Pensions and retirement planning

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Most occupational pension schemes are established on a defined contribution basis. A significant number of existing defined benefit schemes have been converted to defined contribution while many others have closed to new entrants and been replaced by defined contribution schemes.

Across the defined contribution market, occupational pension schemes are being replaced in many instances by grouped individual arrangements known as group personal pensions (GPPs). For quite some time, smaller employers have tended to use GPPs and group stakeholder pensions because they carry fewer administrative and other responsibilities for the employer, e.g. there is no trustee requirement.

Eligibility

Personal pensions and stakeholder plans

Any ‘relevant UK individual’ is eligible to contribute to a personal pe...

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Expenses at retirement are assumed to be 4% of the annuity value at retirement

Including spouse/civil partner’s pension is at discretion of the provider

No allowance is made for mortality before retirement

Mortality after retirement is based on unisex rates

A DWP consultation on how to deliver better annual workplace pension benefit statements together with a harmonised projection basis laid out plans to transfer ownership of SMPI guidance from the FRC to the DWP. The Government’s response was issued in October 2020.

The Government will consult further on draft regulations and guidance in respect of simpler benefit statements in particular regarding costs and charges and assumptions.

How often should statutory money purchase illustrations (SMPIs) be sent?

Answer : Purchase course for answer

Individual pensions (personal pensions) are usually established by issuing contracts which are subject to personal pension scheme rules adopted by the provider, e.g. an insurance company or authorised collective investment scheme manager. The main differences between trust-based schemes and contract-based schemes are:

The ma...

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In April 2019 the FCA issued a consultation paper CP19/15: Independent Governance Committees: extension of remit – om December 2019 final rules were published and came into force on 6 April 2020. The new rules extend the remit of IGCs as follows:

A new duty for IGCs to report on their firm’s policies on ESG issues (environmental, social and governance), consumer concerns and stewardship, for the products that IGCs oversee

A new duty for IGCs to oversee the value for money of investment pathway solutions for pension drawdown

Personal and stakeholder pensions

Personal and stakeholder pensions are individual defined contribution arrangements through which a fund is built up, which is used to purchase benefits at the individual’s chosen retirement age.  The funds can be accessed from normal minimum pension age of 55 (or earlier through ill-health or a protected pension age).

Group personal and stakeholder pensions

A group personal pension plan is essentially a collection of individual personal pensions or stakeholder plans provided by an employer instead of an occupational pension scheme. As with any personal pension, each employee will have their own plan from which they will build up an investment fund through contributions and accumulated investment growth. This is then used to draw benefits at retirement.

Self invested personal pensions

Self invested personal pensions (SIPPs) are effectively personal pension plans with a wider choice of investment and retirement options than personal pensions.

The post-simplification rules impose few restrictions on the investments that can be made, though certain 'prohibited' assets will be subject to punitive tax charges. Specifically, investments into residential property and tangible assets (such as antiques, fine wines, jewellery, classic cars, etc) w...

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At retirement, the value of the member’s defined contribution assets may be added to, in order to make sure that the intended benefit levels are provided, but there is no requirement or promise to actually do so. The top up may come from either an unallocated account held within the scheme specifically for this purpose or from additional one-off contributions from the employer.

However, a targeted money purchase scheme cannot be described as offering the same level of certainty that a defined benefit scheme can, as the only promise is the value of the defined contribution assets for individuals when they retire. Indeed, the employer can disconnect themselves from the funding target at any time.

These days, targeted money purchase schemes are rare. In practice, an employer is likely to use a cash balance arrangement to provide some element of guarantee for fund returns/value without providing the notional defined benefit promise.

What are the key differences between a SIPP and a SSAS?

Answer : Purchase course for answer

Member contributions

The maximum personal contribution paid by a member under age 75 that can receive income tax relief is 100% of relevant UK earnings or £3,600 gross regardless of their earnings, whichever is greater. However, this is also constrained by the annual allowance of £60,000, though carry forward may be used where available. Where contributions exceed this, the excess will not have to be refunded but tax relief will not be available on the excess. If total contributions in respect of a member exceed the annual allowance, and no unused allowance is available to carry forward, a tax charge could appl...

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In-specie contributions

This is a contribution to a registered pension scheme that is in the form of an asset or assets such as shares. The tax rules however state that contributions must be a monetary amount so:

The member (or employer) agrees to make a monetary contribution, and

The contribution is settled by way of a transfer of an asset or assets 

If the contribution is made by the member and the scheme uses the relief at source method the amount of contribution is the net amount and the scheme administrator can recover the basic rate tax relief from HMRC in the normal way. 

