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Copy of Copy of THE TABLET

THE TABLET!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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on 11 May 2016

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Transcript of Copy of Copy of THE TABLET

Pensions & Retirement Planning
Understand the political, economic and social environment factors which provide the context for pensions planning
The History of the Pension -
The Pensions Timebomb
Final Salary Pension Schemes - The Pensions Timebomb
Occupational Pension Scandals -
The Pensions Timebomb
Regulating Pensions - The Pensions Timebomb
Pensions: The Rise and Fall of the World Equity Markets - The Pensions Timebomb
Raising the Retirement Age - The Pensions Timebomb
What is the UK Government Doing? - The Pensions Timebomb
Will We Have Enough Money When We Retire? - The Pensions Timebomb
-Private sector pensions started about 150 years ago usually from enlightened Quaker family firms such as the Rowntree or Cadbury families
-A limited state pension was created in 1908, with a general state pension later started in 1948 based on national insurance contributions which created a right to draw your pension at retirement
-Some employers offered further ways of providing for retirement by providing defined benefit pensions

- From after WW2 up to the early 1980s defined benefit company pensions increasingly became the norm

-Only in the last 30 years that pensions are again increasingly becoming the responsibility of the individual

-Over the last three decades the pension system has been hit hard by fraud, new regulation, shifting political ideology, economic crisis, and an ageing population
-Pensions are for many worth a fraction of what they expected and so are experiencing pensioner poverty with stark choices to make.
-If your company didn’t provide a defined benefit scheme the other option is a defined contribution (DC) scheme
- With a DC scheme the individual bears the risks as you don’t know the size of your fund when you retire or the conversion rate to a pension income
-In the early 1980s the state pension became increasingly unsustainable due to changing demographics with more and more pensioners
-In the 1980s we had a Conservative government who sought to place responsibility on the individual and away from the state

-One step the Thatcher government took to make the state pension more sustainable and to encourage private provision was to link increases in the basic state pension to prices instead of earnings.
-When you are young you think retirement is a long way away

-Anything you can afford to put aside when young is a good thing
-However, as the state pension diminished during the Thatcher years, occupational pensions also suffered a number of devastating blows which put people off saving for their retirement
-Such as the £440 million that went missing from the Mirror Group pension fund
-This caused public concern about the security of their occupational pension schemes.
-The Maxwell scandal led to a major re-think of the regulation of occupational pension schemes

-The Pensions Regulator was created as a result of the Pensions Act 1995 to prevent this happening again

- The 1995 Pensions Act in an attempt to protect scheme members brought in the minimum funding requirement which asked what would the scheme get for its assets if it had to close down today? Could it honour its commitments?
-This had a knock on effect of a more conservative investment strategy for occupational pensions

-Which in turn had a significant impact on the sponsoring employer and its willingness to offer defined benefit schemes
-The next great shock was the inability of Equitable Life to honour the guaranteed returns it had promised to its customers on its policies

-In the early 1990s more than 1 million people were wrongly advised by their financial advisers to give up their occupational pensions and transfer into private pensions

-All of this put together has led to many people asking why should I bother?

-Economic downturns have a big impact on the pensions of ordinary people
-Especially for those close to retirement
-Now a widening gap between what people expect at retirement and what they receive
-Increasing longevity, more regulation, stockmarket volatility and the impact on the company’s accounts all conspire to make pension schemes expensive
-Companies simply can’t afford to run final salary schemes any more
-The state pension has also fared poorly with means testing benefitting some and acting as a disincentive for others to save for their retirement.
-Economic growth and increasing productivity is unlikely to solve the pension problem
-Money that companies are having to put into their pension deficits is money that isn’t available for investment and improvements in productivity
-Many people are working longer because they either want to or because they have to as they can’t afford to retire
-Though the opportunities to do so aren’t always available via employers
-The Turner Report recommended increasing the state pension age to age 68.
-The Turner Report also felt that the way ahead involved ‘opting out’ rather than ‘opting in’

-People need enforced additional savings – but to their own pension pot
-The best time to start saving for retirement is as early as possible
-Long term planning for retirement doesn’t sit well with short term adversarial political environment where pensions rules frequently change
-One example of the impact of changing governments on pensions is when Gordon Brown removed an estimated £5 billion from pension plans by removing the ability to reclaim dividend tax credits.
-The onus to safeguard our futures is on our shoulders
-But it is a national problem that crosses the generations
-Society as a whole has a responsibility to everybody in it
-The question though is where to draw the line…..

-We need to learn the lessons from the past
-There are fewer guarantees than ever that we will have enough money when we retire
-There is no second chance to re-run your life and learn from your mistakes.
To Summarise LO 1.1-1.5
The Role of Government:
- To shape legislation
- To provide state pensions
> Basic state pension
> State additional pensions
Challenges to pensions:
- Not enough being saved
- Move away from defined benefit schemes
- Pension scandals
- Falling annuity rates.
- Complexity
Company involvement:
- Increasing life expectancy
- Changes in accounting standards
- Falls in stockmarkets
- Stakeholder employer access requirements
- Auto-enrolment.
Incentives:
- Tax relief on your contributions
- Tax-free growth
- Tax-free income (not on dividends)
- Tax-free lump sum at retirement
- An income in retirement!
Disincentives:
- Restrictions
- Complexity
- Mistrust
- Expense
Attitudes:
- Affordability
- It's a long time away
- The state will provide
- Usually either final salary or career average
- Pensionable service
- Pensionable remuneration
- The accrual rate
- Tax-free cash either by commutation
or calculated separately

DEFINED BENEFIT PENSIONS


Individual arrangements such as

- Stakeholder pensions
- Personal pensions
- Self Invested Personal Pensions (SIPPs)

Usually governed by a contract



DEFINED CONTRIBUTION PENSIONS


Occupational schemes such as:
 
- Money Purchase schemes
- Small self administered schemes
- Executive pension plans

Usually governed by a trust


DEFINED CONTRIBUTION PENSIONS

- Can carry forward unused annual allowance from previous 3 tax years

- AA assumed to be £50,000 in 08/09, 09/10 & 10/11. It was £50,000 in 11/12 & 12/13

- Need to have been a pension scheme member in each year to be allowed to carry forward from it

- Have to have sufficient relevant earnings in the year being carried forward to in order to get tax relief



CARRY FORWARD OF UNUSED RELIEFS

- Contributions during the pension input period ending in tax year are measured against the annual allowance for that tax year

- Different arrangements can have different input periods, but each arrangement, can only have one input period ending in each tax year

- The PIP does not have to last 12 months

- For schemes commencing on or after 6 April 2012, the PIP matches the tax year





PENSION INPUT PERIODS


- £50,000, held to April 2014 then £40,000
- Tested against total pension input amount
- Carry forward unused annual allowance
- Tax charge if annual allowance exceeded
- Charged at the individual’s marginal rate

THE ANNUAL ALLOWANCE

Relevant UK Individual
- Have to meet the conditions to get tax relief

Individual contributions:
- Maximum tax relievable individual contributions
= £3,600 or 100% of relevant UK earnings
- Two methods of tax relief
- Relief at source
- Net pay method
- Salary sacrifice

Employer contributions
- Unlimited
- Wholly & exclusively rules
- Spreading




TAX RELIEF

Remaining
£30,000
taxed at 45%

First £10,000
of excess
taxed at 40%

Taxable income £140,000

Total tax bill is £17,500 (overall tax rate 43.75%)


If exceed annual allowance, a tax charge arises
Tax charge is designed to recoup tax relief given
Achieved by adding excess contribution onto income

Example – employer contributions only
Bill has taxable income of £140,000 and has an excess contribution of £40,000

TAX CHARGES IF EXCEED ANNUAL ALLOWANCE

PENSION INPUT – DC SCHEMES

All inputs tested.

