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CWM Applied Wealth Management > Pension Re-read > Flashcards

Pension Re-read Flashcards

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1
Q

What were the two major pension reforms?

A

A Day

Pension Freedoms Reform

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2
Q

What investment strategy can be used for pensions as one ages?

A

Lifestyling

also known as glide path

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3
Q

What is lifestyling?

A

Reducing exposure to risk as a person approaches retirement age and their focus shifts to capital preservation.

Generally decrease equities & increase fixed income

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4
Q

When can liftstlying not be suitable?

A

If an individual wants to take a drawdown approach as opposed to an annuity.

The lack of risky assets can see the capital shrink quickly.

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5
Q

When should an advisor start discussing lifestlying?

A

5-10yrs before client retires - should aim to hold yearly reviews

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6
Q

What ways can lifestyling rebalancing take place?

A

1) Automatically through target date funds
2) Regular manual rebalancing to account for market moves

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7
Q

What is a target fund?

A

Pension funds which have a set retirement date and an automatic glide path managed by a PM.

one stop shop for lifestyling

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8
Q

How does the UK state pension work?

A

Single tier system

Benefits are the same for all, based upon years of NI contributions.

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9
Q

Min years to receive state pension?
Years to max state pension?

A

10 yrs
35 yrs

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10
Q

What is the state pension age?

What will it rise to and when is this reviewed?

A

66

set to rise to 67 and then 68

reviewed every 5yrs

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11
Q

How much is the state pension?

Per annum & weekly

A

£11,502
£221.2

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12
Q

How can an individual increase their state pension past £11,502

A

By deferring the state pension, it increases by 1% for every 9 weeks.

To a maximum of 5.8% per year

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13
Q

Why does the state pension constantly increase?

A

Triple Lock

rises by highest of CPI, Wage Growth or 2.5%

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14
Q

What is a defined benefit scheme?

A

A pension scheme which promises a given level of income based upon a proportion of earnings.

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15
Q

How are DB pensions calculated?

A

Salary * Yrs of service * Accrual Rate

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16
Q

What salary can be used for the DB pensoin calculation?

A

Final Salary

Average Salary

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17
Q

What happens if a DB member dies before their normal pension date?

A

A death in service benefit is paid (usually 4x salary)

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18
Q

How can benefits be taken from a DB pension?

A

Tax free lump sum

Pension Income

can do both so long as lump sum is under the PCLS threshold

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19
Q

What happens if an individual dies shortly after taking their DB pension?

A

There is often a period where the spouse is paid.

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20
Q

What type of pension is a DB pension?

A

A scheme pension

No choice around how to draw benefits - to get this freedom a member would have to transfer to a DC pension.

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21
Q

What criteria does a scheme pension have to follow?

A

1) Payments must be annual at a minimum
2) Guarenteed period does not exceed 10yrs
3) Pension amount cannot be reduced
4) Payments must be by the scheme administrator

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22
Q

Give 3 advantages of DB schemes

A

1) Retirement planning is easier
2) Certainty of Income
3) Death in Service Benefit

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23
Q

Give 4 disadvantages to DB pensions

A

1) Earning potential lower in final years
2) Funding concerns (scheme may struggle to pay out)
3) Final Salary calculated less attractively
4) Difficult to transfer

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24
Q

What is a defined contribution scheme?

A

Most common form of pension - pension pot based upon contributions from self & employer

