What is the role of the government relating to pensions?
They provide a minimum level of provision for everybody, along with additional support for people who need it most (low income, disabled etc.).
Beyond this they try to encourage the population to save and provide for their own retirement, thus the idea of the pension and the tax incentives it comes with.
4 pieces of pension related legislation changes
- Pensions Act 1995 - Set up regulation and compensation around occupational schemes, including minimum funding requirements and mandatory increases to pension payments.
- Accounting standard FRS17 - Required companies to report the surplus/defecit on their pension plan as it occurs.
- Pensions Act 2004 - Introduced the Pension Protection Fund (PPF) which looks after people on DB schemes if their employer goes bust.
- Taxation of Pensions Act 2014 - Allows flexibile drawdown of pension funds
What was the governments first attempt to encourage people to contribute more to their retirement?
In 2001 they introduced stakeholder pensions and made all employers offer their employees “access” to one.
It was unsuccesful and the requirement was removed when auto-enrolment was later introduced.
What are the 6 key challenges to retirement savings (from a government perspective)?
- People are living longer;
- People aren’t saving enough (though this is improving lately);
- Companies are switching from DB to DC schemes;
- Pension scandals;
- Falling annuity rates (due to low gilt rates and other investment returns); and
- Pension complexity.
What are the two impacts of the ageing population?
- It reduces annuity rates (annuity providers will have to pay out for longer so they have to reduce the amount they pay out each year);
- For those taking flexible pensions (perhaps due to poor annuity rates) it increases the risk that they will run out of assets before they die.
At age 65 how long can a man expect to live?
- 75% chance of surviving to 81;
- 50% chance of surviving to 88;
- 25% chance of surviving to 94;
- 10% chance of surviving to 99
What is the current requirement for companies and what impact is it having?
When was it brought in?
Auto-enrolment
Since October 2012 all eligible workers have to be enroled into a qualifying pension scheme.
This is significantly increasing the level of pension savings.
What are the two types of occupational pension and the trend?
- Defined Benefit - The benefit is defined, i.e. there is a fixed payout planned for, typically a multiple of the persons final salary (thus the alternative name final salary scheme).
- Defined Contribution - The company only guarantees the amount they contribute (a % of salary each year), the investment returns and final pension payments are the employees own risk
The trend is that DB schemes are being closed to new entrants and contributions ending and they are quickly switching over to DC schemes.
When an employer pays for an adviser to speak to their employees about pensions, is it taxable as a benefit-in-kind?
Rules
Not if:
- Similar advice is offered to all employees;
- The advice is on pensions only (not tax advice or general financial advice); and
- Cost is up to £150 per employee per year (whole amount is taxable if over £150, not just the excess over £150)
Employees tend to move around between employers throughout their career more than ever, what impact does this have on pensions?
If you’re on DB schemes, you usually get less benefit if your career was split between several employers than if you worked for one company your whole life.
What is the rule around using pension funds to pay for financial advice?
Since April 2017 it is possible to take £500 out of a money purchase pension fund (tax free) to spend on financial advice.
It doesn’t have to be related to pensions, can be any financial advice.
No restrictions around age but you can only do it once each tax year and a total of 3 times in your lifetime.
What is the official name for the lump sum you can take out of your pensions fund when you retire and how much is it?
The Pension Commencement Lump Sum (PCLS) is 25% of the value of the fund
Money Purchase
What is a money purchase scheme?
Money purchase mainly refers to DC schemes, however it also includes cash balance schemes.
Cash balance schemes are a hybrid between DB and DC schemes where there is a fixed promised lump sum payment at a specified age (usually retirement age).
After the PCLS how can income be taken from a money purchase scheme?
- Lifetime annuity - Dependent on fund size and annuity rates. A flexible annuity is where the annual income rate can be reduced in any year.
- Scheme Pension - Similar to a lifetime annuity but organised by the pensions scheme and dependent on fund size and scheme rates.
- Drawdown - Just taking money out of your fund. Capped Drawdowns have government imposed caps on drawdowns but are no longer available. Flexi-access drawdowns now offer unlimited drawdowns.
- Uncrystallised funds pension lump sum - Taking a lump sum from the pension fund from which benefits have not yet been taken (uncrystallised).
Death Benefits
How is a dependant defined?
Dependants can include:
- Widow(er) or civil partner at time of death;
- Child under the age of 23 at time of death;
- Child otherwise dependant due to physical/mental health issues;
- Anybody else the court determines is financially dependant, in a financial relationship of mutual dependance or dependant due to physical/mental health, in the opinion of the scheme administrator.
Death Benefits
How is a nominee defined?
What happens if there isn’t one?
A nominee is any individual other than a depedant who the member has nominated to receive the benefits of a pension plan on their death.
In the case of no nominee and no depedants the scheme administrator can elect a dependant.
Death Benefits
How is a successor defined?
A successor is an individual who a nominee or dependent has nominated to receive their flexi-access drawdown.
State Pension age for men and women
Current targetted level and date
Regularity of reviews to SPA by law
Currently 65 for men, was 60 for women in 2010 but rising to 65.
Will rise to 66 for both men and women by 2020.
Plan is to rise to 67 by 2028 (with further reviews thereafter).
Rise to 68 between 2037 and 2039.
By law SPA must be reviewed every 5 years.
What was the impact on NICs when somebody had a DB scheme that was contracted out?
What has happened to NICs of these people as part of recent pension changes?
Originally NICs would be lower, this being an incentive to contract out and give up your right to additional state pension accruals.
Recent changes have increased employer and employee NICs for these people to try to discourage these schemes from being maintained.
What were rough annuity rates in 1990s, 2000 and 2017?
(for a male age 65)
- 1990s: 15%
- 2000: 9%
- 2017: 5.2%