Includes:
- Member contributions
- Employer contributions
- Third party contributions

Excludes:
- Unrelieved pension contributions
- Pension credits
- Investment growth


Video of how to calculate Pension Input for active members of DB schemes
Video explaining which PIPs are tested against which annual allowance
Tax relief, the annual allowance & carry forward
The Lifetime Allowance

- Benefit Crystallisation Events
- Fund value calculation
- Taking benefits in stages

LIFETIME ALLOWANCE

Calculation of Fund Value
•All payments in force at 5th April 2006 (whether annuity or scheme pensions)
- Pre- A Day income: use 25: 1 factor.
- Pre A Day drawdown: use 25: 1 on max permitted withdrawal i.e. 100% GAD as at last review date.

•Defined Benefit Schemes not in force at A-Day
- Multiply accrued pension entitlement by valuation factor of 20:1. - Add the value of the PCLS.
•Defined Contribution Arrangements not in force at A-Day
- If in payment already then multiply pension by factor of 20:1. Add the value of any PCLS taken. If not yet in payment, then use the value of the funds as advised by the provider.

Video of how to calculate the remaining lifetime allowance with a previous post A-Day crystallisation
Benefits taken in stages
Taken before A Day: Value of the benefits (DC fund value or DB pension x 25) are simply deducted from the lifetime allowance.
Taken after A Day: The member’s lifetime allowance will be reduced by the %age taken at each benefit crystallisation event e.g. if 40% of the current lifetime allowance is used at the first crystallisation event, this will leave a balance of 60% of the lifetime allowance applicable at the next crystallisation event.
DC Schemes:
- No further contributions are made
- Except to provide DIS in place before 6 April 2006 or receipt of contracted out rebates


DB Schemes:
- Increase in value of benefits does not exceed the “Appropriate Limit"

RELEVANT BENEFIT ACCRUAL

- Total funds > £1.5 million as at 5th April 2006

- Funds protected at A Day plus lifetime allowance increases

- Member can stay in active scheme membership

PRIMARY PROTECTION

- LTA reduced to £1.5m from 6 April 2012

- Affects individuals whose pension rights exceeded/were likely to exceed £1.5m and had not applied for Primary /Enhanced protection

- Prior to 6 April 2012 could have applied for Fixed Protection: protects benefits up to £1.8m – conditions apply:

- No money purchase contributions may be paid on or after 6 April 2012

Accrual within a DB scheme must have ceased by 5/4/12, although Fixed Protection will not be lost if the value of the member’s benefits have not increased by more than the ‘relevant percentage’ in a tax year

The relevant percentage is either an annual rate specified in the scheme’s rules on 9 December 2010 or the percentage by which CPI increased in the year ending in September of the previous year


FIXED PROTECTION
- Any size of fund

- Fund protected + full fund growth

- But no further Relevant Benefit Accrual........

ENHANCED PROTECTION



Primary Protection

Enhanced Protection

Fixed Protection

TRANSITIONAL PROTECTION

Post A-Day = 25% of the value of the pension

Protected lump sum
- Scheme specific protection
- With primary protection
- With enhanced protection

PENSION COMMENCEMENT LUMP SUM

Primary Protection and lump sum > £375,000

When a lump sum is drawn after A Day, the protected lump sum rights at A-day are increased in line with the increase in the underpinned lifetime allowance (ULA). Any excess will be subject to the lifetime allowance charge.

Example
Assume fund value at 5 April 2006 is £1.6 million and lump sum is £500,000
If the member takes his lump sum in 2013/2014:

The lump sum will be £500,000 x 1.8m / 1.5m=£600,000





Enhanced Protection and lump sum > £375,000

Protected lump sum rights are defined at A-day as a %age of crystallised funds across all schemes, and will remain at the same % of actual funds at crystallisation.

Example
Assume fund value at 5 April 2006 is £1.6 million and lump sum is £500,000. The lump sum is therefore 31.25% of the fund value.
If the member takes his lump sum in 2013/14 and his fund has grown to £1.9 million:

Then the lump sum will be 31.25% x £1,900,000=£593,750

Scheme Specific Protection

Any transfer out of the scheme, after A Day, will invalidate lump sum protection unless it is a block transfer, or a bulk transfer, as a result
of the scheme wind up




Pre A Day Lump Sum:
The lump sum is increased in line with the rise in (underpinned) lifetime allowance up to the time of crystallisation. The underpinned lifetime allowance is £1.8 million until lifetime allowance exceeds this figure

Post A Day Lump Sum:
Calculated as 25% of the fund accrued post A Day
The calculation depends on whether the member has applied for fixed protection

Video of how to calculate PCLS with scheme specific protection
Transitional protection
Protected Pension Commencement Lump Sum
Odds & Ends
Normal Minimum Pension Age is 55

Benefits can be taken from 55 +

Special Ages
- Loss of protected age on transfer
- Except with bulk / block transfers

Benefits payable on death before
taking income

Lump sum
Dependants – definition
IHT implications


Unauthorised Payments - Charges

Dependant includes:

Child of member < age 23
Legally married spouse
Child of member 23 or over and dependent

A person who is:
Financially dependent on member
In a financial relationship of mutual dependence
Dependent because of physical/mental impairment



Video explaining how tax relief and the annual allowance fit together

The Pensions Regulator has the power to investigate schemes:
- It does this firstly by collecting data through the scheme return

- It also expects to receive reports of significant breaches of the law from 'whistleblowers’

- It also expects to receive reports where a scheme is unable to comply fully with the new scheme funding framework

- It can also demand documents (or other information) from trustees and employers


The power to investigate schemes

The Pensions Regulator has the following objectives:
- To protect the benefits and the rights of members of work based pension schemes

- To reduce situations arising that may lead to compensation being paid from the Pension Protection Fund

- To promote good administration and improve understanding of work based pension schemes

- To maximise employer compliance with employer duties and with certain employment safeguards



The Pensions Regulator’s objectives

This is Big Brother....You are live.....Do not swear!

- The Ombudsman will reach his own decision on the case
- The decision will be totally independent of any conclusion reached by The Pensions Advisory Service
- Following his investigation, the Ombudsman’s decision is final and binding on all the parties
- The decision can be enforced in the courts
- The decision can only be changed by appealing to the appropriate court on a point of law

The Pensions Ombudsman’s decision

Comparing the role of TPAS and The Pensions Ombudsman

The maximum compensation is:
£100,000 plus interest and costs
Increasing to £150,000 from 1 January 2012

Compensation limits

The Financial Ombudsman Service can look at complaints about:

Banking
Insurance
Mortgages
Credit cards and store cards
Loans and credit
Pensions
Savings and investments
Hire purchase and pawnbroking
Money transfer
Financial advice
Stocks, shares, unit trusts and bonds.

Complaints

The Pensions Regulator has the power to act against avoidance and as such may issue:
- Contribution notices: to force payment where there is a deliberate attempt to avoid a statutory debt
- Financial support directions: these require financial support to be put in place by the employer
- Restoration orders: if there has been a transaction at an undervalue these require the assets or their equivalent value restored to the scheme


The power to act against avoidance

The Pensions Regulator has the power to put things right:
- It can issue an improvement notice to individuals or companies
- It can act to recover unpaid contributions from the employer
- It can issue a freezing order to halt all activity within the scheme
- It can prohibit individuals from acting as a scheme trustee
- It can impose fines or prosecute the individual

The power to put things right

The Pensions Ombudsman can investigate trustees:
But only after the complaint has gone through the scheme’s dispute resolution process


Can the Pensions Ombudsman investigate trustees?

The Financial Ombudsman Service deals with:
Over a million enquiries
And over 200,000 disputes


Each year.....

The Pensions Regulator’s powers fall into three categories:
- The power to Investigate schemes
- The power to put things right
- The power to act against avoidance

Range of powers

Is the regulator of work based pension schemes:
Its principal aim is to prevent problems from developing


The Pensions Regulator

If the consumer doesn’t, they can go to court instead

On both the consumer and on the business

The Financial Ombudsman’s word is final.... or is it?

