Capped drawdown (nov 18)
X
Selling premise held in SIPP back to company (nov 18)
X
Why take income from non Pension assets (15)
- income from inherited pension is taxable if donor was over 75
- PP can pay PCLS if 25% but rest is taxable
- taking funds from pension will reduce IHT exempt assets
- ISA income is tax free (and therefore reduces the total amount of funds needed to be used to provide income
- ISAs can be fed from UT’s to use CGT exemption
- ownership of assets could be equalised to make full use of personal, savings, dividends allowances and starting rate band
- client has a significant IHT liability will reduce the estate for IHT purposes
- and increase likelihood of RNRB applying
MPAA triggers
- take an income withdrawal from a FAD
- take an uncrystalised funds pension lump sum (UFPLS)
- take more than the permitted maximum for a capped drawdown
Taxation of UFPLS
- 25% is paid tax free
- remainder is income and taxed according to clients income tax position
What is a Pension Increase Exchange (PIE)?
- pension scheme members in receipt of a pension / or are about to start receiving a pension maybe offered a one off % increase on the initial starting income
- in return for the member to give up the rights to receive further pension increases (via escalation) in the future
- so on accepting PIE will be paid at a higher starting, but flat rate throughout
Advantages of PIE
THE SCHEME
- inflation risk and longevity risk are capped
THE SPONSORING EMPLOYER
- RISK is capped in that the financial effects of PIE are known
- improved profit and loss account
- improved balance sheet
THE MEMBER:
- a higher pension income AT retirement
- increased tax free cash
Disadvantages of PIE
THE SCHEME AND SPONSORING EMPLOYER:
- COST - cost of professional advice and overall implementation can be huge
- EMPLOYER may have to pay for members to receive financial advice
- Substantial legal, regulatory and reputations risks existing in the potential of being accused of a PIE mid selling exercise in the future
SCHEME MEMBER
- there is a break even point
- where the increased pension fails to match what they would have otherwise had (through lack of inflationary increases)
- as time goes on this option becomes less appealing
- this must be borne in mind ESPECIALLY for clients who require an income which matches inflation
OVERALL:
- the risk is capped and reduced for the scheme and employer and increased for member over the longer term
What is commutation?
- giving up of pension income in return for an immediate lump sum
- eg for every £1 is future annual income the scheme will offer £12 as a lump sum now
Factors to consider regarding PIE offer (13)
- will PIE provide income required (likely yes)
- will taking PIE push the client into a higher tax bracket?
- including state pension will it be more income than they require?
- if they DO NOT accept the PIE offer then will if provide the income they need NOW or Later including STATE PENSION
- client would like the income to increase inline with inflation
- this will not happen with PIE as they forgo any non statutory increases
- is client in good health/ medical history?
- if so then likely will end up with more overall income if they chose not so accept PIE
- there will be no LTA tax charge of PIE Is not accepted
Benefits to do a big lump pension contribution before retiring (3)
- maximise income tax relief
- capital will be removed from the estate for IHT purposes
- increased retirement income / PCLS
- potential for better returns than cash
Drawbacks of doing big lump sum pension contribution before retiring (3)
- timeframe may limit the investment options if income is to be drawn at retirement
- will have to source the capital from somewhere
- will increase the LTA benefits
Explain, giving reasons, why you would elect for a FAD over an annuity (10)
E - mr x will require flexibility of income payments
R - that would suit FAD better, more options
E - FAD provides a wider range of death benefits
R - decisions can be left until point of death rather than fixed at outset like with the annuity
E - annuity rates are low and Barry is young
- entering a FAD and delaying the annuity purchase could provide a higher income in the future if rates increase
E- mr X wants to retain investment powers over funds
R - not possible under the annuity
E - Mr X wants to preserve funds for next generation
R- which can not be achieved with an annuity
