Pensions

Question 1

What are the current issues surrounding retirement planning?

Answer 1

1) Inflation
2) Life expectancy increasing
3) Annuity Rates are low
4) Increasing state pension age

Question 2

Why is inflation an issue for retirement planning?

Answer 2

Pensioners tend to be on fixed incomes (e.g. annuities) - when prices rise pensioners can be hit worst.

although state triple lock has reduced the effect of this

Question 3

What is a pension shortfall?

Answer 3

Not having enough to support a modest retirement

21% of ppl do not have a pension (much of the 79% have a shortfall)

Question 4

What are some of the reasons for pension shortfalls?

Answer 4

1) Pensions are long term - hyperbolic discounting prevents people saving
2) Pensions are complex & expensive (e.g. advice costs)
3) Mis-selling scandals have put people off
4) Pension fraud has put people off
5) Govt can change their rules dramatically (e.g. pensions in IHT)

Question 5

Why does hyperbolic discounting cause pensoin shortfalls?

Answer 5

People aren’t able to see the benefit in long term investing

They overweight the immediate gratification of spending now.

Question 6

What is the retirement planning process?

High level overview

Answer 6

1) Establish current position (and current strategy)
2) Establish health
3) Establish aspiratoins
4) See what capital is needed
5) Develop appropriate strategy
6) implement

Question 7

How can pensions be categorised?

Answer 7

1) Trust Based vs Contract Based
2) Occupational vs Individual
3) Defined Benefit vs Defined Contribution

Question 8

What is the difference between trust based and contract based pensions?

in terms of who uses them / types of schemes

Answer 8

Trust based is usually occupational & contract based tends to be personal

Question 9

What is the difference between trust based and contract based pensions?

in terms of how they operate

Answer 9

1) Trust based is ran by a board of trustees who choose the professionals to manage the scheme. **THEY HAVE A DUTY OF CARE TO ACT IN BEST INTERESTS **
2) Pension provider, such as an insurance company has a contract with the employee and not the firm

Question 10

What is a Collective Money Purchase Scheme

Answer 10

Risk is shared by members
aims for a target level of benefits
Benefits can be adjusted based on fund assets

Royal Mail use this scheme

Question 11

Since “A-Day” what must all registered pension schemes have?

Answer 11

A registered scheme administrator

Usually outsourced to professionals

Question 12

What is the purpose of having a trust based pension?

Answer 12

Trustees act in the best interests of the schemes members - the structure also ring fences the assets incase the employer becomes insolvent.

Question 13

What is the current minimum age at which pension benefits can be taken?

also what and when does it increase to

Answer 13

Age 55
Increasing to 57 in 2028

the maximum age has been phased out and now people can work for as long as they wish

Question 14

What exceptions are there to the minumum age of 55?

Answer 14

1)People who retire due to ill health (needs written opinion from dr.)
2) Old schemes with contractual rights to retire early
3) People in special occupations such as footballers etc.

Question 15

How does the state pension work vs how it used to

Answer 15

Single tier - based upon years of NI contributions
Used to be 2 tier (basic rate + earnings bonus)

Question 16

How many years of NI contributions are needed for a full state pension?

Answer 16

35 years of contributions

can be topped up through other means

Question 17

What is the current value of the full state pension?

Answer 17

£11,502

Question 18

What is the minimum amount of NI contributions needed to receive the state pension

Answer 18

10 years minimum

Question 19

Other than NI contributions how can one earn credit towards the state pension?

Answer 19

1) Unemployment, sickness and maternity benefit
2) Parents receiving child benefit (child under 12)
3) Approved foster carers
4) Carers who care 20+ hrs per week
5) >18 in training that does not last more than 1 year

Can also pay 6yrs backdated - class 3 voluntary NI contributions

Question 20

What does SPA mean and what is it currently?

Answer 20

State Pension Age - minimum age at which one can claim the state pension
Currently 66 (increasing to 67 in 2026)

Do not have to take the state pension at 66

Question 21

What are the rules around State Pension deferral?

Answer 21

9 Weeks minumum

Question 22

How much extra is earned for deferring the state pension?

yearly and per 9 weeks

Answer 22

1% per 9 weeks
5.8% for every year deferred

Question 23

Who would pension deferral be particuarly attractive to?