If the consumer accepts the decision it is binding

FOS

Must be made within three years of becoming aware

14

Time constraints for complaints

Or six years from when the event took place

If it decides the firm has treated the consumer fairly it will explain why


It is completely independent and impartial

Provides a free service to consumers to settle complaints against financial services firms

The Financial Ombudsman Service

Advisers

Employers

The Pensions Regulator’s approach

Works with trustees

His role is to investigate complaints about how pension schemes are run

He is not a consumer champion or a regulator


The Pensions Ombudsman is a person appointed by the Secretary of State

The Ombudsman appoints staff to conduct investigations and fulfil his functions

The Pensions Ombudsman

It also helps members of the public in disputes with their occupational or private pension arrangement

The Pensions Advisory Service is an independent non-profit organisation

It provides information and guidance to members of the public

Covering State, company, personal & stakeholder pensions


The Pensions Advisory Service

Many disputes settled within 3 months

9

6

0

Most disputes settled within six to nine months

3

Time taken to settle disputes

Time taken to settle disputes

If it decides the firm has treated the consumer wrongly, it can order matters to be put right

Comparison between the FAS and the PPF

Comparison between the FAS and the PPF

Comparison between the FAS and the PPF

Comparison between the FAS and the PPF

Comparison between the FAS and the PPF

Comparison between the FAS and the PPF

Comparison between the FAS and the PPF

- A prescribed insolvency event occurs

- A 12 month assessment period starts

- No further benefits can be earned

- No transfer values can be paid

- No new members can join the scheme

Eligibility to enter the PPF

Must be carried out:
To determine if the scheme is underfunded; and is based on the cost of providing the PPF compensation

Section 143 valuation

Also applies where:
A scheme’s funds have been misappropriated through fraud

The Pension Protection Fund

Came into force in April 2005

Protects members of UK based defined benefit and hybrid schemes

Provides compensation where:

- The scheme is underfunded; and
- The scheme enters into wind-up from 6 April 2005; and
- The sponsoring employer has become insolvent


The Pension Protection Fund (PPF)

Now provides a similar level of compensation as the PPF

That started wind-up between
1 January 2007 & 5 April 2005

The Financial Assistance Scheme

Covers members of underfunded defined benefit & hybrid schemes

Not needed to date

Awards compensation in the
Event of fraud

Run by the Board of the PPF

5

The Fraud Compensation Fund

Financed by a levy

And secondly.........

The 1st main difference between trust-based & contract-based schemes

Defined benefit schemes are always set up as trust based schemes

Defined Benefit schemes


Could be set up either as:
- A trust-based scheme;or
- As a contract-based scheme

Employer established defined contribution schemes

These schemes are outsourced:
Looked after by an insurance company
Who look after all aspects of the scheme

Contract based pension schemes

These are employer sponsored pension schemes that are:
Governed by a trust deed
Overseen by scheme trustees


Trust based pension schemes

A contract-based arrangement would insist the money remains with the scheme

A trust-based arrangement would offer a refund of contributions where the member leaves within two years

The second main difference is to do with their approach to early leavers

The provider is typically an insurance company

Subject to the provider’s scheme rules

Usually established by issuing contracts

Individual pensions

The scheme administrator must declare:
They will discharge their functions
And will do so at all times


Discharging their duties

It is however possible for the scheme administrator to delegate some of these duties to a suitable practitioner

Delegation

Every pension scheme must have a scheme administrator whose duties would typically include:

- Registering the scheme with HMRC
- Making returns of information to HMRC
- Reporting events relating to the scheme and the scheme administrator to HMRC
- Operating tax relief on contributions under the relief at source system for contract based schemes
- Providing information to scheme members, and others

The role and duties of the scheme administrator

They have the power:
- To hold scheme assets
- To determine questions
- To carry out any scheme transaction

Trustees’ powers

Trustees should have a good understanding of the contents of the following documents:

- Trust deed and rules
- Scheme explanatory booklet
- Statement of investment principles
- Statement of funding principles
- Minutes of meetings
- Scheme accounts
- Actuarial valuations

Trustees need to have a good understanding

- They must obtain audited accounts
- They must draw up a schedule of contributions
- They are obliged to report delays in delivery time of contributions
- They must prepare a statement of funding principles
- They must draw up a statement of investment principles
-They must not rely on the advice of any adviser whom they have not appointed themselves
- They must instigate a recovery plan when required



The specific responsibilities of a trustee.....

Pension schemes can be complex arrangements:
With many regulations and laws
Being a trustee is a specialist activity

It’s complicated being a trustee

An employer must appoint trustees to oversee a trust based scheme

The only requirement in order to be a trustee is the legal capacity to hold property. This will therefore exclude:
- Individuals disqualified under the Pensions Act
- Individuals who have been certified insane
- Individuals prohibited by The Pensions Regulator
- Or minors

Who can be a trustee?

Member nominated trustees

The company secretary and/or the company accountant

The trustees are typically....

One or more of the company’s directors

To act within the provisions of the trust

To act impartially and in the members’ best interests

To invest to achieve the best possible returns consistent with security


To hold the scheme assets on behalf of the trust’s beneficiaries

Trustees’ responsibilities

Role and duties of trustees and administrators

It's all about the Trust...unless you have a contract!

Secured Pension – death benefits

- Dependant’s income
- Balance of guarantee
- Capital protection


DRAWING PENSION BENEFITS

ANNUITY TRENDS SINCE 1990

Apart from people living longer, there are other problems facing annuities:

- Long-term gilt yields are near their historic low
- No sign of significant improvements – gilt yields may increase but full benefit may not pass to annuitants
- Solvency II (due 1 January 2014)/ gender neutral pricing are both factors that will drag annuity rates downwards
- Post coding / lifestyle / enhanced annuities – all result in lower incomes for individuals retiring in good health
- Conventional lifetime annuities can no longer be thought of as the default option for all of an individual’s retirement

PROBLEMS FACING STANDARD ANNUITIES

Lifetime Annuity:
- Paid by an insurance company
- Open market option must be available
- Can include annuity protection/dependants’ pension/ guarantee period of max 10 years
- Escalation can be included
- Can be transferred

SECURE PENSION

Scheme Pension:
- Only route for DB OPS
- Option for other types of DC scheme – typically large occupational schemes which offer a fixed rate of conversion
- Paid at least annually
- Maximum guaranteed period 10 years
- Bridging to State Pension Age available
- Can incorporate pension protection
- Cannot usually reduce in payment
- Can be transferred.

RETIREMENT OPTIONS

Secured Pension:
- Scheme pension
- Lifetime annuity

Drawdown Pension:
- Capped drawdown
- Flexible drawdown
- Short term annuity

DRAWING PENSION BENEFITS

Individuals facing many unknowns at retirement:

- Don’t know when they are going to fully retire
- Unsure about the outlook for equities / interest rates
- How much inflation will erode future spending power
- Don’t know how long they will live
- What will be the state of their health in future


KEY ISSUES FACING INDIVIDUAL CLIENTS

An estimated 1.4 million people in the UK aged 51-65 will live to be 100!

(Source – Department for Work and Pensions – Number of Future Centenarians by Age Group – April 2011)


DEMOGRAPHICS

Source: Population estimates and 2010-based projections, Office for National Statistics

HISTORIC AND PROJECTED LIFE EXPECTANCY AT 65

HOW MUCH DO YOU NEED?

In June 2013 a level annuity rate for a 60 year old is around 5%:

ADVANTAGES AND DISADVANTAGES OF THE DRAWDOWN PENSION

Take benefits in stages

PCLS 25% of crystallised fund

Income taken direct from the fund

Minimum / maximum based on GAD rules.


