Welcome to your AF3- Pension Planning Two day revision course

Welcome to your AF3- Pension Planning Two day revision course

Course Objectives To increase your chances of passing the exam.
By covering and revising the essential elements of the exam To show how to gain maximum marks by identifying what the examiner is looking for

Agenda Pension Accumulation State Pensions Defined Benefit Schemes
Money Purchase, taking the benefits Lifetime Allowance and Transitional Protection Pension Transfers

Exam Structure 3 case study based questions Q1 carries 80 marks
Q2 & 3 a total of 80 marks Three hours Pass mark 55% c 88 marks

The heart of AF3 What can you do? What should you do?

Money Purchase: Learning Objectives
Understand the economic and demographic pressures on providing income in later life Understand the legal restraints on saving into a pension product. Calculate accurately the available Total Pension Input for an individual in both money purchase and final salary schemes including the use of carry forward and, if appropriate, calculate the correct Annual Allowance Charge.

Identify the different pension accumulation options available to individuals
Understand the factors that should be established to advise on investment in the accumulation phase of a pension. Understand the main alternatives to pensions in making provision for later life.

What’s happening in pensions
Ageing population Demise of final salary schemes Lack of of life long employment Increasing state pension age More difficult to build up a decent income in later life

What is a pension? Strictly speaking a life long income paid in later life. Technically only a final salary scheme and the state pension are “pensions” in the true sense. Money purchase pensions are really just tax privileged investments Since April 2015 there is no need for a pension even to provide an income Neither is a pension the only way to provide an income in later lfe.

ISA v Pension ISA and pensions are effectively mirror images of each other ISA contributions are paid from net income, fund is tax free but benefits are tax free. TEE Pension contributions are effectively paid from gross income, fund is tax free but apart from tax free PCLS, the benefits are taxable EET

Legal constraints on pension investment
Eligibility UK tax resident Under 75, no minimum age No maximum contributions but amount that will attract tax relief is limited This is what will be the focus of accumulation questions in the exam

Accumulation terminology
PENSION ARRANGEMENT: any registered pension scheme to which an individual, their employer or third party makes a contribution or in which benefits are built up. PENSION INPUT AMOUNT (PIA): the total of member, employer and third party contributions to a pension arrangement. TOTAL PENSION INPUT (TPI): the total of all the individual’s Pension Input Amounts If the TPI exceeds the ANNUAL ALLOWANCE (AA) in a PENSION INPUT PERIOD (PIP) an ANNUAL ALLOWANCE CHARGE will be made.

Member contributions Member contributions are unlimited but amount that will get tax relief is limited; this is termed the MEMBER’S MAXIMUM TAX RELIEVABLE CONTRIBUTION This is the greater of: £3,600 and 100% of the member’s Net Relevant Earnings Jack has NRE of £80,000 so he can get tax relief on a contribution of this amount.

Employer contributions
Employer contributions are tax free in the hands of employees They are normally a tax relievable expense for the employer Employer contributions are unlimited There is no link between what the employer pays an employee is salary and what they pay as a pension contribution. Member tax relievable contribution plusemployer contribution = Pension Input Amount.

Annual Allowance Standard Annual Allowance for 16/17 is £40,000.
Therefore if TPI exceeds available AA an annual allowance charge will be made. Excess TPI over AA is added to member’s income and taxed as income. Carry forward can be used to increase the available AA.

Carry Forward Unlike an ISA, input into a pension is not on a “use it or lose it” basis. Possible to use up (carry forward) any unused allowance from the last three input years. To start the individual must have used up the annual allowance for the current year And been a member of a registered pension scheme for the years used in the carry forward process Individual contributions are still limited to that year’s NRE

Pension Input Period (PIP)
Since April the PIP is the same as the tax year Prior to that the PIP could be different. Whilst this is now historic it will have an impact on carry forward calculations for the next three years

PIP example The AA for PIP 12/13 is based on tax year 13/14
But must have NRE in 13/14 to justify this The AA for PIP 13/14 is based on 14/15 But must have NRE to justify this PIP 1/10 /12 to 30/9/13 PIP 1/10 /13 to 30/9/14 TAX YEAR 12/13 TAX YEAR 13/14 TAX YEAR 14/15

The curious 15/16 tax year Split into two mini input years
Pre alignment year ran until 8 July 2015 Post alignment year ran from 8 July 2015 to 5 April 2016. Annual Allowance for pre alignment £80,000 AA for post is zero but unused AA in pre year can be carried forward to post subject to a maximum of £40,000

Split year examples Pre -Alignment Post - Alignment Alice £80,000 Nil
Bob £60,000 £20,000 Carol £40,000 Dan Erica

Unused allowance from 15/16
Deduct TPI in pre year from £80,000 capped at £40,000 April July Deduct TPI in post year

Pre/post carry forward calculations
Pre year Amount to post year TPI in post year C/f available Alice £60,000 £20,000 Ben Carol £30,000 £40,000 Dan Enya £0 £10,000

