Learning Material Sample
Pension income options6. Critical yield and complianceLearning outcome: Understand the use of the critical yield in advising on drawdown pension and its implications for investment
The critical yield calculation is an attempt to show the investment returns required from a drawdown pension arrangement to match the income that could be provided by a traditional lifetime annuity. The critical yield calculations take into account both morta...
Shortened demo course. See details at foot of page. ...ve the annuity’s underlying interest rate. For example, if the underlying interest rate is 4%, the critical yield will normally be in the region of 6% to 7%.What does the critical yield calculation show? Answer : Purchase course for answer There is no regulatory requirement to produce critical yields on a drawdown illustration; it is longstanding best practice however of drawdown illustrations.
The regulators have historically defined two critical yields: Ty... Shortened demo course. See details at foot of page. ...estment return (2) is around 4% for market leading rates and the total critical yield (1) is 6%, the additional yield (3) is 2%. The additional yield figure does not vary significantly with underlying annuity investment returns. Firms must signpost availability of Pension Wise to clients. This is a free and impartial government service, offering guidance (not advice) on defined contributi...
Shortened demo course. See details at foot of page. ...idering/has decided to discontinue drawdown or use part of a fund for OMO, the OMO statement should be sent (unless one was already issued in the last 12 months). The FCA expects advisers involved in the income drawdown market to have an:
Awareness of such matters... Shortened demo course. See details at foot of page. ...d adviser fees on the contract. Understanding is a greater depth of knowledge than implied by awareness Annuities are generally backed by fixed-interest investments such as Government gilts. In order to make up for the effects of mortality drag and ongoing charges, a drawdown pension fund has to produce a greater return than that available from these fixed interest instruments. This normally means that a fairly high level of equity investment will be needed which increases investment risk.
Note that it is not the explicit return that matters here. What is important is the relative return on the drawdown pension fund compared to that on fixed inte... Shortened demo course. See details at foot of page. ...y may choose to adopt almost any investment strategy, depending on their attitude to risk.Those in poor health may be more concerned with protecting death benefits than providing long-term income. They may consequently choose to adopt a cautious investment strategy, possibly even based around cash deposits. Some individuals may be using drawdown as a temporary measure to meet varying income needs, with the intention of annuitising in a few years’ time. Index-linked or fixed interest investment might be appropriate in these circumstances Pension Wise is the form that the guidance guarantee took when it came into effect in April 2015. It entitles all individuals with a defined contribution pension to free...
Shortened demo course. See details at foot of page. ...ased pension schemesDeliver helpful guidance for consumers that considers their retirement options and refers them to specialist advice or information where appropriate Firms must give appropriate risk warnings to clients accessing their pension funds to help them unde...
Shortened demo course. See details at foot of page. ...n and retirement income providers, trustees of DC arrangements, and employer sponsors of DC schemes. Where drawdown, short-term annuities or UFPLS is to be used, a suitabil...
Shortened demo course. See details at foot of page. ...irm must provide a ‘standardised deterministic projection’. A pension increase exchange (PIE) exercise involves offering defined benefit scheme members the choice of exchanging future annual increases on their pensions for a one-off immediate uplift. The uplifted pension does not then attract any further annual increases. The offer can...
Shortened demo course. See details at foot of page. ...ples that it expects to be followed in any PIE exercise. These are set out, with further information, in a statement called “Incentive Exercises”. The Pension Regulator will investigate cases where it receives reports that the key principles have not been followed.The Pension Protection Fund (PPF) came into force in April 2005 and is an insurance scheme designed to protect members of defined benefit and hybrid schemes. It can provide compensation where a UK-based defined benefit (DB) or hybrid scheme is underfunded and the sponsoring employer becomes insolvent and therefore unable to fund the pension scheme. The scheme must not have commenced wind up before 6 April 2005. Eligibility to enter the PPF begins when a prescribed insolvency event occurs, at which point an assessment period of at least 12 months starts. During this time, the scheme will be considered to see if it meets the criteria for entry into the PPF. Several criteria and conditions will need to be fulfilled before payments can be made, including the requirement that no further benefits can be earned or transfer values paid and no new membe... Shortened demo course. See details at foot of page. ...ing paid, of 50% of the member's PPF entitlement, up a maximum of 100% of the member's PPF entitlement if there is more than one qualifying childProtection for pension increases in payment: there are no increases for benefits accrued for service prior to 6 April 1997. Benefits accrued for service after 5 April 1997 is increased in line with CPI to a maximum of 2.5% A PPF trivial commutation lump sum can be paid to those over 55 and under 75 and with £30,000 maximum overall benefits Early retirement is subject to an actuarial deduction Since April 2017, the PPF compensation cap is increased for those with pensionable service above 20 years by 3% for every extra full year. The maximum will be set at double the current cap. In what circumstances will the PPF provide compensation? Answer : Purchase course for answer The FAS provides some cover to members of under-funded defined benefit pension schemes not covered by the PPF that started wind up procedures between 1 January 1997 and 5 April 2005.
You should note that FAS has accepted no further applications for assistance since 1 September 2016. FAS members will be guaranteed 90% of their accrued pension before the scheme started to wind up. For those ... Shortened demo course. See details at foot of page. ...on for a 50% pension for spouses or civil partnersThe FAS has accepted no further applications for assistance since 1 September 2016 The FAS has accepted no further applications for assistance since 1 September 2016. Where a scheme commences wind up procedures on 6 April 2005, which pension protection scheme will potentially provide compensation? Answer : Purchase course for answer |
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