PHASED DRAWDOWN

PHASED RETIREMENT

PHASED RETIREMENT

Short Term Annuity:
- Temporary in nature
- Through an insurance company
- Open market option
- Maximum term of five years
- Could build in Escalation / Guarantees

RETIREMENT OPTIONS

Drawdown Pension:

- Residual fund less 55% tax

- Dependants income
scheme pension
lifetime annuity
drawdown pension

DEATH IN DRAWDOWN

Capped Drawdown:
- Maximum income 120% of GAD annuity rate
- GAD rates based on level, single life annuity rates paid monthly in arrears, no guarantee
- No minimum
- Review every 3 years unless new money designated or lifetime annuity / scheme pension bought with part of drawdown fund
- Review every year after age 75

CAPPED DRAWDOWN

Take benefits in stages

PCLS of 25% of crystallised fund

Use 75% to purchase an annuity

On death un-crystallised fund paid as a lump sum, tax free up to the lifetime allowance



PHASED RETIREMENT

HAVING MET THE MIR

Scheme administrators are responsible for checking the MIR. However, they won’t be liable where a member has made false declarations

Once test satisfied no further retesting

Contributions paid and defined benefit accrual in tax years falling after the tax year in which a client accessed flexible drawdown will be subject to the annual allowance charge


MEETING THE MIR REQUIRED

Relevant income in the tax year of application must be at
least £20,000

Example 1
• Starts £24,000pa annuity payable monthly on 24th May 2013
• Will receive £2,000pm for 11mths of the tax year = £22,000
• Can apply for Flexible Drawdown from 24th May 2013

Example 2
• Starts £24,000pa annuity payable monthly on 24th July 2013
• Will receive £2,000pm for 9mths of the tax year = £18,000
• Can apply for Flexible Drawdown from 6th April 2014

FLEXIBLE DRAWDOWN
So after securing the MIR it is possible to take the rest of the fund less income tax

But should you?

Example:

Client has MIR of £20,000 pa

Wants income of just below £42,475 to remain basic rate tax payer

Will cash in £22,470

As part of the encashment is tax free cash then less is needed.

Interaction with other investments

DRAWDOWN PENSION-WHAT CAN YOU DO ?

*Minimum of 20 members

not
Purchased Life Annuity
Non-pension income

MINIMUM INCOME REQUIREMENT

£20,000 ‘secured income’:
State pensions
Compulsory purchase annuity
Scheme pension*


Flexible Drawdown:
- Subject to a Minimum Income Requirement of £20,000 per annum ‘secured income’
- 25% can be taken tax-free if coming from an uncrystallised fund
- No cap on limit drawn



FLEXIBLE DRAWDOWN

MIR not tested in future tax years

Contributions/accrual stop here

Tax years

6 April 2016

6 April 2015

6 April 2014

6 April 2013

£20K

Client goes into Flexible drawdown

6 April 2012

FLEXIBLE DRAWDOWN MIR CONDITIONS

In the tax year when flexible drawdown is first taken:
- The full value of the MIR must be payable
- Further contributions are prohibited


MORTALITY DRAG

Type A critical yield: this is the growth rate needed on the drawdown investment sufficient to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity.

Type B critical yield: this is the growth rate necessary needed to provide and maintain a selected level of income.

CRITICAL YIELD

Shows investment return required from drawdown fund to match the income from immediate annuity purchase

Takes into account mortality drag + charges

Must be shown at age 65, 70 and 75

Two types of critical yield – Type A and Type B



CRITICAL YIELD

EFFECT OF A DRAWDOWN REVIEW ON INCOME

Income could be reduced due to:

- Lower fund value (due to withdrawals)
- Lower gilt yield (due to market timing)
- Lower maximum GAD limit (120% down to 100%)
- Lower factors from revised GAD tables (improving mortality)


Members aged below 75 in unsecured pension on 5 April 2011, will have their unsecured pension contracts effectively changed into capped pension drawdown contracts as at 6 April 2011

They will however, be able to keep drawing an income of up to 120% of the 2006 GAD tables until the earlier of:

- the end of their current five-year reference period;
- the start of the pension year after their 75th birthday; or
- the member requesting a change to their reference period.

TRANSITIONAL RULES FOR MEMBERS IN UNSECURED PENSION ON 5 APRIL 2011

Other than the member requesting a change to the reference period, the following circumstances will trigger a recalculation of the maximum income payable under the drawdown pension contract.

1 Part of the fund is used to purchase a lifetime annuity
2 Part of the fund is used to purchase a scheme pension
3 The member gets divorced and the drawdown pension is reduced due to a pension sharing order
4 The member has used part of their funds to provide a drawdown pension and they then decide to designate more funds to provide extra drawdown pension

These events will not change the pension year or the reference date. However:

in the case of numbers 1 to 3 above, the amount of maximum pension will be recalculated at the date of the change but the revised income level will not apply until the next pension year starts; and
in the case of number 4 above, if the re-calculated income levels are higher, these higher income levels can apply immediately, for the balance of the reference period.


THE CAPPED DRAWDOWN REVIEW PROCESS


Example
Harry designated benefits into drawdown pension on 1 May 2011 when he was 60. His reference period is therefore set to run from 1 May 2011 – 30 April 2014.

His pension performs well and Harry decides he would like to be able to draw a higher income and so, in December 2012, he approaches the scheme administrator and asks for his reference period to end a year early on 30 April 2013.

Harry’s scheme administrator agrees to his request. His maximum income is recalculated and his new reference period will run from 1 May 2013 – 30 April 2016.


THE CAPPED DRAWDOWN REVIEW PROCESS


It may be possible for a member aged under 75 to change the reference period of a drawdown pension

This is subject to the scheme administrator’s approval and the member must ask the scheme administrator before the end of the pension year

If they agree to the member’s request, the scheme administrator will then recalculate the maximum income which will then apply for the following three years


THE CAPPED DRAWDOWN REVIEW PROCESS


The pension scheme administrator is required to recalculate the maximum pension payable from a capped drawdown pension as follows:

- For members aged below 75, their maximum pension will be recalculated every three years, starting from when funds are first designated to drawdown pension. This is known as the ‘reference period’

- For members aged 75 or over, the maximum drawdown pension must be recalculated every year at the start of the pension year. The switch to annual reviews takes place at the start of the first pension year after the member’s 75th birthday

- The scheme administrator can carry out the re-calculation of the maximum drawdown pension on any day within a 60 day ‘window’ ending on the new reference date.

The date selected to carry out the re-calculation is called the ‘nominated date’.


THE CAPPED DRAWDOWN REVIEW PROCESS


The use of critical yields A and B come with some guidelines as required by the FCA which state that:

Type B illustrations cannot be supplied in isolation – they must be accompanied by a type A illustration;

Type A illustrations must show annuity purchase at ages 65, 70 and 75: other ages may also be assumed;

The regulator prefers type A illustrations to be client-specific, but allows standardised tables to be used; and
For client-specific illustrations, at least two of the following must be shown:

– the total critical yield;
– the underlying annuity investment return; and
– the additional yield, i.e. the difference between the total critical yield and the underlying annuity investment return.

CRITICAL YIELD

£200,000 fund transferred in - £50,000 taken as tax-free cash and the balance of £150,000 goes into capped drawdown – Max withdrawal allowed is GAD is £8,820 (Age 60 + 2.50% gilt yield of £49 per £1,000). Income required by member is £5,000 per annum

£200,000 fund transferred in - £50,000 taken as tax-free cash and the balance of £150,000 goes into capped drawdown – Max withdrawal allowed is GAD is £8,820 (Age 60 + 2.50% gilt yield of £49 per £1,000). Income required by member is £5,000 per annum

STATE PENSION CREDIT

Increase pension in payment:

- Defer payment 5 weeks +

- Increased by .20% per week (10.40% pa) during
deferment

Lump sum in lieu:

- Defer payment by 12 months + payments
foregone + 2% over bank base rate


DEFER STATE PENSION

NIC credits are given (except for women paying reduced rate NICs) where:

Unemployment, sickness, or maternity benefits are being claimed

Individuals who take time off work to raise children up to age 12 or who spend at
least 20 hours a week looking after a severely disabled person (although no credits
were given under the pre-April 2010 rules for periods before April 1978)

Individuals born since April 1957 were in full time education between the ages
of 16 and 18.
Credits are not given for years spent at university, though they will be given for
individuals aged 18 and over and in full-time training provided the training is
approved and does not last longer than one year


NIC CREDITS

Males:
Age 65

Females:
60 to 65 between April 2010 and November 2018


STATE PENSION AGE


Guarantee Credit:

From age 60 (increasing in line with SPA)
Top up weekly income to guaranteed minimum income

Savings Credit:

From age 65 (increasing in line with SPA)
Designed to encourage saving for retirement

Both take account of savings in excess of £10,000. The DWP will
assume a notional rate of income of £1 a week for each £500 of capital
or part thereof over £10,000 (a return of over 10%!)


