APE Unit 1 Training Slides Oct 2024 PDF

Pensions Management Institute Award in Pensions Essentials Unit 1 October 2024 1  Unit 1 Introduction to UK Pensions 2  The importance of saving Type...

Pensions Management Institute Award in Pensions Essentials Unit 1 October 2024 1  Unit 1 Introduction to UK Pensions 2  The importance of saving Type Advantages Disadvantages State Pension Scheme  Money coming from the  Flat rate Government  Increasing State Pension Age Company Pension Schemes  Company contribute  Cannot access until retirement – minimum age is currently 55  Tax efficient (increasing to 57 from April 2028)  Lump sum and/or income at retirement  Cease accrual upon leaving the company Individual Pension  Portable  No company contributions Arrangement  Tax efficient  Investment returns are tax free ISAs  Tax efficient  Limits on contributions  Gains/income are tax free  Risk of low interest on amount Savings  Own design  Not always tax efficient  Amount could lose real value Property  Potential high returns  Not tax efficient Lottery  Potential life changing benefits  Small chance of success 3  Key advantages of pensions Tax breaks on investment growth Tax relief on contributions for both member and employer Tax free cash at retirement Money locked in until retirement 4  Old State Benefits Full Basic State Those who reached Old Basic State Pension after 30 years State Pension Age Pension is currently: of National Insurance before 6 April 2016 Contributions £169.50 a week / £8,814.00 a year (single) 5  New State Benefits Full New State Pension Minimum New State The current New State after 35 years of Pension after 10 years Pension from 6 April National Insurance of National Insurance 2024 is Contributions Contributions £221.20 a week/£11,502.40 a year (single) 6 State Benefits - State Pension Age State Pension Age Year Effective Males 65 2010 66 2020 67 2028 68 2046 Females 60 2010 65 2018 66 2020 67 2028 68 2046 7  Additional State Pensions Graduated State History – 1961 to 1975 Pension (GSP) Earnings related pension, based on contributions History – 1978 to 2002 State Earnings Based on earnings between the lower earnings limit (LEL) and upper earnings limit (UEL) in each tax year Related Pension Earnings revalued each year 25% of average earnings from 1978 to 1988; Scheme (SERPS) Reduces from 25% to 20% of average earnings from 1988 to 2002 The State Second History – 2002 to 2016; replaces SERPS; to help low earners; Pension (S2P) Complicated formula 8 Basic principles of Contracting-out Pay reduced National Insurance Contributions In return, member receives minimum amount of pension from scheme Employer and employee pay reduced amount for company schemes Employee rebate for individual schemes Aimed at reducing the strain on State Pension 9  Individual Pension Provision – Contract based Retirement Annuity Contract Personal Pensions Section 226 policies 1988 launched Defined contribution personal Promoted as giving choice and pension arrangements portability Tax relief on contributions and Mis-selling scandal investments Tax relief on contributions and Can elect to take tax free cash at investments retirement and an annuity Ability to contract-out (until 06/04/2012) Potential high charges 10  Individual Pension Provision Contribution Allowances Investment risk in personal Can contribute up to £60,000 pensions lies with the each tax year without incurring a member tax charge Member chooses the Restrictions on high earners and funds/default those who have flexibly accessed their pension savings Future inflation Expected returns on investment Lifestyle funds available 11 Occupational Schemes – Trust based Employer sponsored schemes Scheme Trustees’ knowledge and understanding Trust Deed and Rules Governance Scheme Booklet Announcements Pension from normal retirement date Benefits Refund of contributions or cash transfer lump sum Spouse’s pension and/or lump sum when the member dies provided Deferred pension Ill health retirement pension 12  Occupational Schemes – Trust based The Pensions Regulator - www.thepensionsregulator.gov.uk Internal Disputes Resolution Procedure Disclosure Regulations Regulations Requirement to provide information to member/other parties Automatic/upon request Prescribed timescales Penalties for non-compliance 13  Defined Benefit Schemes Main Features Pension = P service x P salary Accrual Accrual Rates – e.g. 60ths, 80ths Pensionable Salary – e.g. basic salary, PAYE -LEL Pensionable Service – e.g. years and months 14  Defined Benefit Schemes Contributions and Funding Contribution