Pension

Question 1

Key benefits for Jane increasing contributions into employer scheme (10)

Answer 1

• tax free growth
• 40% tax relief
• increased income in retirement
• more likely to be able to retire at 60
• will receive additional 2% employer contributions
• as long as she puts in additional 2 % / total of 5%
• ease of admin
• funds are outside estate for IHT
• IT free if she dies before 75
• maybe lower charges as employer scheme

Question 2

Benefits of Nick transferring DB scheme (6)

Answer 2

• can access bens before 65
• chose level and timing of withdrawals/income
• may have access to higher PCLS
• in death before age 75 Bens are payable tax free
• bens can be paid be passed to children on 2nd death
• if he transfers in good health then benefits are outside estate for IHT!

Question 3

Drawbacks of nick transferring DB scheme (6)

Answer 3

• lose of indexation
• loss of secure lifetime income
• if scheme is underfunded then TV may be reduced
• will take on my investment risk
• takes on longevity risk
• cost/charges/ complexity

Question 4

Explain in detail to Nick how a salary sacrifice arrangement would operate and the potential benefits this would provide him (10)

Answer 4

• agreement must be in writing
• nick’s gross salary would be reduced by the agreed amount
• but his net pay remains the same
• the amount sacrificed is paid into the scheme as a gross employer contribution
• it will reduce his IT paid
• and his NIC liability
• employer also saves NICs
• and may agree to redirect some or all of it into the pension
• therefore providing Nick with an increased rate of pension funding
• at no cost to him
• increases their IHT exempt assets
• increases his chances of achieving his objective of retiring when Jane reaches 60

Question 5

Process an adviser should follow to ensure the existing pensions and investments are on target for J to retire at 60

Answer 5

• establish income required in retirement
• level of inflation proofing required
• establish non pension assets that can be used to provide income
• assumed growth rates
• projections for existing pensions to janes age 60
• including ongoing contributions
• investment choices
• and all appropriate FCA guidelines
• take account of if annuity is to be bought
• or flexible drawdown
• whether nick will transfer DB scheme
• calculate fund required to provide income required
• any shortfall that exist
• calculate additional contributions required to meet shortfall
• hold regular reviews