STATE PENSIONS CREDIT

- Can still contract out via defined benefit schemes

- The introduction of the single-tier pension in April 2016 means an end
to contracting out via DB schemes

- Can no longer contract out via defined contribution schemes since 6
April 2012

CONTRACTING OUT

2013/14 Thresholds:

£1.75pw for each year of S2P membership when earnings between
£5,668 to LET of £15,000

10% x earnings £15,000 to UAP £40,040

If earnings < £15,000 treated as if £15,000


STATE SECOND PENSION

SERPS was introduced in 1978 for employees as an earnings-related pension and ran until April
2002

SERPS benefits up to April 2002 are calculated by taking an employee’s total earnings each year
between the upper and lower earnings limit, and revaluing those band earnings in line with increases
in national average earnings up to state retirement age to give the final earnings figure on which
SERPS is based

The SERPS pension after April 1988 is calculated at 20% (previously 25%) of average revalued lifetime
earnings (previously the best 20 years’ earnings) within the upper earnings band

There are transitional arrangements for those who were contributing to SERPS before the changes
were introduced

For anyone contributing to SERPS before April 1988 the pre-1988 part of their SERPS pension will
be calculated on the original 25% formula; and the post-1988 part is calculated according to the
tax year in which their SPA falls ranging from 25% in 1999/2000 to 20% for 2009/10 and later


SERPS

- The basic State Pension is normally increased in
April each year
- From April 2011 the increases will be based on a
triple guarantee of whichever is the highest between
earnings growth and price inflation, or 2.5%
- From 6 April 2012, the Consumer Prices Index (CPI)
is used as the measure of price inflation

INCREASES

In 2013/14 the full basic State Pension for a single person is £110.15 per week. A married man aged
65 or over can claim an extra £66.00 in 2013/14, provided his NIC record is adequate and his wife is
either:

At or above her SPA, irrespective of her earnings or other pension income. In this case the additional
pension is classed as a ‘Category B’ pension and will be taxed as her own income; or

Aged under her SPA and she is earning less than, and/or receiving a pension of less than £71.70 a week
in 2013/14 and her husband reached State Pension age before 6 April 2010. The payment is classed
as an ‘adult dependency increase’ (ADI), which is taxed as the husband’s income and is payable as
long as they satisfy the qualifying conditions, subject to a period of maximum of ten years from
6 April 2010. Since 6 April 2010, no new adult dependency increases (ADIs) have been awarded

The amount is reduced if the man does not receive a full basic State Pension

A married woman with her own NIC record may have contributed enough to give her a basic State
Pension in her own right. The additional pension of £66.00 will then be increased to a maximum
of £110.15 a week.



AMOUNT OF THE BASIC STATE PENSION

Entitlement to the basic State Pension is based on an individual’s NIC
record:

Those earning less than the NIC lower earnings limit pay no NICs and
receive no pension, although a system of credits will ensure a benefit
entitlement in some cases

Anyone reaching SPA now must have paid, or been credited with, 30
qualifying years of national insurance during their working life to receive
the full basic State Pension

A pro-rata reduction applies for shorter contribution records (provided
there is at least one year’s contributions/credit). Likewise, once you
have 30 qualifying years you do not stop paying national insurance.
National insurance is payable up until State Pension age is reached


ENTITLEMENT

65 - 66 October 2020

Then phased in between

66 - 67 2034 - 2036

67 - 68 2044 - 2046


STATE PENSION AGE

State Pensions
Critical yield and the drawdown review process
Drawdown pension
Secure pensions
The total loan to a pension scheme for any purpose is limited to 50% of the net scheme
assets of the scheme before the loan.

Example: Jim’s SIPP has a fund value of £200,000. He would like to use
the SIPP to purchase a commercial property that has been valued at £270,000

The SIPP can borrow up to £200,000 × 50% = £100,000

The fund value of £200,000 will be available as a deposit, so the SIPP’s total
purchasing power is £200,000 + £100,000 = £300,000

Where a scheme has existing borrowing, the maximum loan remains at 50% of net
assets i.e. assets less the existing loan


BORROWING BY A SCHEME


Maximum 50% scheme assets

Loans must be :

- secured as a first charge on assets of equivalent value

- repaid by equal annual instalments

- repaid in no more than 5 years (can be rolled over once)

- carry minimum rate of interest (1% over average bank base rate)



LOANS TO A SPONSORING EMPLOYER

Occupational Schemes

< 5% scheme assets if 1 sponsoring employer

< 20% scheme assets in total
( 4 + sponsoring employers )

SELF- INVESTMENT LIMITS

Provided the client is under 75 years old and does not face any
lifetime allowance issues, recycling pension income rather than
reducing it (where possible) has two potential advantages:

- It increases lump sum death benefits

- It creates a further source of PCLS

- Typically, there is no tax cost in recycling, as the tax on the pension
income will be matched by tax relief on the pension contribution


RECYCLING EXCESS INCOME


The Government sees recycling of the PCLS as abuse of the tax simplification rules
and seeks to prevent excessive PCLS being recycled

This means that the entire PCLS will be treated as an unauthorised payment where
all of the following conditions are met:

- The individual receives a PCLS which, when added to any other PCLS drawn in
the previous twelve-month period, exceeds 1% of the standard lifetime allowance,
and
- The PCLS means that the pension contribution paid on behalf of the individual is
'significantly greater' than it would otherwise be,
- 'Significantly greater’ is taken to be ‘more than 30% of the contributions that
might have been expected’, and
- The cumulative sum of extra contributions exceeds 30% of the PCLS, and
- The additional contributions are made by the individual or by someone else, such
as an employer, and the recycling was pre-planned.



RECYCLING THE PENSION
COMMENCEMENT LUMP SUM


Although lifestyling is a valuable option, it does have some disadvantages:

- If the individual retires earlier than anticipated, the fund may have a high exposure
to equities at the point at which the annuity is purchased. If equity values are falling
this will lead to a reduced fund and hence a reduced annuity
- If the individual retires later than originally planned or if they commence income
withdrawal, too much of the fund will be in more secure investments. The fund will
have been switched into safer funds earlier than required and growth opportunities
will have been lost
- The individual’s attitude to risk may alter over the timeframe of the investment or
the automatic switching of the fund may mean that it no longer matches their
attitude to risk
- Switching occurs automatically at pre-set times and this does not allow for market
conditions and consequently switching may occur when equity values are depressed


LIFESTYLE FUNDS

For the right client, pension could now been seen as an extremely
efficient investment vehicle.....
- Tax relief on contributions
- Tax relief on fund
- No CGT issues on switching
- 25% of uncrystallised fund available as tax free cash
- No limit on level of income
- Income taxed as income
- On death Pre 75 full uncrystallised fund available with no IHT
- On death post 75 fund taxed at 55% - no IHT liability
- But there are alternative ways of saving for retirement……

PENSIONS – AN INVESTMENT VEHICLE

Whilst there are likely to be many areas where expenditure may increase,
including:

- Car and some travel expenses, especially where they need to replace a
company car
- Medical insurance; especially where the individual has previously been a
member of an employer sponsored scheme
- Many clients take extra holidays and travel more
- Expenditure on grandchildren, for example covering the cost of school fees
- There could be a need for long-term care at some point in the client’s life
and it may be prudent to reserve some funds for this purpose
- General increase in household utilities, gas, electricity etc