Carry forward example Tax year Annual Allowance TPI Unused Amount c/f
13/14 £50,000 £30,000 14/15 £40,000 £10,000 15/16 £35,000 16/17 Total

13/14 £50,000 £30,000 £20,000 14/15 £40,000 £10,000 15/16 £35,000 £5,000 £55,000 16/17 Total £95,000

13/14 £50,000 £30,000 14/15 £40,000 £70,000 15/16 £35,000 16/17 Total

Carry forward example WRONG WAY
Tax year Annual Allowance TPI Unused Amount c/f 13/14 £50,000 £30,000 £20,000 14/15 £40,000 £70,000 £0 15/16 £35,000 £5,000 £25,000 16/17 Total £65,000

Carry forward example RIGHT WAY
In 14/15 he must have carried forward £30,000 So we must look back three years to where this came from Earliest year 11/12, nothing to carry forward £20,000 was carried forward from 12/13 £10,000 was carried forward from 13/14 Therefore there is £10,000 unused AA from 13/14 Tax year AA TPI Unused Amount c/f 11/12 £50,000 £0 12/13 £30,000 £20,000 13/14 £10,000 14/15 £40,000 £70,000

Carry forward example RIGHT WAY
Tax year Annual Allowance TPI Unused Amount c/f 13/14 £50,000 £30,000 £10,000 14/15 £40,000 £70,000 £0 15/16 £35,000 £5,000 £15,000 16/17 Total £55,000

Tapered Annual Allowance
Threshold Income Total income Less gross pension contributions under RAS Plus salary sacrifice post 8/7/16 Adjusted Income Total Income Plus employer pension contributions

Key points Threshold income
Total income is total of non-savings, savings, dividend and chargeable gains from life policies Deduct member pension contributions paid under net pay system Deduct Gross pension contributions paid under relief at source sytem Include PSA and Dividend allowance Exclude ISA income and other tax free income such as rent a room

Tapered annual Allowance flow chart
Is Threshold Income more than £110,000? Is Adjusted income greater than £150,000? YES NO Annual Allowance £40,000 NO YES Deduct result from £40,000 to give AA but will always be at least £10,000 Divide Excess over £150,000 by 2

Tapered AA and carry forward
If AA is reduced for 16/17, that will be the starting point for Carry forward. If TAA is £25,000, any excess contribution can be mopped upby using carry forward.

Money Purchase Annual Allowance
Details of when this applies will be covered in the next session. However if it applies the AA is reduced to £10,000 (£4,000 for 17/18) This is for life! Cannot use carry forward

Pension Input Amount (final salary scheme)
Calculate member’s benefits at 6/4/16 Increase by CPI at previous September and multiply by 16 Calculate member’s benefits on April Multiply by 16 The difference is the TPI. Takes account of compulsory member contribution Member can make a further additional contribution of Annual Allowance less PIA

PIA: DB example Kim had 10 years membership in her 60th DB scheme
Basic pay was £24,000 CPI 1% Pension rights 10/60 x £24,000 = £4,000 £4, % = £4,040 x 16 = £64,640 At end of year she has 11 years membership, salary £24,480 £24,480 x 11/60 = £4,488 x 16 = £71,808 £71,808 less £64,640 = £7,168 Kim has remaining Annual Allowance of £32,832

Employer pays annual allowance charge
If pension rights increase by more than £2,500 it will be subject to an annual allowance charge (£2,500 x 16) Member can use carry forward to mop up unused allowance If this cannot be done the member can request the employer pays this. Charge must be more than £2,000 It must be due to main scheme and not an additional member contribution Notice must be served on the scheme by 31 July in the following tax year Member’s benefits must be reduced accordingly

Spreading of tax relief
If employer contributions increase by more than 210% tax relief must be spread over a number of years. Deduct last year’s contributions + 10% from this year’s contributions If under £500K, whole amount gets tax relief in the current year £500K to £1m, excess contribution spread over two years £1m to £2m, excess spread over three years £2m +, excess spread over four years

Example 15/16 £1.5m, 16/17 £3.65m and continues at £3.65m
£3.65m less £1.65m (£1.5m + 10%) =£2,000,000 Excess over £2m so spread over four years Year Main contribution Excess 16/17 £1,650,000 £500,000 17/18 £3,650,000 18/19 19/20

Practical application in the accumulation phase
Identify the different pension accumulation options available to individuals Understand the factors that should be established to advise on investment in the accumulation phase of a pension. Understand the main alternatives to pensions in making provision for later life.

