Pension Products Unit 1

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Questions and Answers

What type of pension scheme depends solely on investment performance?

Defined-benefit occupational pension

Defined-contribution occupational or personal pension (correct)

Final-salary occupational pension

State pension entitlement

What does AVC stand for in pension terms?

Annual Validated Contributions

Average Voluntary Contributions

Additional Voluntary Contributions (correct)

Alternative Variable Contributions

Which of the following describes a key feature of defined-benefit pension schemes?

Benefits determined by an employee's earnings and years of service (correct)

Higher employee contribution rates compared to defined-contribution schemes

Flexibility in choosing investment options

No guarantee of a specific payout at retirement

Which tax relief is typically available for personal pension contributions?

Tax relief at the employee's highest rate of income tax Signup and view all the answers

How does an FSAVC differ from an AVC?

FSAVC is a free-standing arrangement versus AVC which is linked to an employer's pension scheme Signup and view all the answers

What is a primary eligibility rule for workplace pensions?

Employees must work a minimum number of hours weekly Signup and view all the answers

What does FAD stand for in pension terminology?

Flexible Access Drawdown Signup and view all the answers

When a pension scheme member dies, which option is typically NOT available?

Option to take a measured payout based on initial contributions Signup and view all the answers

What is the primary benefit of a group personal pension for employees?

Employees can benefit from lower setup and management charges compared to individual pensions. Signup and view all the answers

Which of the following best describes a self-invested personal pension (SIPP)?

A pension plan that permits holding direct shares and commercial properties. Signup and view all the answers

What was the primary aim of introducing stakeholder pensions?

To encourage low-earning individuals to save for pensions. Signup and view all the answers

Which statement accurately reflects a characteristic of a group personal pension?

Contributions can be collected from gross salary and paid to the provider in bulk. Signup and view all the answers

How does a SIPP differ from a conventional personal pension?

A SIPP offers a wider range of investment options, including direct ownership of assets. Signup and view all the answers

Which of the following does NOT accurately describe stakeholder pensions?

They require significant financial input from employers. Signup and view all the answers

What is a key feature of a direct pay arrangement in a group personal pension?

Employers handle pension contributions collectively for all employees. Signup and view all the answers

For whom are stakeholder pensions primarily designed?

Individuals at lower earnings levels with limited pension provisions. Signup and view all the answers

What percentage of the accumulated fund can be taken as a tax-free PCLS?

25% Signup and view all the answers

What is a key benefit of purchasing an annuity?

Guaranteed rate of income Signup and view all the answers

Which option allows for potential growth of the pension fund after taking any PCLS?

Flexi-access drawdown Signup and view all the answers

What risk does an annuity eliminate upon purchase?

Investment risk Signup and view all the answers

What should clients be informed regarding annuity purchase options?

They can shop around for better rates. Signup and view all the answers

What is the primary risk associated with flexi-access drawdown?

Fund value may fall Signup and view all the answers

What is the recommended approach to withdrawing funds from flexi-access drawdown?

Structure payments according to needs Signup and view all the answers

Once an annuity is purchased, what is likely to occur?

There is no potential for further investment growth. Signup and view all the answers

What rate of tax relief is applied to contributions to an individual's pension plan?

Basic, higher or additional rate depending upon the contributor’s marginal rate of tax. Signup and view all the answers

Which statement is true regarding auto-enrollment in a workplace pension scheme?

Earnings must be over £10,000 a year. Signup and view all the answers

Which of the following statements about stakeholder pensions is correct?

There must not be any entry or exit charges. Signup and view all the answers

What is the amount of each uncrystallised funds lump sum payment that is free of tax?

25 percent. Signup and view all the answers

How do contributions to Additional Voluntary Contributions (AVCs) affect gross income?

They are deducted from gross income. Signup and view all the answers

Which previous form of income drawdown was converted to flexi-access drawdown after April 2015?

Flexible income drawdown. Signup and view all the answers

In what year did personal pension providers start allowing uncrystallised funds lump sum access?

<ol start="2015"> <li></li> </ol> Signup and view all the answers

What is a key feature of lump sum allowances in pensions?

They may include both lump sum and death benefits. Signup and view all the answers

How is threshold income calculated?

Deduct any gross pension contributions that benefited from relief at source. Signup and view all the answers

What adjustments are made to calculate adjusted income?

Add claims for tax relief on pension savings made before relief was given. Signup and view all the answers

What is the result of applying the tapering rule for adjusted income over £260,000?

The annual allowance is reduced by £1 for every £2 over £260,000. Signup and view all the answers

What is the annual allowance after the taper for someone with an adjusted income of £300,000 and a base annual allowance of £60,000?

£40,000 Signup and view all the answers

What happens if pension contributions exceed the total annual allowance including carry forward?

A penalty tax is charged on the excess amount. Signup and view all the answers

What does the money purchase annual allowance (MPAA) apply to?

To pension scheme members who use flexi-access drawdown or take UFPLS. Signup and view all the answers

What was the lifetime allowance (LTA) in relation to pension savings?

The maximum amount that can be saved into all pensions before tax is incurred. Signup and view all the answers

Which of the following is NOT included when calculating threshold income?

Employer contributions to pensions. Signup and view all the answers

Study Notes

Pension Products Overview

Threshold income: total net income minus gross pension contributions (excluding employer contributions), lump sum death benefits, plus any pension provision reductions from salary sacrifice post-8 July 2015.
Adjusted income: total net income plus claims for tax relief on pre-relief contributions, pension savings with tax relief, overseas pension scheme relief (for non-domiciles), and employer contributions; deduct lump sum death benefits.

Annual Allowance Reduction

Adjusted income of £300,000 triggers a tapering reduction of the annual allowance; for every £2 over £260,000, the allowance is reduced by £1.
Initial annual allowance of £60,000; post-tapered allowance is £40,000.
Unused annual allowance can be carried forward from the previous three tax years, allowing contributions beyond the annual limit without penalties.

Types of Pension Plans

Group Personal Pension:
- Structured group of individual plans managed by an insurance company for multiple employees.
- Offers bulk discounts on setup and management fees.
- Employees retain individual plans, even upon leaving the employer.
Self-Invested Personal Pension (SIPP):
- Provides broader investment options, including direct shareholdings and commercial property.
- Ideal for individuals comfortable making their own investment decisions while still having conventional fund access.
Stakeholder Pension:
- Introduced to encourage pension contributions, especially among low earners.
- Designed as simple and low-cost alternatives.

Pension Benefits Options

Annuity Purchase:
- Exchange a lump sum for guaranteed income for life.
- Allows shopping around for better rates (open-market option).
- Removes investment risk but halts growth potential once purchased.
Flexi-Access Drawdown (FAD):
- Allows pension fund withdrawal post-tax-free cash (PCLS) and reinvestment for income.
- Fund remains invested; potential for growth but also risks value fluctuation and subsequent taxable income.
- Withdrawals can be tailored as regular or one-off payments, mindful of tax implications.

Regulation and Planning

Pensions dashboards assist in managing state pension entitlements and various pension funds to aid retirement planning.
Implementation of dashboards has faced delays; ongoing monitoring is essential.

Knowledge Assessment

Understand differences between defined-contribution and defined-benefit schemes.
Familiarize with tax reliefs and allowances for pension contributions.
Recognize eligibility criteria for workplace pensions.
Identify the options available when taking benefits from personal pensions and how they apply upon a member's death.

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Description

This quiz covers the fundamental aspects of pension products, including the calculation of threshold income. Understand the steps involved in determining net income for tax purposes and the impact of various deductions. Test your knowledge of pension contribution reliefs and death benefits.