CHANGES TO EXPENDITURE

Typically the following expenditure will cease at or close to retirement age:

- Mortgage capital and interest repayments
- Pension contributions
- National Insurance contributions
- Life assurance premiums
- Savings
- Expenditure on children
- Work-related expenditure


CHANGES TO EXPENDITURE

It is also vital that you review the investments being used regularly and
re-direct contributions or switch funds as required. For example:

- If the intention is to purchase an annuity at the point of retirement then a
gradual switching of funds from equities into fixed interest funds will ensure
that there are no sudden falls in value just prior to annuity purchase
- If a fund is performing poorly against a benchmark, future contributions
can be re-directed to a suitable alternative
- If the client’s attitude to risk changes the funds may need to be moved to
investments that better meet their needs
- New funds may become available that offer greater growth potential


PENSION ACCUMULATION

Where you identify a shortfall, there are various means of dealing
with this:

- Increasing the contributions they make, subject to affordability
- Delaying retirement to give the funds more time to grow
- Decreasing expectations of the level of income available in
retirement or downsizing their home and using the funds released to
provide additional funds for retirement income
- Switching to a more aggressive fund strategy if there is sufficient
time and the client’s attitude to risk permits
- Taking partial retirement and continuing to work part-time


PENSION ACCUMULATION

There are many unknowns involved in making projections of future
pension entitlements, for instance:
- A client’s personal circumstances may change leading to a greater
(or lesser) need for income and/or capital in retirement
- It is likely that tax rates and legislation will change
- Investment returns will vary
- Changes may occur to the social security system that impact on the
level of benefits available and the age from which an individual will
be eligible to receive them
- The rate of inflation in the future is unknown and difficult to predict.


UNKNOWNS

Consider also:
Affordability
Attitude to risk (inc asset allocation)
Investments available
Any ethical considerations

OTHER FACTORS TO CONSIDER

The client’s financial needs at and after retirement are likely to depend on some or all of the following factors:

- When and how the client would like to retire
- Any specific needs the client has for capital at or after retirement
- Any specific liabilities that will need to be repaid at or after retirement
- The client’s desired level of income and capital in the early years of retirement and their longer-term income needs
- The client’s requirements for income or capital for a spouse or dependant(s) on their death
- Other specific requirements, such as provision for long-term care or estate planning aims


FACTORS THAT DETERMINE NEEDS

The Finance Act 2006 which introduced measures to treat investment in residential property and tangible assets as unauthorised member payments

The list of ‘taxable property’ covers residential property (with minor exceptions, e.g. a caretaker’s flat) and most forms of tangible moveable property

Residential property is defined in great detail, e.g. beach huts are residential property, but student halls of accommodation are not

Tangible moveable property basically means personal chattels (e.g. antiques, wine, art and cars) but excludes certain business assets valued at not more than £6,000


TAXABLE PROPERTY

- Drawdown pension reviews
- Purchasing an annuity
- Reaching age 75
- When gradually retiring
- Change in income needs
- Change in capital needs
- Recycling
- Changes in dependants
- Changed view of estate planning
- Changes in investment conditions
- Changes in legislation
- Product development
- Economic change

CLIENT REVIEWS


- ISAs
- Residential property
- Personal business investment

ALTERNATIVE SOURCES

This is where the investment mix of the pension fund is automatically moved
away from equities and into fixed interest investments and cash as
retirement approaches. This happens as follows:

- The switching begins between five and ten years before the individual’s
chosen retirement age
- This approach locks in gains that have been made and reduces the risk of
the fund falling in value as retirement approaches
- The inclusion of gilts within the fund also provides a hedge against falling
annuity rates, since annuity rates are based on gilt yields
- As the switching is automatic the individual does not have to remember to
switch their own funds as retirement approaches


LIFESTYLE FUNDS

A change of income requirements can stem from a variety of factors including:

- Starting to receive state pension and/or other pension benefits
- Inflation
- Failing health (of the client or their partner)
- A need for long-term care (for the client or their partner)
- Moving home, including emigration and immigration
- New family responsibilities
- A change in investment income
- Legislative changes
- Inheritance.


CHANGE IN INCOME REQUIREMENTS

Public sector pensions for members and their surviving spouses are fully index-linked,
though the public service schemes have several features that differentiate them from
private sector schemes:

- Pensions in payment escalate in line with the CPI, so they are fully inflation protected

- The treatment given to members on early retirement is usually superior to that offered
by a private sector scheme, particularly where early retirement is due to ill-health

- Public service schemes belong to the Transfer Club, which allows members to transfer
to another public sector or public service scheme and have their full pensionable
service credited in the new scheme


PUBLIC SECTOR PENSIONS

The FCA Handbook sets out the current requirements in the COBS sourcebook. COBS 19.1.2R and 19.1.3G
say that a firm must:

Compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme
with the benefits afforded by a personal pension scheme or stakeholder pension scheme, before it advises a
retail client to transfer out of a defined benefits pension scheme

Ensure that the comparison includes enough information for the client to be able to make an informed decision

Give the client a copy of the comparison, drawing the client's attention to the factors that do and do not
support the firm's advice, no later than when the key features document is provided

Take reasonable steps to ensure that the client understands the firm's comparison and its advice


FCA's VIEW OF TRANSFERS


Calculate deferred pension, as at date of leaving the
scheme
Revalue to Normal Pension Date
Convert to cash equivalent (based on assumed annuity rates)
Discount this cash equivalent back to today’s date

TRANSFER VALUE CALCULATION
FOR FINAL SALARY SCHEMES

What is TVAS?

When must it be used?:
When transferring out of a DB scheme

What does it do?:
Calculates the ‘Critical Yield’
To match the DB benefits at retirement
Normally based on retirement benefits only

TVAS

LEAVER OPTIONS

 
International Accounting Standards 19 replaced FRS17 for all listed
companies, however it uses broadly the same assumptions as FRS17

The aim of IAS19, like FRS17, is to make transparent the costs to a company
of running its pension scheme by fixing a discount rate based on AA rated
bonds and using market values for assets (as for FRS17) IAS19 gives an
element of consistency between companies

IAS 19 requires the pension scheme surplus or deficit to be brought onto
the company’s balance sheet and the pension scheme cost into the
company’s profit and loss account

Result is that the cost of running the scheme to the employer is more
transparent



IAS 19


Schedule of Contributions:
- The trustees must prepare a Schedule of Contributions, which specifies the rate of contributions
(by employer and employee) to be paid, and their due dates for payment
 - The scheme actuary must certify the scheduled contributions as being sufficient to ensure the
statutory funding objective will be met

The schedule must be reviewed annually
 
Recovery Plan:
- Required if the valuation shows that the statutory funding objective is not met, setting out the
steps to be taken to make up the shortfall
- The recovery plan must include a target date to clear half the shortfall
- No specific target period, but if > 10 years it will trigger closer scrutiny
- The recovery plan must be submitted to the TPR




SCHEDULE OF CONTRIBUTIONS
& RECOVERY PLAN





Reflects the circumstances of the sponsoring scheme (e.g. age profile of
membership, investment policy, employer’s financial strength)

A Final Salary scheme is required to “have sufficient and appropriate assets to
cover its “technical provisions’’

“Technical provisions” is the scheme liabilities – the cost of providing the accrued
retirement benefits. (i.e. the amount required on an actuarial calculation to make
provision for the scheme liabilities)
The technical provisions are to be determined on an ongoing scheme specific
basis.


SCHEME SPECIFIC FUNDING STANDARD





Pension x Commutation Factor
________________________________
1 + (0.15 x Commutation Factor)

COMMUTATION LUMP SUM

The PURPLE Book produced by The Pensions Regulator (TPR) showed that at 31 March 2012, 83% of private sector DB schemes were closed to new entrants, broken down as follows:
57% closed to new entrants only
26% closed to both new entrants and future accruals for existing members
2% in wind-up.