normally paid by member and employer e.g. 5% of salary member; remainder from the employer Amounts to be paid set out in Schedule of Contributions Aim for scheme assets and contributions to pay for all benefits – 100% funded The Pension Protection Fund – lifeboat for underfunded schemes with no solvent employer 15  Defined Benefit Schemes Contracting-out Reduced National Insurance Contributions Must provide minimum benefits from Scheme Ceased from 6th April 2016 Historic benefits within the Scheme Investment risk lies with the employer/trustees Benefits supported by scheme assets Any shortfall met by the employer/trustees Inflation and salary risks for employer/trustees Employer to provide ultimate support 16  Defined Contribution Schemes Main features Money In + Investment return => Retirement Fund ◦ Employer contributions ◦ Employee contributions ◦ Tax relief ◦ Investment return ◦ Contracted-out rebates (ceased) 17  Defined Contribution Schemes Contracting-out Reduced National Insurance Contributions Rebates issued to the scheme Scheme builds Protected Rights Abolished from 6 April 2012 Investment risk lies with the member Member chooses the funds/default Future inflation Expected returns on investments Lifestyle funds available 18  Defined Contribution Schemes Contributions collected by payroll Transferred to Trustees bank account Schedule issued to administrators Allocation splits calculated Contribution Money and investment totals issued cycle to investment houses process Units bought Unit prices and totals advised to administrators Member records updated All money and investments reconciled 19  Defined Contribution Schemes Administration issues Accurate records on contributions Accurate and up to date records of investment choices Timely investment of contributions Efficient processes Close collaboration with the employer payroll Automated processes Manual intervention needs to be minimised 20  Defined Contribution Schemes Main differences between Defined Benefit and Defined Contributions schemes Defined Benefit Defined Contribution Type of benefit at Defined Undefined retirement Contributions/Cost Variable/undefined Fixed/defined Investment risk Trustees/ER EE Security/Protection Certain level of No PPF protection measures protection (PPF) 21 Defined Contribution Schemes Directors/key employees Own control of Overview of assets and investment policy Small Self- Usually limited to Administered maximum of 11 Schemes members Defined contributions Trust based 22 Basic Overview of Retirement Options Pension Scheme Annuities – Commencement Pension – income for life Lump Sum – tax income for life free cash Uncrystallised Flexi Access Trivial Fund Pension Drawdown Commutation Lump Sum (FAD) Lump Sum (UFPLS) Small Lump Sum 23  Pension freedom of choice There will Leave your pension pot – leave it invested essentially Get a secure income – known as an Annuity be 5 main Get a flexible income – known as options Drawdown Cash in your whole pot – may be available subject to a considerable amount of tax Mix the options – either now, or at some to you:- future point in time 24  Roles and Responsibilities of other people involved in pensions Administrator Financial Conduct Authority (FCA) Employer MoneyHelper Service Trustees Investment Manager The Pensions Dashboard Actuary The Pensions Regulator (tPR) Auditor His Majesty’s Revenue & Customs Lawyer (HMRC) 25  People involved in a pension scheme Auditor Employer Actuary Trustees Pension Scheme Administrator Investment Manager Lawyer Investment Adviser  Contribution and Benefit Allowances Maximum amount of benefit accrual/contributions per year Allowance is £60,000 each tax year (potentially restricted for high earners or those who have Annual Allowance flexibly accessed benefits) DC schemes – based on contributions paid over the period DB schemes – based on increase in value of accrued benefits over the period The lifetime allowance was replaced with three difference allowances: Lifetime the lump sum allowance – £268,275 the lump sum and death benefit allowance - Allowance (LTA) £1,073,100 was abolished Both allowances limit the amount of tax-free lump sum that can be paid. from 6 April There is also: 2024 the overseas transfer allowance – £1,073,100 Benefits more than these allowances are subject to tax 27  Contribution and Benefit Limits Before 6 April 2024 Checks against the LTA when Benefit certain events occur Crystallisation Required to compare value of benefits against available LTA Events (BCE) 13 BCEs 28  End of Unit 1 Introduction to UK Pensions 29