In specie v transfer Fund In specie Assets treated as contributions
Fund value increases Tax relief claimed Pension input so must have sufficient AA Transfer Assets bought from owner Fund value remains the same Not an input so needs no AA

State Pension system: Learning objectives
Know the differences between the pre and post April 2016 system Know the principles of the changes in SPA Know the rules on deferring state pension

State Pension: All change!
Comparison with pre 2016 benefits. People reaching state pension age after 6 April will not automatically get £ a week, some will get less, some will get more April 2016 is the start of a process that will take over 30 years to complete

Comparison of old and new
Flat rate, no earnings related benefits. Contracting out abolished 35 years NIC to get full benefits 10 years contributions to get anything Can only defer for increased pension and on worse terms than the old system Mix of flat rate (BSP) and earnings related (SERPS & S2P) Possible to contract out of earnings related benefits 30 years NIC to get full benefits No minimum requirement to get something Can defer for increased pension or lump sum

The basics of the new system
Dan, 22, starts work for the first time on April He will build up 1/35 of the new pension for each year of NIC contribution and credits. This is about £4.44 a week (1/35 of £155.65) He will probably reach SPA in 46 years time. His pension will be maximised after 35 years His pension will not be affected by the amount of salary he earns over his working life

Pre April 2016 benefits Only applies to men born on or after 6 April 1951 and women born on or after 6 April 1953. These get a starting amount based on the higher of either: The amount built up under the pre 2016 rules And the amount the individual would have got had the rules been in place at the start of your working life. Deduction will be made for periods of being contracted out. What happens then depends on whether the starting point is more or less than £ a week

Examples Alan’s starting pension is less than £ He builds up credit post April 16 at a flat rate of £4.44 a year (1/35 x £155.65) He will never get less than the current BSP Belinda’s starting pension is more than £ due to good S2P/SERPS benefits. If this is £185.65, then £30 is called her protected payment. This will be paid on top of the new state pension and will be increased in line with CPI between now and her state pension age. Future contributions will not add to her state pension.

State Pension Age Originally 65 men, 60 women
Planned to have equalised by 2020 Affected women born after April Now accelerated to be 66 by 2020 Then to be increased to 68 my mid century Possible linked to average life expectancy

Deferring State Pension SPA pre 6/4/16
Can defer to increase pension or to take a lump sum Minimum of 5 week deferment 1% increase for every 5 week’s deferment Equivalent to 10.4% a year If deferred for 12 months can have a lump sum equivalent to pension given up Interest given at base rate plus 2% This is taxable

Deferring pension, SPA post April 6 2016
Minimum deferment 9 weeks 1% increase for every 9 weeks, equivalent to 5.4% a year No cash option

Defined Benefit schemes: Learning objectives
The basic offer of a DB scheme How to calculate PCLS The rules on escalating benefits The principles of scheme funding Member Protection

Crystallisation of final salary
Will be a scheme pension Paid directly from the scheme’s fund Paid at scheme normal retirement age Early retirement can be taken subject to actuarial reduction Some element of spouse’s pension but is taxable. Escalation must be given Only decision member has to make is how much cash to take

Cash from a final salary scheme
Main decision for final salary scheme members State schemes traditionally gave cash in addition to the pension at a fixed formula (3n/80) In the private sector member exchanges pension for cash Commutation factor of say 14 means every £14 of cash taken results in £1 of pension being given up How do we calculate maximum cash?

Application to defined benefit schemes
Pension before commutation x CF 1 + (0.15 x CF)

Escalation Most schemes pay more than the legal minimum
GMP pre April 88 Nil (State pays this increase) GMP post April 88 Scheme pays first 3%, State pays excess Pre April 97 excess benefits Nil April 97 – April 05 CPI to a max of 5% Post April 05 CPI to a max of 2.5% ATTENTION Scheme does not need to increase any GMP for members reach SPA after April

£ £ Scheme funding What the scheme has Liabilities Assets
The cost of all current and future pensions

Typical active scheme Active members Deferred members Retired members
Those still employed and contributing Deferred members Those who have left employment but still have rights and will get a pension Retired members Those who are in receipt of a pension

Summary of variables Split of active, deferred and retired members
Age/gender/marital split of membership Structure of benefits Assumed inflation Assumed growth in salaries Mortality rates Level of employer/employee contributions Future investment returns

Calculating a liability
Ongoing basis IAS19/FRS 17 Insolvency (Insurance)

On going basis The scheme will carry on
The employer will continue to contribute Benefits will fall due as planned The trustees can use any investment return they think is appropriate It will tend to give the lowest liability

IAS19 Used by accountants
To show any deficit as a debt in the employer’s books Investment assumptions will be based on good quality corporate bonds Therefore will give a greater liability than ongoing if trustees are using share based returns

Insolvency Assumes scheme has to be wound up now
Scheme has to secure all benefits by purchasing immediate and deferred annuities Will give the largest deficit

Scheme’s technical provisions
Assume employer failed There would be no further employer contributions. Would scheme have enough assets to pay pensions in payment? Plus accrued pensions as and when they became due?

