee Benefits

Question 1

What is a group risk benefit?

Answer 1

Group risk benefit is promised to an employee by the employer or the trustees of a pension scheme,

Question 2

What is an insurance policy?

Answer 2

An insurance policy is arranged by the employer or trustees to help them pay the benefits they have promised if they fall due.

Question 3

Complete this sentence.

Death-in-service benefits are most commonly provided by _____ ______ ______ and are promised to members by the ________ of that scheme.

Answer 3

1. company pension schemes

2. trustees

Question 4

Compete this sentence

GIP benefits are promised by the ______.

Answer 4

Employer

Question 5

What are the tax benefits of pension schemes?

Answer 5

1. The investment returns on invested contributions generally are free of tax
2. Can take a portion of the benefits as a tax-free cash sum

Question 6

What is ‘NEST’?

Answer 6

NEST (National Employment Savings Trust) is a low-cost pension scheme that any employer can use to meet its workplace pension duties. The scheme is designed to meet the needs of low-to-moderate earners and their employers.

Question 7

True of False.

As of 2009, all companies have to ‘auto-enrol’ eligible employees into a company scheme that meets certain minimum requirements or use NEST.

Answer 7

False.

The statement is correct but was effective as of 2012.

Question 8

What are the two different types of arrangements a company pension scheme can be split into?

Answer 8

1. Trust-based pension scheme

2. Contract-based pension scheme

Question 9

What is a ‘Trust-based pension scheme’?

Answer 9

This scheme is managed by a board of trustees, who have responsibility for the management, administration and investment of the scheme. The trustees must always act in the interests of the scheme’s members.

Question 10

What are 3 examples of trust-based pension schemes?

Answer 10

1. Defined benefit (final salary) schemes
2. Career averaged revalued earnings (CARE) schemes
3. Occupational defined contribution (money purchase) schemes.

Question 11

What is a ‘Contract-based pension scheme’?

Answer 11

The employee has a direct contract with the pension provider and retains an individual policy. The employer has no contractual relationship with the pension provider. Contract-based pension schemes are always defined contribution (money purchase).

Question 12

What are 2 examples of a contract based scheme?

Answer 12

1. Group personal pensions (GPPs)

2. Stakeholder pensions

Question 13

At what age can you make unlimited withdrawals to your pension fund?

Answer 13

Since April 2015, anyone aged over 55. However, these withdrawals will be subject to their marginal rate of income tax in that year - although the first 25% of their pot will remain tax-free.

Question 14

What is a defined benefit (DB) pension arrangement

Answer 14

Established by an employer to provide retirement and ancillary benefits to its employees as part of their employment benefits. Contributions go into a general fund which is managed by the trustees’ appointed investment managers. There is no allocation of funds to individual members.

Question 15

In a DB pension arrangement, are employer contributions compulsory?

Answer 15

Yes, however employee contributions are not.

Question 16

How are pension benefits provided through the pension scheme calculated?

Answer 16

1. Specified accrual rate (typically 1/60th or 1/80th)
2. Member’s ‘pensionable service’ commonly calculated in complete years and months from the date of joining the arrangement.
3. Member’s ‘final salary’ at expected pension age or date of leaving service (if benefits have been accrued and the member has left the company’s service prior to their expected pension age).

Question 17

Mrs Applewig has been a member of her employers DB pension scheme for 20 years when she reaches her normal pension age. The pension scheme has an accrual rate of 1/60th, and Mrs Applewig’s final salary is £50,000 p/a. What is her ‘final salary’ pension?

Answer 17

£50,000 x 20/60 = £16,666.67 p/a

Question 18

If any pension is paid early, what would this be subject to?

Answer 18

Actuarial reduction