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25
How can DC benefits be taken?
Drawdown Purchase an annuity PCLS can be taken first before the above
26
What are DC scheme benefits dependant on?
Level of contributions Fund performance Charges
27
Who arranges DC schemes?
The employer, if they are large enough Or group pension providers offer services to smaller firms
28
Who has to be offered a workplace pension?
Eligible workers
29
What 3 criteria are requied to be an eligible worker
1) Between 22 - 66 2) Working in the uK 3) Earning more than £10,000
30
Who holds the funds in a DC scheme?
Trustees
31
Can a DB scheme be transferred to a DC scheme?
Yes, providing you have not started taking an income
32
Give 4 points around DB to DC transfers
1) Advisors must start out assuming it is unsuitable 2) A CETV must be calculated to provide a figure on how much will be transferred to a DC scheme 3) If a pot exceeds >£30,000, must speak to an advisor 4) It is irreversible ## Footnote cash equivalent transfer value
33
Give 3 advantages of transferring from DB to DC
1) Can access benefits earlier 2) Choice of annuities 3) Flexible income drawdown
34
Disadvantages of transferring DB to DC
1) Investment & Sequencing Risk 2) Longevity risk of drawdown 3) Complx to understand options
35
For a firm to reduce theri DB liabilities, what might they offer?
An enhanced value transfer ## Footnote still often not worth transferring even with an enhanced value
36
What is a CETV?
Cash equivalent transfer value The amount that would be transferred into a DC scheme from a DB pension
37
What factors effect the value of a CETV
1) Assumed Returns 2) Age
38
What is a personal pension?
A pension where an individual contracts with a pension provider DC Scheme
39
What is a SIPP? Who are they designed for?
A self invested personal pension - designed for more sophisticated investors
40
How can SIPPs be offered?
Through a provider - on an XO basis or Through an investment manager (advisory / discretionary)
41
How do XO and IM SIPPs differ?
IM SIPPs tend to have more fees (setup fees, admin fees etc)
42
What did the FCA find with SIPPs?
IMs were selecting non-standard investments which were unsuitable There was a lack of due diligence and product understanding
43
What is a SSAS?
Small self administered scheme
44
How does a Small self administered scheme work? What are the conditions?
Company directors can set up and provide pensions to themselves and other employees Up to a maximum of 11 members allowed ## Footnote It is a DC pension
45
How do SSASs differ from other pension schemes?
Wider variety of assets can be invested in (e.g. commercial property) Not an FCA regulated product
46
What are the two main structures for Occupational pensions?
1) Trust Based Schemes 2) Contract Based Schemes
47
What is a trust based scheme
Run by trustees that are the legal owners - trustees appoint managers to look after the money in the best interests of the members
48
What is a contract based scheme?
Employer appoints an insurance provider - the contract is between the member and the life office
49
What age can a pension be drawn from? How does it differ for DB & DC ## Footnote not state-pension
55 ( set to increase to 57) Tends to be 60-65 for DB (normal retirement age) ## Footnote max retirement age no longer exists - free to work as long as you wish
50
What exceptions apply to the 55 pension age?
Critically ill (signed off on by Doctor) Work in certain industries (e.g. sports)
51
How does the tax free lump sum work? ## Footnote how does it differ between DC & DB
can withdraw 25% of value of pension without paying any tax DC pensions are straight forward 25% of value DB pensions are more complicated as they have apply commutation
52
What is the max tax free lump sum?
£268,275
53
What is trivial commutation? ## Footnote how does tax apply?
If over 55, and total value of benefits <£30,000 - they can be cashed in for a lump sum first 25% tax free - rest at marginal rate
54
In addition to trivial commutation - what is the small pots rule?
any number of pots <£10,000 can be cashed out for a lump sum ## Footnote 25% tax free
55
How does taking a tax free lump sum effect a DB pension?
Lowers the income paid out
56
What are the 3 main options available when taking benefits from a DC pension?
after taking 25% tax free 1) Guaranteed Income (annuity) 2) Non-Guaranteed Income (drawdown UFLPS) 3) Take the whole pot ## Footnote able to also do nothing or mix options
57
When can an annuity be taken?
anytime, can shop around for the best rate
58
What three things are annuity rates determined by?
1) Life expectancy 2) Gilt Yields 3) Options Chosen
59
What is flexible income?
take a flexible income through flexi-access drawdown or use an UFPLS. Drawdown allows one to take a tax-free lump sum and invest the remainder to provide an income.
60
What are the advantages of flexible drawdown?
- The remainder after taking tax free cash remains invested giving the potential for growth - Can wait until annuity rates improve – can be purchased at any time - Removes guess work from joint annuities. - Can elect to purchase an annuity at anytime
61
What is critical yield?
this measures the rate of return needed for a drawdown to equal the purchase of an annuity.
62
What two forms does critical yield come in?
A & B
63
What is critical yield A?
Critical Yield A: is the rate needed to provide and maintain income equal to an annuity
64
What is critical yield B?
Critical Yield B: is the rate required to provide a specific amount of income (can be used to compare to a DB and its level of income)
65
What risk is present when drawing down from a pension?
Sequence Risk
66
What is sequence risk?
Sequence risk is the risk that the order of investment returns is going to be unfavourable. This risk exists at accumulation stage but it is amplified by withdrawals from a portfolio during the retirement stage.
67
What is the maximum tax relieved level of pension contributions that can be made each year?