Technical Provisions definition
The amount required in the fund now On the basis of actuarial methods and assumptions In order to pay its accrued pension commitments As they fall due in the future

Technical provisions not met
Trustees must agree a recovery plan with the employer This must be set out in a statement of funding principles and communicated to members If agreement cannot be reached, the Pensions regulator must be informed Who can impose a funding programme

Final Salary member protection
Member’s pension depends on there being sufficient assets to pay promised benefits. Problems arise if sponsoring employer goes into liquidation. Trustees can request that scheme enters the pension protection fund

Pension Protection Fund
Employer failed after 5/4/05 100% protection for Members who are above scheme retirement age Dependents’ pensions Ill health pensions 90% protection for all others including those who retired early This is subject to a max pension cap (£37,420.) (90% of which is £33,678 Which is reduced if scheme pensionage before 65 50% spouse’s pension

Pensions Protection Fund
Pensions payable from scheme pension age But can be taken earlier with an actuarial reduction Deferred pensions will be revalued in line with CPI but capped at 5% (2.5% post April 09) Pensions in payment will increase by CPI to a max of 2.5% but only on benefits accrued post April

Financial Assistance Scheme
employer failed before 6/4/05 Tops up benefits that member gets from scheme to 90% of accrued pension max £33,454 Paid at SRA Serious ill payment health from 55 Ill health payment from five years before SRA 50% spouse’s pension Escalation of CPI/2.5% but only on post April 97 benefits

MP: Taking the benefits. Learning objectives
The rules on taking benefits prior to minimum pension age The main options at minimum pension age The rules regarding death benefits The main factors to consider in advising clients

Crystallisation pre 55 Special Occupations
Contractual right to pension at 50 Transfer to an overseas scheme Ill health pension Serious ill health lump sum payment

Ill health pension Must have ceased work
Administrator must have medical evidence that member will be unable to resume work Payment can be stopped if health improves and member returns to work Member has the same options as at minimum pension age Irrelevant after 55 as benefits can be accessed without restriction

Serious ill Health Lump Sum
Allows payment of uncrystallised fund as a lump sum Administrator must have evidence from a medical practitioner before payment is made That member’s life expectance is less than 12 months Whole uncrystallised fund must be taken Can be taken post 55 as long as payment comes from uncrystallised funds. Tax free if member under 75, taxed as income if over 75

The main options Uncrystallised Fund Lifetime Annuity 25% PCLS
Flexi Access Drawdown UFPLS Small Pots

Lifetime Annuity Guaranteed income for life in exchange for a lump sum
Rate will depend on: Member’s age Gilt Yields Options taken Single/joint annuity Inflation protection Guarantees Income taxed as non-savings

Single or joint life? Income from single life ends on death of purchaser Can name a second life, if purchaser dies first a set % of the income continues until second life dies Second life can be anyone (dependent or nominee) No minimum age to receive a second life pension Cannot be passed on to third life. No cash, no guarantees Can be paid with or without overlap

Guarantees Two types, Income or Capital protection
Selecting income guarantees income will be paid for a set period. No maximum term Can be paid to anyone, can be different to second life. Capital Guarantee pays out the difference between a percentage of sum used to purchase an annuity and gross payments made

Income guarantee triviality
If amount paid from guarantee is less than £30,000, whole amount can be taken as cash If over this amount can take instalments until below £30,000 then take lump sum Can do this with nominee’s pension but benefit must be actuarially calculated Usual tax position

Flexi Access Drawdown Fund after PCLS is designated a FAD
Member can withdraw anything they want. All withdrawals taxed as non-savings income No new money can be paid in but uncrystallised funds can be transferred into the FAD.

Uncrystallised Fund Pension Lump Sum (UFPLS)
Ad hoc withdrawals from uncrystallised fund No separate PCLS 25% of each withdrawal is tax free, 75% is subject to income tax Some individuals are disqualified from UFPLS Triggers MPAA

Barred from UFPLS Member under 75 does not have sufficient LTA to cover UPFLS Member has enhanced and primary protection and protection for lump sums over £375,000

Small Pots Small Pots are PP benefits with a value of less than £10,000 Whole fund may be taken as cash with 25% tax free and remainder taxed as non-savings income Can be done a maximum of three times. Stranded pots are from occupational money purchase schemes. £10,000 maximum per pot but no limit to the number of times this is done.

Capped Drawdown Ceased to be available on 6 April 2015
Existing ones can continue Maximum withdrawal 150% of GAD rate per plan year Maximum withdrawal has to be recalculated every three years Member can elect to switch to FAD This is automatic if more than maximum amount is withdrawn

Setting the maximum Using medium term gilt yields published on the 15th of the previous month Rounded down to the nearest 0.25% If member is under 75 maximum is set for 3 years and must then be recalculated on 3rd anniversary Once over 75 review is on an annual basis

Other recalculation events
Must also be reset if another uncrystallised arrangement is transferred into the arrangement Or part of the fund is used to buy an annuity Or it becomes subject to a pension sharing order If fund increases new limit comes into effect immediately If money comes out, new limit applies from next plan anniversary Three year review cycle stays the same

Phased retirement You will be given the target income, the individual’s tax rate and the chosen method Work out how much income crystallising £1,000 would give remembering that £250 will be tax free Remaining £750 is used to provide taxed income Divide target by income from £1,000 and multiply by 1,000

Using FAD/UFPLS Target £10,000 higher rate tax payer
£1,000 produces £250 tax free plus £750 taxed at 40% gives £450 net, a total of £700 Divide £10,000 by £700 and multiply by 1,000 This gives you £14,285 This method gives no continuing income

