Retirement Planning Considerations

Question 1

Q: How are the investments used to meet a client’s needs determined?

Answer 1

A: They are determined by a number of factors including their attitude to risk; the timescale of the investment; their level of wealth; their past experience of investing; other investments they hold and any ethical or sustainability considerations they have.

Question 2

Q: What does a client’s risk profile determine regarding their asset holdings?

Answer 2

A: A client’s risk profile will determine the mix of the four main asset classes they hold: cash, fixed interest, equities, and property.

Question 3

Q: What is the purpose of a lifestyling option provided by some pension providers?

Answer 3

A: It automatically moves the investment mix of the pension fund away from equities and into fixed interest investments and cash as retirement approaches, to reduce risk.

Question 4

Q: How can individuals exercise substantial control over the choice of investments in their pensions?

Answer 4

A: By establishing a member-directed personal pension arrangement (SIPP), individuals can have control over their investment choices in their pensions.

Question 5

Q: What investment options do SIPPs offer?

Answer 5

A: SIPPs can invest in a portfolio of shares and bonds, purchase shares in one’s own business, or be invested directly into commercial property.

Question 6

Q: How much can a SSAS invest in any one sponsoring employer?

Answer 6

A: A SSAS can only invest under 5% of scheme assets in any one sponsoring employer. However, this could equate to 100% of the employer’s shares. This restriction does not apply to a SIPP.

Question 7

Q: What are the regulations regarding investment in taxable property by schemes, and what are the implications of investing in such properties?

Answer 7

A: Schemes should not invest in taxable property, which includes residential property and personal chattels like antiques, art, and cars, due to tax penalties that will apply if they decide to do so.

Question 8

Q: Can SIPPs and SSASs borrow to finance an investment?

Answer 8

A: Yes, but not more than 50% of the scheme’s net assets. Any existing borrowing must be deducted from the fund before the maximum borrowing is calculated.

Question 9

Q: What limitations are there on loans from a SSAS to the sponsoring employer?

Answer 9

A: A SSAS can loan no more than 50% of the scheme’s net assets to the sponsoring employer. A contract-based SIPP cannot loan money in this way.

Question 10

Q: What options are available to a client when they crystallise their pension benefits?

Answer 10

A: Options include a PCLS, an UFPLS, flexi-access drawdown, a lifetime annuity, or a scheme pension.

Question 11

Q: Why is a structured and well-defined advice process essential in retirement planning?

Answer 11

A: It is essential to determine the most appropriate recommendation to meet the client’s needs and objectives, considering the variety and complexity of options available.

Question 12

Q: Can a defined contribution pension fund be passed onto a beneficiary who is not a spouse, civil partner, or dependant, and what are the tax implications if the member dies before the age of 75?

Answer 12

A: Yes, it can be passed to such a beneficiary, and the payments will be tax-free if the member dies before the age of 75.

Question 13

Q: What should an adviser do when considering flexible retirement options for a client?

Answer 13

A: The adviser should ask a number of specific questions to help determine which options would be most suitable for the client in their individual circumstances.

Question 14

Q: What unknown factors should be considered in retirement planning?

Answer 14

A: Unknown factors such as health, inflation, and family needs should be taken into account in retirement planning.

Question 15

Q: Why should retirement planning arrangements incorporate flexibility?

Answer 15

A: To help meet any additional expenses arising from a sustained period of ill-health in later life.

Question 16

Q: Why is cash flow modelling very important for a client in drawdown?

Answer 16

A: Cash flow modelling is crucial as drawdown involves more risks than a pension fund in the accumulation phase, requiring careful management and monitoring.

Question 17

Q: When drawing an income from their pension fund, what should a cash flow model for a client take into account?

Answer 17

A: It should take into account a realistic range of returns, including periods of low or negative returns, to ensure sustained income.

Question 18

Q: Why should a cash flow model be regularly ‘stress tested,’ and what significant factor should it account for?

Answer 18

A: It should be stress tested to anticipate various financial scenarios and should take inflation into account as it can significantly affect living standards over time.

Question 19

Q: Why have reviews become even more important with the introduction of pension flexibilities and the facility to take large ad hoc withdrawals?