How are pension contributions treated that are above the permitted limits?

Answer : Purchase course for answer

Take a refund of personal contributions paid into the pension scheme. It was possible for an employee with less than two years’ pensionable service who left prior to  1 October 2015 to have had a refund of pension contributions from an occupational defined contribution (DC) pension scheme, i.e. the same as the rules applying to occupational defined benefit (DB) sche...

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Take early retirement benefits. Usually the earliest age that benefits can be taken is 55 (currently) – the rules of the scheme will state how benefits can be provided.

Under what circumstances could a scheme member obtain a refund of personal contributions if they left within two years of pensionable service?

Answer : Purchase course for answer

The death in service benefits from a defined contribution scheme are the uncrystallised funds in the member’s name at the date of their death. This can be used to provide pension and/or lump sum benefits. 

Life cover

Pension term assurance

Between A-Day (6 April 2006) and 5 April 2007 it was possible to make any level of contribution to a registered pension sche...

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The death benefits in retirement for a defined contribution pension scheme will depend on the options available and selected when the member starts to draw benefits. If drawdown or phased retirement is chosen, the choice of survivor’s benefits can be deferred.

From which date was tax relief withdrawn for any new pension term assurance policies?

Answer : Purchase course for answer

Pension contribution insurance (PCI) is a separate insurance contract linked to a personal pension or stakeholder pension. This allows an individual’s and/or employer’s contributions to continue being paid if the individual is unable to work due to ill-health or incapacity after a specified deferred period (typically 26 weeks). The premiums payable for PCI are not eligible for tax relief.

Prior to the introduction of PCI on 6 April 2001, contributions could be covered in the event of incapacity by an option selected on the pension plan called 'waiver of contribution'. Up until 6 April 2006 existing contracts with in...

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Serious ill-health lump sums can only be paid out of uncrystallised funds (or out of unused funds after age 75).

State the circumstances whereby it is possible for a member to commute their uncrystallised pension arrangements for a serious ill health lump sum.

Answer : Purchase course for answer

Benefits can be taken from a defined contribution scheme in the form of an income and/or as a lump sum. The benefits depend on the size of the fund that has been built up. 

Pension commencement lump sum (PCLS)

A PCLS is usually available except when there is no scope in the scheme rules for any of the proceeds to be paid out as a lump sum (which would be rare) or where the member has used up all of their PCLS allowance.

The maximum PCLS is generally 25% of the fund, subject to a...

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It is an FCA requirement that providers of individual pensions give members the opportunity to choose the insurer which is to provide their lifetime annuity. This is known as taking an open market option (OMO), i.e. buying an annuity from any authorised insurer. This requirement does not extend to occupational schemes but would generally be regarded as good practice.

Members of what types of schemes must be offered an OMO?

Answer : Purchase course for answer

Since 6 April 2015, a deferred member of an occupational money purchase scheme with flexible benefits (money purchase benefits, cash balance benefits and any benefit that is calculated by reference to a fund) has the right to a transfer value right up to the date of crystallisation of their benefits, even if they have already reached the scheme’s normal pension age.

Members of defined contribution occupational schemes leaving employment can transfer benefits to:

Another occupational scheme of a new employer

A group personal pension/stakeholder scheme operated by their present employer

An individual pension or st...

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The adviser should also take into account:

Charges on the ceding scheme and new scheme

Past performance of funds

Analysis of existing with profit funds

Transfer penalties/market adjustment factors

Guaranteed annuity rates, bonus rates, growth rates

Proposed investments in the new scheme

Any life cover or benefit that will be lost on transfer

Why must a member of a defined contribution occupational scheme complete a discharge form when transferring benefits to another pension arrangement?

Answer : Purchase course for answer

Minimum standards

Minimum contributions

Contributions must be accepted by stakeholder pension providers at any frequency. The minimum contribution cannot be higher than £20 (net of basic rate tax relief). Any form of payment must be accepted other than cash, credit or debit card. Stakeholder sc...

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The decision trees include examples of how much a specific contribution will buy in pension terms. The calculation is made in real terms and assumes contributions will rise in line with inflation. The projected pension figures also include a 50% survivors' pension and inflation proofing.

The last page asks 'Where do I go from here?' and provides a list of sources of advice and advisers. The decision trees are updated annually.

Estimated study tim...

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