Context of pensions planning

Question 1

Q: What is happening to many companies’ pension schemes?

Answer 1

A: Many companies are closing their defined benefit schemes and replacing them with defined contribution alternatives.

Question 2

Q: What has damaged the reputation of the UK pensions industry?

Answer 2

A: There have been a number of scandals over recent years that have damaged the reputation of the UK pensions industry.

Question 3

Q: How have falling stock markets and falling gilt yields affected pension income?

Answer 3

A: Falling stock markets and falling gilt yields have decimated annuity rates and thus pension income over the past few years.

Question 4

Q: What is happening to the proportion of people who have retired in the UK?

Answer 4

A: The proportion of people who have retired is growing while the working population is reducing.

Question 5

Q: Which age group has experienced the fastest population increase in the UK?

Answer 5

A: The fastest population increase has been in the number of people aged 85 and over.

Question 6

Q: What is the current life expectancy at birth for boys in the UK?

Answer 6

A: The current life expectancy at birth for a boy in the UK is 79 years.

Question 7

Q: What is the current life expectancy at birth for girls in the UK?

Answer 7

A: The current life expectancy at birth for a girl in the UK is 82.9 years.

Question 8

Q: How much have annuity rates for a male aged 65 looking to buy a single life annuity reduced over the years?

Answer 8

A: Annuity rates for a male aged 65 looking to buy a single life annuity have reduced from over 15% at the beginning of the 1990s to around 5.6% by early 2023.

Question 9

Q: What has caused significant reductions in annuity rates over recent years?

Answer 9

A: Increased life expectancy has caused significant reductions in annuity rates over recent years.

Question 10

Q: What is the requirement for employers regarding pension schemes since October 2012?

Answer 10

A: Since October 2012, all employers have to auto-enrol all eligible workers into a qualifying pension scheme.

Question 11

Q: What is happening to membership of defined benefit schemes in the UK?

Answer 11

A: Membership of defined benefit schemes is declining, largely due to increasing costs.

Question 12

Q: How have changing employment trends and increased job mobility affected pension provision in the UK?

Answer 12

A: Changing employment trends and increased job mobility have further reduced the amount of pension provision in the UK.

Question 13

Q: What tax incentives are offered to encourage retirement savings?

Answer 13

A: Various tax-related incentives are offered, such as tax relief on contributions and tax-free fund growth.

Question 14

Q: What restrictions related to pensions act as a disincentive towards saving?

Answer 14

A: Some restrictions, such as the limit on tax-free cash lump sums and lack of access to pension funds until the normal minimum pension age, act as a disincentive towards pension saving.

Question 15

Q: What are some other factors that act as disincentives towards pension saving?

Answer 15

A: Other factors include costs, adviser charges, and the complexity of pensions.

Question 16

Q: How do attitudes towards saving affect pension provision?

Answer 16

A: Attitudes towards saving, such as the belief that the state will provide or the low priority given to pension saving due to retirement being far away, can lead to a lack of pension provision.

Question 17

Q: What pensions might individuals who reached their State Pension age before 6 April 2016 be eligible for?

Answer 17

A: Those who reached their State Pension age before 6 April 2016 may be eligible to receive one or more of the Basic State Pension, the State Graduated Pension Scheme, the State Earnings Related Pension Scheme (SERPS), and the State Second Pension (S2P).

Question 18

Q: What is the new State Pension and who is eligible for it?

Answer 18

A: Individuals reaching their State Pension age on or after 6 April 2016 may be eligible to receive the new State Pension.

Question 19

Q: What are the benefits of a defined benefit (final salary) scheme?

Answer 19

A: A defined benefit scheme provides benefits that are guaranteed as a proportion of the final salary at retirement or death. These benefits are often superior to those provided by other types of pension schemes in terms of both the level and range of benefits.

Question 20

Q: What is the major advantage of a defined benefit scheme for employees?

Answer 20

A: The guaranteed nature of the benefits is the major advantage of a defined benefit scheme for employees.

Question 21

Q: What is a defined contribution (money purchase) scheme?

Answer 21

A: A defined contribution scheme provides benefits based on the size of the fund and, if applicable, annuity rates when benefits are taken.

Question 22

Q: What risks are associated with a defined contribution scheme?

Answer 22

A: There are no guarantees of the level of benefits provided by a defined contribution scheme. The member bears the investment risk and, if applicable, the annuity rate risk.

Question 23

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

a.
68.

b.
65.

c.
67.

d.
66.

Answer 23

c.
67.

Question 24

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 Graduated Pension Scheme.

b.
State Earnings Related Pension Scheme.

c.
Basic State pension.

d.
State Second Pension.

Answer 24

d.
State Second Pension.

Question 25

On the death of a member with a defined contribution plan, the tax treatment of the death benefits will be most favourable if: a. all of the fund is yet to be crystallised. b. the member dies before the age of 75. c. the member dies after the age of 75. d. all of the fund has already been crystallised.

