Pensions

Question 1

What is a phased annuity purchase?

Answer 1

• Can choose how much to crystallise to achieve required income
• Income in early years is mostly PCLS so tax efficient
• Annuity provides lifetime guaranteed income
• Includes options such as widow’s benefits, annuity protection etc
• Flexible annuity options can be used to decrease income if required
• Uncrystallised funds can continue to grow/potential investment growth
• Any remaining uncrystallised funds available for beneficiaries
• Tax-free if death is before 75/currently IHT free

Question 2

What is phased flexi-access drawdown (FAD)?

Answer 2

• Can choose how much to crystallise to achieve retired income
• Tax-efficient income and total control over level of taxable income taken
• 25% PCLS/75% to FAD
• The remainder of the fund can remain invested
• Remaining funds invested to suit ATR
• Potential investment growth
• Decision about what to do with remaining funds can be deferred
• Not locking into an annuity/poor annuity rates/rates may improve
• Tax-free death benefits if death before 75/currently IHT free/flexibility of beneficiary

Question 3

What is UFPLS?

Answer 3

• Can access as much of the pension fund as income as required
• Up to 25% tax-free/excess taxed as pension income
• Tax-efficient income
• Remainder of funds can remain invested
• Remaining funds invested to suit ATR
• Potential investment growth
• Decision about what to do with remaining funds can be deferred
• Not locking into an annuity/poor annuity rates/rates may improve.
• Simple to understand
• Useful for tax planning
• Tax free death benefits if death before 75/currently IHT free/flexibility of beneficiary

Question 4

Explain mortality risk and how it applies to drawdown and annuities

Answer 4

• When annuities are bought the funds are invested by the insurance company.
• Some annuity holders will die earlier than expected meaning the insurance company has to pay less out in annuity income than they were expecting
• The extra funds stay invested; this extra amount is known as the mortality gain to the fund.
• The insurance company uses this gain to enhance the annuity rate offered to those buying an annuity
• This is also known as ‘cross subsidy’ - with drawdown there is no cross subsidy
• The mortality drag is the extra return needed from the pension fund to offset the loss o the cross subsidy with an annuity.
• The mortality drag factor is used when calculating the critical yield; this increases with age

Question 5

Explain how the new State Pension entitlement works and why clients should obtain a State Pension Forecast

Answer 5

• Minimum 10 years needed to receive any State Pension
• Full rate in 2025/26 = £230.25
• For a full new State Pension - 35 qualifying years are needed
• Qualifying years can be met through contributions or credits
• Starting amount calculated at 5/4/16
• Triple lock/State Pension increased by higher of earnings, prices and 2.5%
• Taxed as earned income
• Option to defer/must be for at least 9 weeks/rate of increase 1% per nine weeks
• BR19 shows projected State Pension and missing years/confirms SP age/indicates costs to fill gaps/can check credits for childcare period/helps with retirement planning

Question 6

Describe the process an adviser could use to ensure there are sufficient funds under an existing pension plan to provide the required levels of targeted benefits

Answer 6

• Establish the income required, allowing for inflation
• Calculate the fund required based on assumed/agreed annuity rates
• Allow for PCLS requirement
• Calculate existing benefits using assumed or agreed growth rate
• Include ongoing funding
• Calculate the shortfall and the increased contributions required
• Ongoing reviews needed.