Using Capped Drawdown £10,000 target HRT, GAD rate £60/00
£250 PCLS plus £750 into CD £60/00 = £ % = £67.50 Less 40% tax = £40.50, a total of £290.50 £10,000 /£ x 1,000 = £34,423 This method would leave money in the drawdown fund

Using Lifetime annuity
£10,000, HRT, annuity rate 5% £1,000 gives £250 plus £750 to buy an annuity 5% = £37.50 less tax £22.50, total of £272.50 £10,000/£ x 1,000 = £36,697 There would be continuing income from annuity Options would have to be selected at outset

What happens on death? Lifetime annuity will cease unless there is a second life and/or guarantees More options if member dies with: Uncrystallised funds Capped or FAD

Survivor Benefits (Annuity)
Joint life annuity will pass on to named beneficiary. Income guarantee will continue to be paid to end of guarantee period. If total to be paid to end of term is less than £30,000, this can be taken as a lump sum. All benefits, including capital guarantee, are tax free provided member died before 75 and company notified within two years of death. Benefits taxed as recipient’s non-savings income if member died over 75 or company not notified within two years of death

Nominations (and lack of them)
Member should nominate persons to receive uncrystallised funds or FAD funds. Normally an expression of wish so not binding on the administrator If no nomination made, administrator can nominate but only a dependant can choose to take an income. Payment to a non dependant can only be a cash lump sum

Uncrystallised Fund or FAD
Cash Money outside pension regime Nominee’s annuity Uncrystallised Fund or FAD Income will end on nominee’s death Any funds remaining in FAD can be passed to successor Nominee’s FAD Tax free if member dies under 75 Taxed on recipient if member dies over 75

Dependant’s/nominee’s FAD
Any money remaining in a FAD on the death of the holder can be passed on to a dependant, nominee or successor. The money could pass through many generations At each step the nominated person has the option of taking cash or buying an annuity. The member cannot nominate a successor. If the deceased holder was under 75 the benefits taken by dependant/nominee or successor are tax free. Age of recipient isn’t relevant If over 75 benefits are taxable even if recipient is under 18 Member’s FAD Dependant’s/nominee’s FAD Successor’s FAD

Who’s who Dependant. Nominee: Successor
Defined as previously, nominated by member or administrator Nominee: someone not a dependant nominated by member or administrator Successor Someone nominated by dependant, nominee or administrator

Charity Lump Sum Death Benefit
Member can nominate a charity to receive the fund on their death IF: There are no dependants of the member It is paid from the member’s drawdown fund (at any age) It is paid from uncrystallised funds (if deceased over 75) The charity was nominated by the member

Charity Lump Sum Death Benefit
Beneficiary can make a CLSDB on their death IF: There are no dependants of the member It is paid from a dependant’s or nominee’s flexi access drawdown fund It is paid to a charity nominated by the member If the member made no nomination, the beneficiary can make the nomination.

Taxation summary Apart from 25% PCLS (or 25% of UFPLS or small pots), benefits taken by the member are ALWAYS subject to income tax. Dependant, nominee or successor benefits are always income tax exempt provided member or nominee/successor died before 75 and provider notified within two years of death. Dependant, nominee or successor benefits are always subject to income tax if member or nominee/successor died after 75 or provider not notified within two years of death. Uncrystallised and FAD funds are exempt from IHT

Money Purchase Annual Allowance
Restricts all future input to a money purchase arrangement to £10,000 per PIP This is for life! Cannot use carry forward to increase MPAA Does not apply to DB but if £10,000 input is made the AA to a DB scheme is £30,000

What triggers MPAA Those in flex drawdown before 6/4/15 are automatically in MPAA Capped drawdown holders who elect to switch to FAD or take more than maximum amount. Taking a withdrawal from a FAD Taking a UFPLS Purchasing a flexible annuity

What does not trigger MPAA?
Buying a lifetime annuity or scheme pension Keeping within limits of capped drawdown Designating a FAD without drawing an income Paying a beneficiary’s pension. Designating a FAD to a nominee’s or successor’s FAD Triviality payments

The fine print MPAA comes into effect the day after the trigger event.
Payments in excess of MPAA made before the trigger date will not result in a AA charge But even if MPAA applies the overall input must not exceed £40,000 Scheme administrator must give the member a MPAA statement within 31 days of the trigger event Besides informing them that they are subject to the MPAA it must inform them that they have a duty to pass this on any other schemes they have. The member has 13 weeks to inform any other scheme in which they are accruing benefits

Compliance issues: Execution only
Applies to members wishing to use FAD or UPFLS who are not receiving advice Firm must ask if client has received pension guidance or regulated advice and if not encourage them to do so. Firm must ask client questions to identify risk factors in their proposed choice and give client the risk warnings in writing

Pensions Guidance Pension Wise is government brand that offers information for money purchase members when crystallising their fund Can offer face to face meeting through the Citizens’ Advice Bureau or telephone through TPAS. Only information, “this is what you could do” and not “this is what you should do”