Answer 25

b. the member dies before the age of 75.

Question 26

How frequently will the State Pension Age be reviewed? a. At least once during each Parliament. b. Every five years. c. Every ten years. d. Every two years.

Answer 26

a. At least once during each Parliament.

Question 27

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

Answer 27

c. 35.

Question 28

Why has an increasingly mobile workforce had an adverse effect on the level of pension savings? a. People's salaries tend to be lower due to the number of times they change employment. b. Most employers enforce a one year waiting period to join an employer sponsored pension arrangement. c. Many people stop and start pension contributions as they change employments. d. Most people experience a period of unemployment when no pension benefits are being accumulated.

Answer 28

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

Question 29

What was NOT replaced by the new State Pension when it was introduced in April 2016? a. State Guarantee Credit. b. State Second Pension. c. Basic State Pension. d. State Savings Credit.

Answer 29

a. State Guarantee Credit.

Question 30

Which flexible income option is NOT available to someone approaching retirement, whose only pension arrangement is an uncrystallised personal pension? a. Capped drawdown. b. Lifetime annuity. c. Uncrystallised funds pension lump sum. d. Flexi-access drawdown.

Answer 30

a. Capped drawdown.

Question 31

What would act as an incentive for someone to contribute to a defined contribution pension plan? a. These plans have no investment charges applied to them. b. They can nominate anyone they wish to receive the benefits when they die. c. Any dividends received by the fund are only taxed at 8.75%. d. Their employer will take on the investment risk.

Answer 31

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

Question 32

Which government initiative has increased the attractiveness of pension saving in the UK? a. The introduction of the new State Pension. b. The abolition of contracting out under defined benefit schemes. c. The replacement of many defined benefit schemes with defined contribution alternatives. d. The introduction of pension flexibility for defined contribution schemes.

Answer 32

d. The introduction of pension flexibility for defined contribution schemes.

Question 33

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 33

a. the scheme's underlying investment returns.

Question 34

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. Citizens Advice. b. Pension Wise. c. The Money Advice Service. d. The Financial Ombudsman Service.

Answer 34

b. Pension Wise.

Question 35

What pension option pays an income for life, but can be reduced in circumstances set out in the contract? a. Capped drawdown pension. b. Flexi-access drawdown pension. c. Scheme pension. d. Flexible lifetime annuity.

Answer 35

d. Flexible lifetime annuity.

Question 36

How are the investment profits taxed within a pension fund? a. Subject to income tax and capital gains tax. b. Subject to income tax, but exempt from capital gains tax. c. Exempt from income tax, but subject to capital gains tax. d. Exempt from income tax and capital gains tax.

Answer 36

d. Exempt from income tax and capital gains tax.

Question 37

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 the new State Pension. c. equalisation and increase of the State Pension Age for both men and women. d. introduction of auto-enrolment.

Answer 37

d. introduction of auto-enrolment.

Question 38

What is an example of a 'hybrid' scheme? a. Targeted money purchase scheme. b. Small self-administered scheme. c. Section 32 contract. d. Executive pension plan.

Answer 38

a. Targeted money purchase scheme.

Question 39

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 tax relief available but there are limits on the level of contributions that can be paid. b. no limits on the contributions that can be paid nor on the tax relief available. c. no limits on the contributions that can be paid but there are limits on the tax relief available. d. limits on both the contributions that can be paid and the tax relief available.

Answer 39

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

Question 40

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. Both the employer and the employees' NICs have reduced. b. There has been no change to the employer's NICs, but the employees' NICs have increased. c. The employer's NICs have increased, but there has been no change to the employees' NICs. d. Both the employer and the employees' NICs have increased.

Answer 40

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

Question 41

Increased life expectancy has contributed towards the trend away from which type of pension scheme? a. Small self-administered schemes. b. Executive pension plans. c. Section 32 plans. d. Defined benefit schemes.

Answer 41

d. Defined benefit schemes.

Question 42

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 42

b. Lack of affordability.

Question 43

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 £14,000 p.a. because Harry purchased his lifetime annuity in: a. 1990, whereas Edward purchased his lifetime annuity in 2023. b. 2023, whereas Edward purchased his lifetime annuity in 2000. c. 1990, whereas Edward purchased his lifetime annuity in 2000. d. 2000, whereas Edward purchased his lifetime annuity in 2023.

Answer 43

d. 2000, whereas Edward purchased his lifetime annuity in 2023.

Question 44

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. No new risks. b. Investment risk only. c. Annuity risk only. d. Investment and annuity risk.

Answer 44

d. Investment and annuity risk.

Question 45

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 employer contributions, which will be relievable against the company's corporation tax bill. b. As employer contributions, which will be relievable against the company director's income tax bill. c. As employee contributions, which will be relievable against the employee's income tax bill. d. As salary sacrifice payments, which will reduce the salary the employee pays income tax on.

Answer 45

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

Question 46

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

Answer 46

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