Answer 19

A: Reviews have become crucial due to the increased risk of depleting funds prematurely with the availability of large ad hoc withdrawals and various flexible options. Regular reviews help in monitoring and adjusting strategies as needed to ensure financial stability throughout retirement.

Question 19

Q: What is the safe withdrawal rate in the context of pension portfolios?

Answer 19

A: The safe withdrawal rate is the highest percentage of a client’s initial pension portfolio, adjusted for inflation each subsequent year, which can be taken without the client running out of money over a period of 30 years.

Question 20

Q: What do the pension flexibilities imply for a client who is not actually retiring?

Answer 20

A: They mean that income or capital can be taken as required by a client, even if they are not actually retiring, providing more flexibility in managing finances.

Question 21

Q: On what factors does the best solution for a client depend regarding pension flexibilities?

Answer 21

A: The best solution depends on factors such as taxation consequences, income needs, the importance of certainty, any plans to make future contributions, and the importance of death benefits.

Question 22

Q: How do the various pension options differ?

Answer 22

A: The various options have different benefits and drawbacks relating to income, death benefits, and other considerations such as cost and flexibility, requiring careful consideration and alignment with individual needs and preferences.

Question 23

Q: When a client is planning to make significant contributions into a defined contribution pension arrangement, what actions will not trigger the MPAA?

Answer 23

A: Specific actions may vary based on regulations, but generally, the MPAA is designed to prevent excessive contributions, so actions in line with contribution limits and guidelines will typically not trigger the MPAA.

Question 24

Q: What opportunities do clients have for IHT planning when using the drawdown pension option?

Answer 24

A: The drawdown pension option can provide significant IHT planning opportunities, allowing for more strategic management of wealth and potentially reducing inheritance tax liabilities.

Question 25

Q: How can families use defined contribution pension savings in wealth management?

Answer 25

A: Families can use their defined contribution pension savings as vehicles for passing wealth down through the generations in a tax-efficient manner, optimizing wealth transfer and minimizing tax implications.

Question 26

Q: How may the pension flexibility rules influence clients' decisions regarding funding a pension and using other sources of income and capital in retirement?

Answer 26

A: The pension flexibility rules may make clients more likely to consider funding a pension and also to use other sources of income and capital in retirement, leaving a pension plan intact for future generations due to enhanced flexibility and strategic advantages.

Question 27

Q: How can ISAs be an attractive alternative for financial planning, and what are the tax implications?

Answer 27

A: ISAs can be attractive as the funds are taxed in the same manner as pensions, and both income and capital can be taken tax-free from an ISA at any age an individual chooses.

Question 28

Q: Who is eligible for a Lifetime ISA and what are the benefits?

Answer 28

A: A Lifetime ISA can be set up by investors aged between 18 and 40; it allows them to invest up to £4,000 per tax year and receive a 25% bonus from the Government.

Question 29

Q: How do pension flexibilities relate to purchasing a buy-to-let property?

Answer 29

A: The pension flexibilities allow people to use some or all of their pension fund to purchase a buy-to-let property, enabling diversified investment options.

Question 30

Q: What are the implications of taking out a buy-to-let mortgage on investment returns?

Answer 30

A: If a buy-to-let mortgage is taken out, the investment will be leveraged, which could lead to significantly enhanced returns due to increased capital exposure.

Question 31

Q: Why might business owners prefer reinvesting profits in the business over making pension contributions?

Answer 31

A: Reinvesting profits in the business is often attractive to business owners as it offers a way of financing the business, and they are investing in an asset they know well. They can benefit from business asset disposal relief, and a business often qualifies for 100% relief against IHT.

Question 32

Q: What are the downsides to business owners reinvesting profits in the business instead of making pension contributions?

Answer 32

A: The downsides include a lack of diversification, the possibility that other investments would yield a better return, and the date of retirement may not coincide with a favorable time to sell the business.

Question 33

Q: What factors are likely to influence a client’s financial needs at and after retirement?

Answer 33

A: A client's financial needs at and after retirement are likely to depend upon when they would like to retire; their need for capital and income in retirement; their need to provide for a beneficiary and any desire they have to plan for long-term care or estate planning.