What should you do? Member must choose Lifetime Annuity FAD UFPLS
Dependent/nominee must choose Cash Survivor’s annuity Dependant/nominee’s FAD

Lifetime Allowance and Transitional Protection. Learning Objectives
The principles of lifetime allowance The main BCE and valuations The main forms of transitional protection Calculation of an individual’s remaining lifetime allowance and any lifetime allowance charge

Lifetime Allowance principles
At each BCE the administrator must carry out a check to see how much lifetime allowance has been used up Each BCE uses up a percentage of the individual’s lifetime allowance. (round down to two decimal places) The administrator informs the member Once the member has used up 100% of their LTA a 55% charge on the excess is made if taken as cash, 25% if taken as pension Charge is normally deducted before payment is made

BCE: death before 75 Death in Service benefit or return of uncrystallised fund if made within two years of death. (BCE 7) Value is amount paid. Charge is always 55% Test is carried out by deceased’s personal representatives but paid by recipient Designation of uncrystallised fund to a dependant’s/nominees annuity (BCE5c) Designation of uncrystallised fund to a nominee’s drawdown fund (BCE 5d) Amount that is designated is tested Deceased’s LTA is tested and not the recipient’s

Payment of a relevant lump sum
Payment of a PCLS A serious ill health payment Payment of UFPLS Payment of lump sum in excess of LTA. Charge is 55% but no charge on PCLS as it can never be more than 25% of remaining LTA All are BCE6

Taking benefits after MPA
Buying a lifetime annuity (BCE4) Amount tested is purchase price Designating funds into a FAD (BCE1) As a PCLS will also be taken, there are two BCE’s BCE or BCE 1 + 6 If a FAD is used to buy an annuity then only the growth in the fund is tested

Taking a scheme pension
BCE 2 Valuation is 20 times pension before any cash Alternatively if cash taken separately 20 x reduced pension + PCLS BCE 3 occurs when pension increases by more than RPI or 5% Won’t apply to a scheme with more than 20 members and everyone gets the increase

Reaching 75 All remining funds and rights must be crystallised at 75.
Three possibilities Member has an entitlement to a scheme pension but hasn’t yet taken it (BCE5) Member is in capped drawdown or FAD (BCE5A) Member has uncrystallised funds (BCE5B) Charge is always 25%

After 75 There are no BCE after member reaches 75
No uncrystallised funds so an uncrystallised fund pre 75 becomes an unused fund If member dies after 75 with unused funds, nominee can take this as cash or buy a nominee’s annuity or designate as FAD. All will be taxed at recipient’s tax rate Member with unused funds can buy an annuity or go into FAD at any time after 75.

PCLS after 75 You cannot have 100% LTA after 75
Normally PCLS cannot be greater than remaining LTA BUT in calculating the PCLS from unused funds the % crystallised at 75 is excluded. Carol used up 25% of her LTA at 65 and 50% at 75 At 78 she is going to put her unused fund of £500K into a FAD. Maximum PCLS is lower of 25% of £500K = £125K AND 25% of £750,000 = £187,500

Not a BCE Spouse’s pension from a scheme pension
Payment of survivor’s pension from a joint life annuity Designating a nominee’s FAD to a successor FAD Dependant, nominee or successor taking withdrawals from a FAD Using small pots but must have some LTA Triviality up to £30,000 but must have some LTA

What can reduce standard LTA?
Protected pension age where there is a 2.5% reduction for each year before 55. Does not apply to schemes such as armed forces Where pre April 2006 benefits are being paid Reduces LTA but can never result in a charge

Pre A-Day pensions Basic rule 25 times pension in payment at date of first BCE after A Day Drawdown was 25 times maximum drawdown but care needs to be taken if there is a pre A-day drawdown and the first BCE takes place after 6 Aril 2015 Generally value is 80% x maximum annual drawdown Exception is where a capped drawdown was converted to Flexi drawdown in a drawdown year starting on or after 27/3/14

Primary Protection Must have applied by 5/4/09
Member gets an enhancement When crystallisation takes place lifetime enhancement factor is applied to £1.8m Penalty if over that limit Member can still contribute

Primary Protection calculation
Jack had pension fund of £2.4m at A-Day LAEF is £2.4m-£1.5m/£1.5m =0.6 On a BCE his own LTA is £1.8m x 0.6 plus £1.8m = £2,880,000

Primary Protection with previous BCE
In all cases the starting point for anyone with PP is £1.8m x LAEF + £1.8m This is a fixed sum, e.g. £3.6m where LAEF is 1 Therefore we deduct amount being crystallised to give the remaining LTA. We don’t use percentages But what happens if there had been a previous BCE before 6 April 2012?

