Defined Contribution plans

Question 1

Occupational schemes

Answer 1

• Set up by employer
• Employer sets scheme rules such as retirement age
• Established under individual or master trust
• Normally offers scheme pension or lifetime annuity at retirement

Question 2

Occupational schemes

Executive Pension Plans

Answer 2

• Aimed at directors and senior employees
• Designed to provide higher benefits than standard occupation scheme
• Especially around tax free cash

Question 3

Occupational schemes

Small self-administered schemes (SSAS)

Answer 3

• Aimed at company directors & senior employees
• Less than 12 members who are all trustees
• Occupational version of a SIPP
• Flexibility of investments chosen by trustees
• Allows for pension to borrow and lend to the sponsoring employer

Question 4

Occupational schemes

Section 32 policies

Answer 4

• Designed to accept benefits transferred out of an occupational pension before A-day
• Preserved GMP - provider had to guarantee to match
• Max benefits subject to occupational pension rules - potential increased TFC

Largely historic

Question 5

Group Schemes

Answer 5

• Cheaper option for employers
• Individual contracts set up for each employee
• Employer still has control over scheme contribution amounts
• Easier to move on if employee leaves company as essentially a personal pension
• Largely replaced by auto-enrolment schemes which do very similar things
• Scheme retirement age set but not allowed to restrict access post 55

Question 6

Personal Pension schemes

Retirement Annuity Contract

Answer 6

• Pre-1988 PPP - No new schemes since July 1988 but existing can be maintained
• Mainly aimed at self-employed
• Some offered GAR at retirement - safeguarded benefit
• Some could return pension as a lump sum death benefit
• Contributions paid gross & tax relief had to be reclaimed via self-assessment

Question 7

Personal Pension schemes

Personal Pension Plans

Answer 7

• Launched in July 1988
• Offers basic retirement features and fund choices but may offer little by way of flexibility when drawing benefits

Question 8

Personal Pension schemes

Stakeholder pension schemes

Answer 8

• Contributions start from as low as £20
• Max 1.5% AMC for 10 years then 1% after
• No initial charges
• Default investment fund such as a lifestyling fund
• No advice required

Question 9

Personal Pension schemes

Self-Invested Personal Pension

Answer 9

• Flexible investment of underlying assets
• Pension itself can borrow money (Not the member themselves!) - up to 50% of net fund value
• Cannot lend money
• Full range of flexible benefits at retirement - FAD, UFPLS etc.
• Must provide SMPI at least annually

Personal version of a SSAS
SMPI = Statutory Money Purchase Illustration

Question 10

Occupational Schemes - Tax relief on contributions

Answer 10

• Net pay arrangement from salary
• Paid from gross pay so immediate tax relief at source
• Reduction in income liable to income tax

Question 11

Personal Schemes - Tax relief on contributions

Answer 11

• Basic rate tax relief at source
• if HRT or ART - declare on self-assessment
• HMRC will expand your basic rate tax band by gross contribution
• So only BRT relief is invested into pension, HRT & ART reduce your income tax

Question 12

Retirement Annuity Contracts - Tax relief on contributions

Answer 12

• Paid gross
• Declare the contribution on tax return
• HMRC reimburse the tax relief you are due

e.g. If you are a BRT and want to contribute £10k then you need to do the full 10k yourself at first. Declare it on your self-assessment & HMRC will pay you back the tax relief (£2k) so you have made the net contribution.

Question 13

In-specie transfers/switches

Answer 13

• Contribution in form of an asset rather than cash
  e.g. shares in a company instead of selling the shares and contributing the cash
• Tax rules specify that a contribution must have a monetary value. As prices fluctuate this would not be known until the transaction completed
• Must declare an amount of contribution first - creates a ‘debt’
• Shares transferred to new pension, if share value less than declared value will need to top-up

Tax rules do not apply to DC to DC transfers (providers) as don’t receive tax relief on these type of transfers

Question 14

Statutory Money Purchase Illustrations

Answer 14

• Valuation of benefits
• Shows projected pension income in real terms, that may be available at a set retirement date in future
• Must be sent annually
• Makes assumptions of investment growth, inflation, interest rates etc.
• Applies to all personal pensions & group pensions
• Not currently required for occupational schemes, but can be sent on demand

Question 15

Legal bases

Trust based schemes

Answer 15

• Employer-sponsored
• Governed by a trust deed & overseen by trustees
• Master or individual trust required
• Contributions done via net pay arrangement from salary
• Generally more expensive for employer as more governence required

Question 16

Legal bases

Contract based schemes

Answer 16

• Outsourced to an insurance company & managed by them
• Stand alone policies for each member - if employee leaves they can simply transfer pension away
• Contributions done via relief at source for BRT
• Tax return for HRT & ART which increases Basic rate tax bands
• Often cheaper for employer as outsourced admin

Includes group schemes

Question 17

Trust based schemes - Trust arrangements

Answer 17

Bespoke/individual trust
* Must have member representation
* Member nominated trustees - at least 1/3rd of trustees must be nominated

Master trust
* One size fits all arrangement used by majority of employer schemes
* Best example is NEST

Lots of FCA governance for both

Question 18

Name the differences between a SIPP & a SSAS on following:
* No. of member(s)?
* Contract or trust based?
* Regulated by?
* Who selects investments?
* How much admin involved?
* Borrowing allowed?
* Lending allowed?
* Required to send SMPI’s?