Answer 23

Those on the additional rate of tax

can wait until earnings are lower in order to be taxed less on pension

Question 24

What is a defined benefit scheme?

Answer 24

Promises a given level of income at retirement
Based upon years of service and individual’s salary

Question 25

What will a DB scheme always be?

Answer 25

Trust Based ## Footnote also vary rarely tend to be private sector (bin men and MPs still get DBs as public sector workers)

Question 26

How can the final salary calculation vary from scheme to scheme

Answer 26

1) Definition of pensional employment 2) Accrual rate used 3) Definition of pensionable salary

Question 27

What are the two most common accrual rates?

Answer 27

1/60 1/80 ## Footnote 1/60 private sector and 1/80 usually public sector

Question 28

If a final salary isn't used what might be taken instead?

Answer 28

Career Average ## Footnote Can be revalued by RPI

Question 29

How can a member of a DB scheme boost their pension?

Answer 29

Additional Voluntary Contributoins (AVCs) 1) Buy extra years (employer determines to cost - can also set a maximum) 2) Invest extra into a seperate fund

Question 30

What are the drawbacks of a DB member doing AVCs into a seperate fund?

Answer 30

1) Limited fund choice 2) Employer may not contribute

Question 31

How can benefits be taken from a DB scheme?

Answer 31

A specific date (normal retirement date) - specifies date at which benefits are expected to be paid: 1) Lump Sum (tax free as long as it doesn't exceed PCLS rules) 2) Death-in service benefit 3) Pension Income (taxed)

Question 32

How does a death in service benefit work for a DB pension?

Answer 32

If a DB member dies before "normal retirement age" Death in service benefit will be paid which is usually a multiple of pensionable pay (usualy 4x)

Question 33

What is the formula for Final Salary pension calculation

Answer 33

1/60th * No of Years * Final Salary ## Footnote 1/60th is the accrual rate could be 1/80th if public sector

Question 34

What is the formula for an average earnings pension calculation

Answer 34

1/60th * No of Years * Career average earnings ## Footnote 1/60th is the accrual rate could be 1/80th if public sector

Question 35

Why are defined benefits less common?

Answer 35

Employers struggle to afford them ## Footnote many schemes that still exist place new hires onto DC schemes instead.

Question 36

What age can benefits be taken from in a DB pension?

Answer 36

55 ## Footnote can be taken earlier for ill health early retirement

Question 37

What is the main advantage of a DB pension scheme?

Answer 37

It provides certainty over what amount of income will be received (Allows for retirement planning)

Question 38

What is a potential disadvantage of DB pension schemes?

Answer 38

In the final years working, an employee may not be at their maximum earning power anymore.

Question 39

What is a defined contribution pension scheme?

Answer 39

Pension schemes that do not guarentee a level of income. Employer and employee agree on a set amount to be contributed to the scheme.

Question 40

What does retirement income from a DC pension depend on?

Answer 40

1) Level of contributions 2) Fund return 3) How benefits are taken

Question 41

How can benefits from a DC pension be taken?

Answer 41

1) Buy an annuity 2) Pension Income Drawdown 3) PCLS

Question 42

If an individual leaves a pension scheme, what determines their "leaver options"

Answer 42

The time spent in "pensionable service" ## Footnote amount of time worked for company

Question 43

If an individual has spent less than 3 months in a pension scheme - what leaver option is most likely?

Answer 43

A refund of contributions ## Footnote unlikely to be able to transfer out

Question 44

If an individual has spent 3-24 months in a pension scheme - what leaver option is most likely?

Answer 44

Refund of contributions OR transfer out

Question 45

If an individual has >2 years of pensionable service what leaver options are available?

Answer 45

All except refund of contributions 1) Preservation of benefits 2) Transfer Out 3) Vesting benefits (from age 55)

Question 46

What is an ill-health early retirement?

Answer 46

Can draw benefits before NMPA (55). Must have evidence from medical practicioner. Can be suspended if member gets better

Question 47

What is TVAS and what does it do?

Answer 47

Transfer Value Analysis Calculates the "critical yield"

Question 48

What is critical yield?

Answer 48

The investment return required to match the benefits available from a DB scheme. ## Footnote return after fees

Question 49

What are the two types of Critical Yield?