A DYING BREED

Final salary pension which depends on:
- Definition of pensionable employment
- Accrual rate used
- Definition of pensionable salary
- Whether it deducts the Basic State Pension

Career average:
- Which is based on the average earnings over a member’s career
- Which may be revalued with RPI or NAE
- There may be an improvement in the accrual rate


DEFINED BENEFIT SCHEMES

In March 2011, Lord Hutton published his Independent Public Service Pensions
Commission report on public sector schemes and recommended a number of substantial
amendments to public sector pensions, with the key ones being:

- Future accrual within public service pensions should be based on career average
earnings and not final salary

- Pension ages should be linked to the State Pension age (SPA)

- The Government should set a fixed cost ceiling, expressed as a percentage of
pensionable pay, for its contributions to the schemes


PUBLIC SECTOR PENSIONS

There is a growing awareness from pension scheme trustees that longevity risk is a real issue they
must address as well as a growing desire to offload longevity risk to a third party who are better
able to tolerate and bear that risk for them
 
Buy ins – the company buys an annuity contract to cover some or all of the pension scheme’s
liabilities, often those relating to pensioners in payment. The liabilities continue to be the
responsibility of trustees of the scheme

Buy outs – the pension scheme’s liabilities are transferred to an insurance company and it no
longer has any responsibility for them

Longevity swaps – the company purchases an investment to reduce the risk faced should
beneficiaries of the scheme live longer than expected



RISK TRANSFER

In particular, the comparison should:
1. Take into account all of the retail client's relevant circumstances
2. Have regard to the benefits and options available under the ceding scheme and the
effect of replacing them with the benefits and options under the proposed scheme
3. Explain the assumptions on which it is based and the rates of return that would have
to be achieved to replicate the benefits being given up

COBS also says that when advising a member of a DB occupational pension scheme
whether to transfer, the starting point should be ‘that a transfer will not be suitable’,
i.e. the default position is to stay put


FCA's VIEW OF TRANSFERS

Changes in :
- Discount rate used
- Assumed annuity rates
- Assumed pension increase rates

The scheme’s funding position

FACTORS THAT COULD AFFECT
TRANSFER VALUE CALCULATION

Serious Ill Health Commutation:
- Life expectancy less than 12 months
- Tax free lump sum up to remaining lifetime allowance
- Excess taxed at 55%
- Satisfactory medical evidence required from a registered
medical practitioner
- Otherwise classed as an Unauthorised Payment

ILL HEALTH

Ill Health Early Retirement:

- Draw benefits before NMPA
- Satisfactory evidence from a registered medical practitioner
- Member is and will continue to be incapable of doing their own
occupation due to physical or mental impairment
- Can be suspended if member gets better!


ILL HEALTH


Refund of contributions

Preserved Pension

Transfer value

Vest the pension

LEAVER OPTIONS


The difference in the methods of calculation of assets and liabilities, when compared
to the scheme actuary’s valuations, often resulting in a potentially lower solvency position

The emphasis on bond yields has encouraged investment in higher proportions of fixed
interest investments and lower equity content

The mortality assumptions used are often higher than in the latest actuarial tables


PROBLEMS ARISING FROM FR17 & IAS19



Finance Reporting Standard 17 (FRS 17) replaced SSAP24

Its aim is to dictate how company accounts show pension scheme costs

FRS 17 prescribed the method of calculation:

- Scheme assets are measured at market value

- Scheme liabilities are measured using an AA corporate bond discount rate

- Past service costs are immediately recognised

- Actuarial gains and losses are immediately recognised 


FRS17


Statutory Funding Objective:
Trustees must ensure that the scheme funding meets the scheme’s liabilities

Statement of Funding Principles:
The trustees must have a written statement of funding principles setting out their policy
for achieving the statutory funding objective

This will include:
- How liabilities are likely to grow and how covered by existing investments and future
contributions
- The methods and assumptions to be used
- The timescale for clearing any shortfall




STATUTORY FUNDING OBJECTIVE
& STATEMENT OF FUNDING PRINCIPLES




Pre 6 April 1997:
Excess over GMP Nil
GMP 6.4.78 to 5.4.88 Nil (CPI paid by state)
GMP 6.4.88 to 5.4.97 Scheme CPI max 3% pa State – balance to CPI

Post 5 April 1997 LPI:
6.4.97 to 5.4.05 CPI max 5%
6.4.05 onwards CPI max 2.50%

STATUTORY ESCALATION RATES

Guaranteed Minimum Pension (Pre 6/4/97) which must:
- Provide a widow & widower’s pension
- Must be revalued in line with earnings
- Must escalate in line with RPI in payment

Reference Scheme Test from 6/4/97 onwards must:
- Provide a 50% spouse’s pension
- Provide benefits equivalent to a pension at age 65 of 1/80th of 90% of earnings in the LEL to UAP band (£5,564-£40,040)
- Be revalued in line with LPI (5% cap to 6/4/05; 2.50% thereafter)



CONTRACTED OUT DEFINED BENEFIT SCHEMES


Defined benefit schemes
A video showing how to calculate PCLS by commutation
Video of how to calculate the remaining lifetime allowance with going into drawdown pre A-Day
Video of how to calculate the remaining lifetime allowance with commencing an increasing pension pre A-Day
Video of SIPP/SSAS borrowing where there is an existing loan
Based on a % of ‘Qualifying Earnings’
Employer 3%
Employee 4%
HMRC (tax relief) 1%

To be phased in between 2012 and 2018

There are also three other alternative bases for making qualifying contributions

NEST/QUALIFYING DC SCHEME – CONTRIBUTIONS

Introduced in October 2012

Eligibility

Auto-enrolment

Contributions



NEST


Exceptions to the need to provide SMPI:
- RAC contracts
- S32 contracts
- Member’s with a retirement date within 2 years of illustration date
- The fund is less than £5,000 and no contributions have been made since 4 April 2003, and no further contributions are expected
- SSAS where all members are trustees
 
Key assumptions:
- Rate of future investment return no more than 7% pa
- Expenses at retirement assumed to be 4% of the value of the annuity at retirement
- Inflation will be 2.50% pa
- Contributions will continue to be regular contribution contracts until the selected retirement age
- If contributions linked to earnings then assume they increase by 2.50% pa
- Cost of insured benefits deducted from contributions will increase by 2.50% pa


SMPIs

- From April 2003 all money purchase schemes, whether personal
(inc stakeholder and SIPP) or occupational, including AVCs and FSAVCs,
must provide members with annual illustrations, on a basis laid down
by Statute
- The aim is to make schemes show the amount of pension that may be
payable from the selected retirement age, in today’s money terms 
- The projections must be based on an annuity payable before taking
tax free cash
- The annuity must include RPI increases in payment, with a 50%
spouse’s pension for married members 
- The figures quoted must be based on “today’s money’’ terms, rather
than future projections 
- From 20 December 2012, unisex annuity rates are obligatory



STATUTORY MONEY PURCHASE
ILLUSTRATIONS (SMPIs)


- At outset, a target level of benefit will be determined
- An actuary calculates the contribution rate required to provide the targeted benefit
- The contribution rate for each member will be regularly reviewed to keep the
funding of the scheme on course to provide the intended level of benefit
- At retirement, the value of the member’s DC assets may be topped up to ensure that
the target level of benefits is provided. This topping up may come from either:
- An unallocated account held within the scheme for this purpose or additional
special contributions from the employer
- The employer has not promised the illustrated level of DB, and can therefore avoid
paying for the defined benefits illustrated if the assumptions are not met
- The only benefit that is promised is the value of the DC assets
- Early leavers would normally only be entitled to a preserved benefit of the DC assets


TARGETED MONEY PURCHASE SCHEMES


Small self-administered schemes (SSASs):