Answer 18

• Individual member only - Limited members/trustees (12 max)
• Contract - Trust
• FCA - TPR
• Member - Trustees
• Less admin - More admin as trustees need to agree on decisions
• Yes 50% of net fund value - Yes 50% of net fund value
• No - Yes up to 50% of net value
• At least annually - Not required as occupational scheme

SIPP
SSAS

Question 19

Member benefit options at retirement

Answer 19

• Income and/or lump sum
• No guarantees, dependent on size of pot
• Can be used to purchase annuity, FAD (personal & group schemes mainly) etc.
• Tax free cash element

Question 20

Secured income at retirement

Answer 20

• Annuities
• Scheme pensions (Occupational DC schemes)
• Guaranteed income for life
• Death benefits can be included such as spousal/dependants pensions

Question 21

Unsecured income at retirement

Answer 21

• Drawdown arrangements - FAD
• Income not guaranteed as taken from investment pot
• Unused funds stay invested for growth potential
• Taxable at marginal income rate after 25% TFC
• Set death benefit rules by scheme

Question 22

Lump Sums

Answer 22

• Up to 25% tax free cash
• Anything above taxable as earned income
• UFPLS - Take full amount of pension in one go

Question 23

Ill health benefits

Answer 23

• If unable to work to poor health & causing financial hardship may be able to take before 55
• Rules decided by scheme
• Scheme can suspend benefits if member regains health
• May lead to more favourable annuity rates as impaired life/life expectancy

Question 24

Serious ill health benefits

Answer 24

• May be able to commute all benefits for a serious ill-health lump sum if:
• Funds are uncrystallised and
• Life expectancy less than 1 year
• Under/over 55 doesnt matter

Question 25

# Incapacity & pension planning Waiver of contribution

Answer 25

* Pre-A day * Pension contributions paid directly to pension at same levels as paid previously

Question 26

# Incapacity & pension planning Pension contribution insurance

Answer 26

* Post A-day * Contributions paid net to pension directly * Generally limit of £3,600 applies

Question 27

# Incapacity & pension planning Broader income benefits - Income protection

Answer 27

* Replacement of income paid to individual who decides what to do with the money * Could use some of this to continue contributions * If income is £0 apart from IP benefits, £3,600 limit applies as no relevant earnings

Question 28

# Death benefits - potential beneficiaries Successor

Answer 28

Only if placed in Drawdown Nominated by dependant/nominee or scheme admin if none in place Scheme pensions/ annuities - will have their own death benefit rules usually to spouse/dependant ## Footnote Term given to 3rd generation of beneficiary and beyond

Question 29

# Death benefits - potential beneficiaries Charity

Answer 29

* Available if no dependants * Member can nominate a charity OR * Scheme admin if no dependants can be located

Question 30

# Death benefits - potential beneficiaries Trust

Answer 30

* Bypass Trust - so benefits can 'skip' a generation and be left to grandkids for example * Tax implications apply

Question 31

# Death benefits - potential beneficiaries Dependant

Answer 31

* Spouse/RCP * Child under 18 or 23 in full time education * Anyone else who has financial dependancy on member

Question 32

# Death benefits - potential beneficiaries Nominee

Answer 32

* Not a dependant, can be literally anyone * Nominated by member OR * Scheme admin if member hasnt made a nomination

Question 33

# Death benefits Personal Schemes

Answer 33

* Can elect anyone to receive death benefits via nomination form * Tax implications depend on age of member at death: Over 75 = taxable at beneficiaries marginal rate when income paid out. Under 75 = Can be taken tax free * If benefits crystallised into annuity - Depends on added annuity features * Uncrystallised or crystallised into drawdown - Full range of options apply

Question 34

# Personal Schemes Death over 75

Answer 34

Taxable on recipient's marginal rate when paid out as: * Death benefit lump sum or income * Annuity purchase If transferred to beneficiary a drawdown pension, not taxable until income or capital is paid. Transfer alone would not incur tax.

Question 35

# Personal Schemes Death under 75

Answer 35

Can be paid as: * Death benefit lump sum or income * Annuity purchase * Beneficiary drawdown transfer Tax-free on recipient provided benefits are distributed within 2 year window of death notification

Question 36

# Transferring benefits on leaving scheme Personal/individual Schemes

Answer 36

* Fully portable between providers * Advice not mandatory unless there are safeguarded benefits

Question 37

# Transferring benefits on leaving scheme Occupational Schemes

Answer 37

* Option to remain an active member ceases when employment ends * So would need to transfer to another scheme to continue contributing * Benefits can be left in scheme to be preserved

Question 38

# Leaving occupational scheme options Short service refunds

Answer 38

* Only available if membership is less than 30 days * Basically a right to cancel period like when you take out insurance etc. * Beyond 30 days member receives the right to maintain preserved benefits or transfer out * So refund no longer available

Question 39

# Leaving occupational scheme options Transfer of benefits

Answer 39

* Member with at least 3 months' service has right to obtain a transfer value * Receiving schemes may place restrictions on minimum value they accept * If low value, may need to transfer to stakeholder pension as they have minimum of £20 * Can transfer to access flexible benefits * Discharge form completed to ensure no unauthorised payments are made