Here’s how to do it Judy has Primary Protection of £3.6M
Her previous BCE was for £2.7m in 2009/10 when LTA was £1,750,000 How much has she left? Not £900,000 (£3.6m - £2.7M) Revalue previous BCE by £1.5m/LTA at last BCE Revalue £2.7m x £1.5m/£1.75m = £2,314,285 Therefore £1,285,715 left

Primary Protection and protected cash
If cash at A Day was greater than £375,000 (25% of £1.5m) member could elect to have this protected If no protection max PCLS is 25% of enhanced LTA Lump sum cash is registered Value of protected sum increases by 20% Therefore is a fixed amount Can be transferred

Protected cash with previous BCE
Protected cash with primary is a fixed amount Therefore every PCLS reduces that figure But as protected cash would have been lower if taken before 6/4/12 then it must be increased using the formula £1.8m/LTA at previous BCE

Here’s how it works Protected cash at A Day £400,000
In 16/17 (with underpin) £480,000 £200,000 cash taken 08/09 how much more can be taken? Not £280,000 because protected cash in 08/09 would have been £400k + 10% = £440,000. Cash must be reduced £200,000 x £1.8m/£1.65m = £218,182 So a further £261,818 can be taken

LAEF & Divorce LAEF cannot be renounced but it can be reduced by a pension sharing order In the previous example Jack’s rights at A-Day were £2.4m If a sharing order gave is wife £600,000 then LAEF would be recalculated £1.8m-£1.5m/£1.5m = 0.2 If order had been for more than £900,000 then A-day fund would have been £1.5m and there would be no Primary Protection

Enhanced Protection Size of fund irrelevant
Must have applied by 5/4/09 No excess charge will ever be made But no input Can be renounced

Enhanced protection and protected cash
Defined as a percentage of cash benefits to uncrystallised funds This percentage applied to fund when benefits crystallised Protected on transfer

Primary v Enhanced cash protection
Tim had a fund of £1.8 M at A Day with protected tax free cash of £900,000. He has both primary and enhanced protection In 2015/16 fund is £2.4m. How much cash can be taken from each option?

Fixed Protection Protects individuals who found themselves over the standard LTA when it was reduced . But no further input and no cash protection Fixed protection 2012 gives an LTA of £1.8m Fixed protection 2014 gives an LTA of £1.5m Fixed protection 2016 gives an LTA of £1.25m Can be renounced

Individual Protection (2014) and (2016)
Application (IP 14) must be made by April Fixes individual LTA at fund value on April Maximum of £1.5m Can have further input IP 2016 fixes LTA at total of pension rights/fund at April capped at £1.25m Can apply when next BCE occurs

How to calculate IP14 & 16 Four elements but main two are
Uncrystallised benefits as at 5/4/14 or 5/4/16 Uncrystallised DB benefits x 20 BCE’s taken since April 2006 For IP 14 revalue amount taken by 1.5m/LTA when BCE taken For IP 16 revalue amount taken by 1.25m/LTA when BCE taken

Protected TFC Not registered with HMRC, recorded by the administrator
Protection is scheme specific Protected cash x 20% PLUS 25% of Fund at retirement less revalued fund value at A-Day Protection lost on transfer

Here’s how it works Fund at A day £80K Protected cash £45K
In 2016/17 fund £120,000 Pre A Day cash £45, % = £54,000 Revalue A-Day fund x 1 /1.5 = £53,333 £120,000 less £53,333 = £66,667 25% of £66,667 = £16,667 £54,000 + £16,667 = £70,667

Couple of final points If fixed protection 2012 then A-Day fund increased by 1.8/1.5 If fixed protection 2014 A Day fund is unchanged

Pension Transfers: Learning Objectives
Options for members on leaving employment Revaluation of DB member benefits Calculation of Transfer Value Factors in advising transfer from DB to MP arrangements. Compliance issues on transfers

Why transfers are important
The days of “jobs for life” are long gone. Auto-enrolment means that almost all employees will be building up pension savings What happens when they leave that job? The advent of Flexible Pensions has increased interest in defined benefit members transferring to money purchase arrangements at the point of retirement

Moving jobs: money purchase arrangements
General rule is that there is no refund except under cooling off procedures UNLESS Member joined an occupational scheme before October and left within two years. Refund of member contributions less 20% tax on first £20,000 and 50% tax on excess This will have disappeared by October 2017

Money Purchase: Preserved Benefits
Proposal for “pot follows member” has been abandoned for the time being. If old and new employer offered NEST the member’s account can be transferred GPP/PP, belongs to member can continue to contribute OPS, member cannot contribute once left employment Funds remain invested and can get potential growth Individuals could end up with many separate pots

Problems with stranded pots
Difficult to keep track of the funds May be no planned investment strategy May have high charges Occupational scheme funds may not allow benefits to be accessed flexibly

Why transfer? Consolidation of benefits, particularly bringing MP benefits together To get lower charges Wish to get a better performance To avoid trail commission To access benefits flexibly

Early leavers: DB schemes
Members who leave before two years can have a return of member’s contribution less 20% tax on the first £20,000 and 50% on the excess. After 3 months they can have a transfer value Members leaving after that get a preserved pension which will be revalued to retirement Default option, member needs to take no action

Revaluation rates Split into GMP and non GMP benefits
GMP revalued at a fixed rate depending on date of leaving. Current rate 4.75% per tax year. Non GMP benefits prior to April 2011 are revalued by RPI, ALL post April 2011 revalued by CPI Averaged over complete calendar years between leaving and retirement capped at 5% to April 2009, 2.5% post April 2009 Revaluation figures are detailed in Section 52A orders