£60,000
68
What two things reduce the £60,000 pension contribution allowance? ## Footnote what does each one mean
1) MPAA - When someone has accessed their pension pot flexibly 2) Tapered Annual allowance - when income exceeds a limit
69
What triggers the MPAA?
Taking a flexible income e.g. a series of lump sums a variable annuity taking pension in one go (unless below £10,000)
70
What are the limits for the tapered annual allowance? What is the lower bound?
Adjusted income above £260,000 Adjusted by £1 for every £2 above Cannot fall below £10,000
71
Who can receive tax relief on pension contributions?
A relevant person on relevant earnings
72
What is a relevant person?
1) Resident in UK for tax that year 2) Resident in one of last 5 3) Overseas crown employee (or spouse is)
73
What are relevant UK earnings?
1) Income from employment 2) Income from trade 3) income from Intellectual property 4) Income from overseas crown employment
74
What are the 3 main methods of claiming tax relief?
1) Net pay - contributions made before any tax paid 2) Releif at source - contribution made less basic rate - admin claims back basic rate 3) Assesment - can claim back from HMRC ## Footnote if >basic rate payer - can claim back more on self assesment
75
What was the lifetime allowance?
Previously capped the amount of tax advantaged money that could be saved within a pension - however, this has been scrapped in order to encourage people to work longer
76
What is a relevant benefit crystalisation event
an event where an individual receives a lump sum and a pension administrator needs to identify whether it breaches any lump sum allowances
77
What two allowances did relevant benefit events introduce? ## Footnote how much are they?
Lump Sum Allowance = £268,275 Lump Sum and Death Benefit = £1,073,100
78
Who can take benefits before 55?
1) Impaired to the extent a medical professional beleives you will not return to work before retirement 2) Less than 1 year to live - confirmed by professional 3) Certain occupations (e.g. a sports person)
79
If you have less than 12 months to live, how is your pension taxed?
<75 tax free (can be taken in one lump sum) >75 taxed @ marginal rate
80
How does UFLPS differ from drawdown?
Drawdown allows you to access your 25% tax free first and then remain invested in order to provide stability and growth to ensure your pot lasts as long as possible. UFLPS on the other hand will likely stay invested over the long term as it was before which is not suitable for supporting withdrawals.
81
What are the risks of UFLPS?
not good for long term income. You may draw too much in one go. Only 25% of each UFLPS is tax free, you are paying more tax than is necessary.
82
How is pension income taxed?
Pension income is treated as earned income for tax purposes and will be paid at source by the administrator.
83
What is the usual DB death in service benefit?
4.5x salary can also be a £ value multiplied by years of service
83
Who receives death benefits from pensions?
Dependants - usually a spouse but can be a chlid <23 or >23 and mentally / physically impaired or anyone deemed to be financially dependant by the scheme administrator
84
How to DC death benefits differ to DB?
More freedom after 2015 reforms - can receive a lump sum as well as regular income Beneficaries have to be assigned within 2yrs of death
85
What are the 3 ways a pension can be divided in divorce?
1) Offsetting 2) Attachment ORder 3) Pension Sharing
86
What is offsetting? ## Footnote Pensions & Divorce
CETV used to value pension - this value is added to total estate and other assets can be offset against it
87
What is an attachment order? ## Footnote Pensions & Divorce
Effectively a court order to pay maintenance from pension income ## Footnote court decides what level of payments to make
88
What is pension sharing? ## Footnote Pensions & Divorce
Pension pot is split at divorce. each spouse recieves own share (can be kept at same provider to transferred out)
89
Who are the two main regulators for the pensions sector?
The Pensions Regulator and the FCA ## Footnote HMRC also provide guidance / regulations
90
What are the 4 key areas of focus for pension regulation?
1) Ensuring pensions support adequate savings for later life 2) Promoting well funded & appropriately invested pension schemes. 3) Driving value for money while ensuring good governance 4) Improve people’s ability to make informed pension decisions
91
What are the pension regulators 5 statutory objectives?
1) Safeguard Benefits 2) Enhance management practices 3) Reduce claims on protection fund 4) Ensure employers meet responsibilities / laws 5) Balance DB funding with growth of employers
92
What is the pension protection fund? ## Footnote PPF
Provides compensation for members of DB schemes which were unable to meet their liabilities.
93
How is the PPF funded?
DB schemes pay a levy
94
Under what circumstances does the PPF pay out?
- Employer becomes insolvent - Pension scheme is underfunded - No realistic chance of scheme being rescued
95
What level of benefit do members of DB schemes receive from the PPF?
100% if >retirement age when DB scheme failed 90% if
96
What is the FCAs main area of concern around pensions?
Unsuitable transfers of DB to DC
97
What 3 things did the FCA highlight / implement in regard to DB transfers?
- Too many firms giving advice without having collected enough information - Can no longer charge a fee which is dependant on the transfer going ahead - Provide guidance on what information advisors require to assess a transfer.
98
Pension advice is regulated, however, what advice requires additional authorisation?
When there are safeguarded benefits,
99
What are safeguarded benefits?
1) Defined Benefit 2) Guaranteed Minimum Pension 3) Guaranteed Annuity Rate ## Footnote other than money purchase or cash benefits

CWM Applied Wealth Management (37 decks)

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