- SSASs are defined contribution occupational pension schemes
- They are aimed at company directors and senior employees and are
governed by occupational pension scheme rules
- A SSAS is defined as a self-administered scheme that has less than twelve
members, all of whom must be trustees
- A SSAS has a pooled fund so that all of the members’ pension savings are
held in one common fund. In a SSAS the members benefits are ‘notionally
earmarked’
- SSASs offer access to the assets of the fund – 50% of net asset value can
be loaned to the sponsoring company, or borrowed by the scheme
- There may also be limited scope for investment in the company’s shares



SMALL SELF-ADMINISTERED SCHEMES

- A CIMPS works on the same principle as personal and stakeholder
pensions
- However, an employer establishes a scheme by declaration of trust
for the benefit of its employees

- The employer will set the scheme’s eligibility requirements and the
rules of the scheme will continue to specify the level of contributions
that will be paid and various other factors, such as death benefits,
the age to which the company will pay contributions, whether the
member has to retire to take benefits etc

CONTRACTED IN MONEY PURCHASE SCHEMES

There are three main categories of SIPP:

1. Full SIPP – In theory a full SIPP offers the whole range of investment opportunities,
however in practice even they tend to exclude some categories of investment such as
private equity and taxable property

2. Hybrid SIPP –offers a choice of the provider’s insured funds (both in-house and
externally managed) and non-insured investments. Some providers insist on a
minimum level of investment in insured funds, although about half do not

3. Deferred SIPP – effectiveley a personal pension written under a SIPP trust. The
facility to use full (or limited) SIPP investment powers can be called upon at any time,
but until that happens, the plan operates as a personal pension, usually with lower
charges than would apply to a full SIPP


SIPPs


- A SIPP is simply a personal pension scheme that has a much wider
investment and retirement choice than a personal pension offered by
a life office
- A SIPP can invest directly in company shares or can be used to
purchase a commercial property
- A SIPP can also borrow funds from a third party such as a bank
- A SIPP can offer drawdown pension and phased retirement as an
alternative to annuity purchase



A SELF INVESTED PERSONAL PENSION (SIPP)


Personal pensions plans (PPPs):
- Introduced on 1 July 1988
- A personal pension is an individual defined contribution (DC) arrangement
- Typically offer a limited range of internally managed funds and possibly some
externally managed funds

Stakeholder pensions (SHPs):
- Introduced on 6 April 2001
- Effectively a low cost personal pension
- Subject to certain minimum standards concerning for example:
Charges; Investment choice; Minimum contributions
- Transfer values

A group stakeholder (GSP) or group personal pension plan (GPP):
- Looks similar to an occupational pension scheme, but is actually a series of
individual DC arrangements taken out by the employees


PERSONAL PENSIONS &
STAKEHOLDER PENSIONS

Benefits depend on:
- Contributions made
- Fund growth within the fund(s)
- Charges
- Benefits selected at retirement


DEFINED CONTRIBUTION SCHEMES

Statements to be made with SMPI:

- The selected retirement date and illustration date
- What further payments are assumed to be made
- Assumed investment rate and inflation rates
- Assumption about spouse’s age (if spouse’s pension provided)
- Rate of post retirement increases assumed to be provided
- Frequency of pension payments
- That what actually happens may be significantly different from what has been
assumed and the actual pension payable will depend on a variety of factors, including:
- How the fund is invested and the actual investment return achieved, and
- The cost of buying a pension at retirement


SMPIs

- This is an occupational scheme that contains both a DC and a DB arrangement.
The benefit payable will be the arrangement with the higher value
- These schemes were popular in the 1980s when the DB scheme transfer
values for a member with short service could be less than the member’s
contributions
- Hybrid scheme contains a money purchase arrangement for member’s
contributions
- The early leaver’s transfer payment would be based on the higher of the
cash equivalent of the defined benefits and the money purchase arrangement


HYBRID SCHEME


Section 32s, AKA ‘buyout plans’, were introduced by the Finance Act 1981
The aim of these policies, prior to 6 April 2006, was to accept benefits transferred in
from an occupational pension scheme.

The main reasons for doing this prior to A-Day were:
- The guaranteed minimum pension (GMP) liability from a contracted out defined
benefit (DB) scheme could be secured within the section 32
- The maximum benefits that could be provided by the section 32 were subject to
occupational pension scheme rules, which meant that the member could achieve
higher tax-free cash and/or lump sum death benefits
- Certain scheme members such as controlling directors could be restricted and would
be unable to transfer to a personal pension making the section 32 the only option
- Apart from the provision of the GMP, section 32s are DC schemes, so the ultimate
level of benefits depends on investment performance and annuity rates at retirement
- Since 6 April 2006, a section 32 has become just another registered pension scheme.
They may still be used to secure a GMP liability following a transfer from a DB scheme.
They are also used for scheme wind-ups where the member has protected tax free cash


SECTION 32 POLICIES


- An EPP is a contracted in defined contribution occupational pension
scheme
- EPPs were generally set up as ‘one-man’ schemes aimed at directors
and senior employees so that higher benefits could be provided for
such employees separate from the main CIMPS
- EPPs are now really only of historical interest, but you may come
across individuals with EPPs that were set up prior to April 2006

The advantages of EPPs include:
- Flexibility for executives, who can decide their own preferred balance
between remuneration and pension contribution
- Confidentiality, where the employer wishes to set aside substantial
sums for one or more executives compared with contributions made
for other employees
- Portability, as compared to DB schemes, for executives who move
jobs regularly



EXECUTIVE PENSION PLANS

- Introduced in 1956
- The first pensions that the self-employed and individuals who were not
members of an occupational pension scheme could take out
- It has not been possible to take out a new contract since 1 July 1988
- A RAC is an individual defined contribution arrangement, which is very
similar to a personal pension plan
- The benefits offered can differ from personal pension plans in two ways:
- Some RACs offer a guaranteed annuity rate at retirement
- The benefits payable on death before retirement depend on the rules of the
RAC and could be more restrictive than return of fund:
- No return
- Return of contributions with no interest
- Return of contributions with interest


RETIREMENT ANNUITY CONTRACTS

Minimum contributions:
- A stakeholder pension scheme must be able to accept contributions at any frequency and
cannot set the minimum permitted contribution at a rate higher than £20
- They must also accept contributions by cheque, standing order, direct debit and direct credit
(i.e. BACs payments). The only methods of payment that can be refused are payments by
cash, credit card or debit card
- A stakeholder scheme must accept transfer payments from another pension source. It must not
impose any additional charges in respect of transfers into or out of a stakeholder pension scheme

Charges:
- For those who joined before 6 April 2005 the maximum annual charge is 1% of the value of
the fund
- For new members after 5 April 2005 the annual charge must be no more than 1.5% per
annum for the first ten years. After ten years this must be reduced to 1% per annum

Investment options:
- A default investment choice must be offered
- With-profits funds are allowed, but the fund cannot contain non-stakeholder assets
- With effect from 6 April 2005, new customers must be offered a lifestyle arrangement for
the default investment choice




DEFINED CONTRIBUTION SCHEMES

From 8 October 2001 until the introduction of the workplace pension reforms on
1 October 2012, all employers had to offer an employee access to a stakeholder
scheme within three months of their starting work. The only exception was if the
employer was exempt because they met one or more of the following criteria:

- They employed fewer than five employees
- All employees had earnings below the National Insurance LEL for at least one week
during the last three months
- There was an occupational pension scheme available to all employees, provided
that the waiting period was no more than one year
- However, employees under the age of 18 or those within five years of the scheme’s
retirement age at entry could have been excluded from the scheme
- They were employers who contributed at least 3% of each employee’s basic pay
into personal pensions or a group personal pension subject to certain conditions


STAKEHOLDER EMPLOYER
ACCESS REQUIREMENTS

Defined contribution schemes
Aims & Objectives of Retirement Planning
Drawdown Pension
Phased Drawdown
Pension Guarantee Credit (from age 60):

- Single £145.40

- Married £222.05

Pension Savings Credit (from age 65):

- 60p per £1 where income is above £115.30 (single)/£183.90 (married) up to a maximum of £145.40 (single)/ £222.05 (married)

- Reduced by 40p per £1 for each £1 over this level
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