Question 34

Q: What unknowns are involved in making projections of future pension entitlements?

Answer 34

A: There are many unknowns including changes in a client’s personal circumstances, changes in taxation and legislation, varying investment returns, and unknown future levels of inflation.

Question 34

Q: Can the process of estimating a client’s financial needs in retirement and the level of contributions required to meet those needs ever be completely accurate?

Answer 34

A: No, the process can never be completely accurate, and the further away the client is from retirement, the more difficult it is to make accurate projections of future income and needs.

Question 35

Q: Why is it important to regularly measure the progress of pension funds while they are being accumulated?

Answer 35

A: It is important to regularly measure their progress against the client’s income and capital requirements to ensure the client is on track to meet their financial goals in retirement.

Question 36

Q: What actions could be taken if a shortfall in pension funds is identified?

Answer 36

A: Actions could include increasing contributions; delaying retirement; decreasing expectations; downsizing; changing investment strategy to increase equity content or considering partial retirement.

Question 37

Q: How often should the investments used in pension funds be reviewed, and why is it vital?

Answer 37

A: The investments should be reviewed regularly. It is vital to ensure that contributions are redirected, or funds are switched as required to meet the client's evolving needs and to adapt to changes in the market conditions.

Question 38

**Question**: What is the maximum percentage of shareholdings in the sponsoring employer that an occupational scheme can hold?

Answer 38

**Answer**: Under 5% of scheme assets in any one sponsoring employer.

Question 39

Q: What is the combined limit of shareholdings in multiple sponsoring employers that an occupational scheme can hold?

Answer 39

A: Under 20% of scheme assets, where the shareholdings relate to more than one sponsoring employer. However, shares in any one sponsoring employer must still be less than 5%.

Question 40

Q: At what point is the percentage of value of shareholdings calculated?

Answer 40

A: At the time the scheme pays for the shares. It is not retested later unless further shares in the sponsoring employer are acquired.

Question 41

Q: Are there restrictions on the percentage of shares that a registered pension scheme can hold in one company?

Answer 41

A: No, a registered pension scheme could potentially own 100% of the share capital of a company as long as the sums invested are less than 5% of the scheme's fund value.

Question 42

Q: Which Act defines the 'occupational pension schemes' that the shareholding limits apply to?

Answer 42

A: The Finance Act 2004.

Question 43

Q: Are SSAS and trust-based SIPP considered occupational schemes?

Answer 43

A: Yes, both SSAS and trust-based SIPP are occupational schemes.

Question 44

Q: Do the shareholding limits apply to a contract-based SIPP?

Answer 44

A: No, because a contract-based SIPP is not an occupational pension scheme.

Question 44

Q: Why is investing in a member's employer considered high risk?

Answer 44

A: It's high risk because employees depend on their employer for both their retirement income and current earnings. If the employer fails, they could lose everything.

Question 45

Q: How can shareholdings in an employer’s company create conflicts of interest?

Answer 45

A: Members might want to sell their shares when the employer does not wish to see sales taking place.

Question 46

Q: What is the liquidity status of shareholdings in unlisted companies?

Answer 46

A: For unlisted companies, shareholdings are generally highly illiquid.

Question 47

Q: When might a member shareholding in their employer through the pension scheme make sense in the short term?

Answer 47

A: When it arises from a transfer of shares obtained from a SAYE option or share incentive plan.

Question 48

Q: Can loans be granted to sponsoring employers from occupational schemes such as SSAS or a SIPP set up under an individual trust?

Answer 48

A: Yes, subject to certain conditions.

Question 49

Q: Are loans to an employer from a contract based SIPP permitted?

Answer 49

A: No.

Question 50

Q: What is the maximum loan limit from an occupational scheme to the sponsoring employer?

Answer 50

A: Loans must not exceed 50% of the net value of the scheme's assets at the date the loan is granted.

Question 51

Q: What kind of security is required for loans to sponsoring employers?

Answer 51

A: Loans must be secured, as a first charge, on assets that initially have a value at least equal to the loan plus interest.

Question 52

Q: What is the minimum interest rate for loans to sponsoring employers?