Alternatives to preserved pension
Transfer to another DB scheme but only possible in the state sector Give up all rights in the scheme in exchange for a lump sum that is invested in a PP/SIPP Different considerations if transfer is made years before retirement or at the point of retirement. Risk of early transfer is that investment growth will not produce the same level of income as preserved rights. Transfer at point of retirement is essentially the same choice as annuity versus FAD

Stay or leave Guaranteed income for life Indexed plus spouse’s pension
No investment risk No possibility of passing on capital Income cannot be varied Decision can be deferred Removes the risk of living too long Enables access to FAD Can vary income Can pass capital to family on death Poor investment performance may result in lower income Irrevocable decision Removes the risk of dying too soon

Factors influencing transfer
The transfer value represents fair value and ideally is generous versus the pension benefits left behind. Comfortable with the responsibility of looking after an invested fund Can cope with the risk of reduced income in later life Better use can be made of the withdrawal options than the scheme cash and income options

Factors influencing “stay”
Attracted by a secure income with limited risks and no admin Little experience of investment Final salary pension is the only source of retirement income If scheme pension matches year by year income requirements

Transfer Value Calculation
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 date of calculation

Ceding scheme need to know
Amount of pension at date of leaving including GMP Revaluation rates Scheme retirement age Early retirement penalties Spouse’s/dependant’s death benefits post retirement Definition of spouse/dependant Escalation rate Lump sum death benefits prior to retirement Scheme funding and employer strength

Individual: need to know
Term to retirement Retirement income needed Attitude to risk/capacity for loss State of health (including spouse’s) Marital status Other income and assets Importance of lump sum death benefits Importance of tax free cash Importance of passing on capital

Other points to consider
Have we reached “peak” CETV? Legislation may change in the future Transfers are irrevocable If the driver is to use FAD, this must be justified as being appropriate for the client.

Critical Yield Tests if CETV represents fair value
Investment return, after charges to produce a capital sum sufficient to buy an annuity that would produce the equivalent of the revalued benefits at scheme pension age Establish projected pension at scheme pension age. Establish capital sum required to buy an annuity giving the same benefits Critical Yield is the return required to produce this lump sum from the CETV using FCA guidelines

Is critical yield any use?
It assumes an annuity will be purchased. Critical yield will reflect current low annuity rates which may not be inappropriate if planned retirement is some way off. It does not take into account the likely return on the funds/assets in which the CETV is placed. If member plans to use FAD it is not as critical to achieve the target lump sum. It becomes less relevant as planned retirement age gets nearer FCA has criticised firms that solely use CY in assessing transfers

Compliance issues: Definitions
Flexible benefits: any pension that is dependent on the value of the underlying fund Safeguarded benefits: all defined benefit schemes and MP schemes that have a guaranteed annuity rate Pension switching: transferring uncrystallised benefits from one MP arrangement to another Pension Conversion: converting safeguarded benefits into flexible benefits within the same scheme Pension Transfers: transferring deferred safeguarded benefits into a PP/SIPP

Compliance 1 FCA regard DB to MP as high risk
Starting point is that a firm should assume that a transfer will not be suitable and only recommend this course of action if it can clearly demonstrate that it is the client’s best interest to transfer. A TVAS needs to be carried out It must compare the benefits potentially payable from the defined benefit arrangement and the PP/SIPP Ensure it contains enough information for the client to make an informed decision

Compliance 2 For pension transfers advice is compulsory if benefits (CETV) more than £30,000 Advice must be independent of the scheme’s trustees or sponsoring employer. It must be given by a Pensions Transfer Specialist Member puts in a request for a CETV. This generally holds for three months. (the guarantee date) The scheme must give the member details of the benefits they would be giving up. Trustees of ceding scheme must get evidence/confirmation that advice has been given andcheck that the receiving scheme will accept the transfer

Transfers to a non UK scheme
Transfer to a non UK scheme is an unauthorised payment unless it is to a QROPS It is a benefit crystallisation event Lifetime allowance charge would be 25% If the member is UK resident and for 5 years after becoming non resident the QROPS must notify HMRC when benefits are paid or a transfer is made

Transfers from a non UK scheme
Generally permitted Would not count as pension input Would count towards lifetime allowance If from a recognised overseas scheme Lifetime allowance can be increased by percentage of transfer compared to current lifetime allowance £100K transfer in 16/17 would increase lifetime allowance by 10%

Between now and the exam
Draw up a list of what you need to know. Make sure you have a structure for your calculations In the final weeks focus on one topic at a time. Keep on working! When you feel you are not taking anything in, STOP, have a break

On the day Do you know where you are going?
Don’t forget ID or your calculator Try and relax! If you can’t answer a question, try and write something and come back to it later. Check the number of marks Mine the data Watch the time GOOD LUCK

Welcome to your AF3- Pension Planning Two day revision course

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Welcome to your AF3- Pension Planning Two day revision course

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