Answer 49

Type A & Type B

Question 50

What is Type A Critical Yield

Answer 50

Growth rate needed on drawdown investment to match an annuity ## Footnote rate required to keep drawdown income in line with an annuity which could have been bought instead

Question 51

What is type B critical yield?

Answer 51

Growth rate necessary to maintain a selected level of income ## Footnote e.g. want to maintain £1000 a month forever - rate of return required to do this

Question 52

What are the FCA guidelines on Type B critical yield? ## Footnote in regards to presenting an illustration

Answer 52

Cannot be supplied in isolation (must be with a type A)

Question 53

What are the FCA guidelines on Type A critical yield?

Answer 53

Must show annuity purchases at ages: 65, 70 & 75

Question 54

What factors effect the transfer value calculation?

Answer 54

1) Discount Rate Used 2) Assumed Annuity Rates

Question 55

What is the FCAs default position on DB transfer outs?

Answer 55

It is NOT APPROPRIATE to transfer out so adviser needs to show why it is.

Question 56

What is the 4 step process for transfer value analysis?

Answer 56

1) Calculate pension value at leaving date 2) Revalue to nromal pension date 3) Convert to cash equivelant (based on annuity rate) 4) Discount cash value to today's date

Question 57

What tax relief to HMRC provide to incentivise retirement planning?

Answer 57

1) Tax relief on contributions 2) Tax free lump sum (25%) 3) Fund grows free of UK tax (cgt etc) 4) Currently exempt from IHT (but is set to change)

Question 58

To receive tax relief on contributions, what must a person be?

Answer 58

A relevant individual

Question 59

Who is a "relevant UK individual"?

Answer 59

Under 75 (and meets 1 of the following:) 1) UK Earnings chargeable to income tax 2) Resident in UK at some point in year 3) Resident at any point of previous 5 tax years before contribution was made ## Footnote Or they / spouse have earnings from overseas crown employment

Question 60

What is salary sacrifice?

Answer 60

An agreement between employer & employee to give up part of salary in exchange for an employer pension contribution | must have a written agreement in place ## Footnote Can not reduce salary below minimum wage

Question 61

What are the advantages of salary sacrifice? ## Footnote to an employee giving up salary

Answer 61

1) Take home pay is same or higher 2) NI & Tax Savings 3) Can reinstate personal allowance (if earning >£100k)

Question 62

What are the disadvantages of salary sacrifice? ## Footnote to an employee giving up salary

Answer 62

1) Salary reduced for things like death in service 2) May reduce borrowing capacity ## Footnote e.g. could affect ability to get a mortgage

Question 63

What is the current annual allowance for pension contributions?

Answer 63

£60,000 per annum

Question 64

What are the rules around carry forward for pension contributions? ## Footnote how much would the max be?

Answer 64

Can carry 3 previous years forward 1 x £60,000 2 x £40,000

Question 65

What might prevent someone from being able to carry forward?

Answer 65

They have triggered the money purchase allowance

Question 66

What is the annual allowance charge?

Answer 66

A charge levied against anyone who exceeds the annual allowance for pension contributions.

Question 67

How does the UK pension allowance taper?

Answer 67

Every £2 earned above £260k adjusted earnings tapers by £1 ## Footnote adjusted income includes employer pension contributions (& your own)

Question 68

What is the maximum the pension allowance can taper down to?

Answer 68

£10,000 ## Footnote MPAA & Taper both £10k

Question 69

What can trigger the money purchase annual allowance?

Answer 69

1. Flexi-access drawdown 2. uncrystallised funds pension lump sum 3. Purchasing a flexible annuity where your income could go down

Question 70

What doesn't trigger the MPAA?

Answer 70

1) Small pots valued at less than £10,000 2) Take TFCLS and buy an annuity that either stays the same or increases 3) Flexi-access drawdown but don't take an income

Question 71

If you trigger the MPAA, what can't be done in a DC contribution?

Answer 71

Cannot carry forward in a DC (only in a DB)

Question 72

What did the lifetime allowance do?

Answer 72

Limited amount of savings which can be built up in a tax advantaged environment. ## Footnote it has now been scrapped (as of 24/25 tax year)

Question 73

What is the money purchase annual allowance

Answer 73

If triggered - it limits the level of tax releived pension contributions an individual can make in a year ## Footnote can be triggered from 55 once benefits can be taken.