Answer 52

A: A minimum of 1% over the average base rate of the six main clearing banks, rounded up to the higher 0.25% if not a multiple of 0.25%.

Question 52

Q: What happens if the value of the security subsequently falls?

Answer 52

A: Subsequent falls are permitted as long as they are not the result of actions taken by the employer or any connected persons.

Question 53

Q: How long can loans (in pension schemes) to sponsoring employers last?

Answer 53

A: Not longer than five years, but they can be rolled over for one more period of no more than five years if the employer faces payment difficulties.

Question 54

Q: How should the repayment of loans to sponsoring employers be structured?

Answer 54

A: They should be repaid by equal annual instalments of capital and interest.

Question 55

Q: What consequence arises if any loan conditions aren't met?

Answer 55

A: An unauthorised payment arises, which could result in the scheme being de-registered.

Question 56

Q: Can both SIPPs (contract and trust-based) and SSASs borrow funds?

Answer 56

A: Yes, for investment purposes.

Question 57

Q: What is the borrowing limit for a pension scheme?

Answer 57

A: 50% of the net assets of the scheme before the loan. E.g., a fund with net assets of £200,000 can have maximum borrowings of £100,000.

Question 58

Q: What does the list of 'taxable property' include?

Answer 58

A: The list includes residential property (with minor exceptions like a caretaker’s flat) and tangible moveable property such as personal chattels.

Question 59

Q: Are beach huts considered residential property?

Answer 59

A: Yes, beach huts are classified as residential property.

Question 60

Q: What examples of tangible moveable property are considered as taxable?

Answer 60

A: Examples include antiques, art, and cars.

Question 61

Q: Are student halls of accommodation considered residential property?

Answer 61

A: No, student halls of accommodation are not considered residential property.

Question 62

Q: Are there any exclusions to tangible moveable property?

Answer 62

A: Yes, certain business assets valued at not more than £6,000 are excluded.

Question 63

Q: What happens if a self-invested pension scheme purchases a prohibited asset?

Answer 63

A: The scheme and/or the member is subject to one or more of the unauthorised payments tax charges.

Question 64

Q: Why is developing a withdrawal strategy important for clients in retirement?

Answer 64

A: It ensures that the pension fund lasts for the client's lifetime and that its purchasing power isn't eroded by inflation.

Question 65

Q: What is the 'safe withdrawal rate'?

Answer 65

A: It's a method determining the highest percentage of the initial portfolio, adjusted for inflation each subsequent year, that can be taken without running out of money over a 30-year period.

Question 66

Q: When and where was the safe withdrawal rate method developed?

Answer 66

A: It was developed in the USA in 1998.

Question 67

Q: What was the concluded safe withdrawal rate based on historical simulations in the USA?

Answer 67

A: The safe withdrawal rate was determined to be 4%.

Question 68

Q: Based on UK market data over 100 years, what was the safe withdrawal rate for a portfolio with 60% in equities?

Answer 68

A: The safe withdrawal rate was 3.7%.

Question 69

Q: For a portfolio with 50% in equities in the UK study, what was the safe withdrawal rate?

Answer 69

A: The safe withdrawal rate was 3.4%.

Question 70

Q: What time periods did the UK study (for safe withdrawal rates) consider?

Answer 70

A: It considered periods that included very severe economic conditions.

Question 71

Q: What does the safe withdrawal rate assume about the retirement duration?

Answer 71

A: It assumes a period of 30 years in retirement.

Question 72

Q: Why might a 30-year retirement period not be long enough for a couple both aged 65?

Answer 72

A: There is a good chance of one of them reaching the age of 100.

Question 73

Q: How is the safe withdrawal rate affected by the client's portfolio?

Answer 73

A: The rate is sensitive to asset allocation, and the acceptable rate needs to be adapted to reflect the actual portfolio, which is influenced by each client's attitude to risk.

Question 74

Q: How can the likelihood of the fund not being depleted during retirement be improved?

Answer 74

A: By dynamically adjusting withdrawals to market and portfolio conditions, such as foregoing annual inflation adjustments after poor market returns, taking a fixed percentage of the portfolio value, or withdrawing from the asset classes that have grown the most.