PMI

What is Regulated Financial Advice?

Regulated financial advice has a specific legal and regulatory meaning. It is a personal recommendation from a qualified individual given after due consideration of the customer's personal circumstances and objectives.It is important to clarify the difference between taking advice and the customer marking their own decisions without going through this process (known as 'execution only').In June 2010 the Chancellor announced changes to the way that financial services would be regulated and this came into effect from 1 April 2013.

Note: A change in the definition of financial advice for regulated firms will come into effect from 3 January 2018.

The Financial Services Authority was abolished and replaced by the Financial Conduct Authority.

How are Members Protected?

The FCA uses the term "consumer” and in this learning module the consumers we are particularly referring to are pension scheme members.The FCA ensure that firms stick to the rules and take appropriate action to protect themselves against fraud.It is also important to ensure that consumers don’t fall victims to scams or get tied into unfair contracts.

Money Laundering

This is the process by which the proceeds of crime are concealed by converting them into assets which appear to have a legitimate origin.There are three stages involved:

1. Placement – money from illegal sources is introduced into the financial system.
2. Layering – a series of financial transactions take place to disguise the illegal source.
3. Integration – the wealth is acquired.  

The FCA regulation and supervision requires firms to have in place systems and controls in order to reduce financial crime including money laundering. 

Firms are required to undertake customer due diligence before entering into any financial transactions and are also required to monitor the customer relationship in order to identify unusual requests which could suggest potential money laundering activities.

It is an offence to:

• assist anyone to keep the benefits of crime
• acquire, possess and / or use criminal proceeds
• conceal or transfer proceeds to avoid prosecution or a confiscation order
• fail to disclose knowledge or suspicion of money laundering
• tip off someone that they are under investigation.

Whilst firms are regulated to protect against financial crime there are many risk areas where individuals could become victims.

Information Security

One way of protecting members’ data is to ensure that their information is held in a secure place. Firms must have systems and controls in place to protect personal details such as Address, National Insurance Number, Earnings and Account details.Information Security also includes:

• being aware of who is listening into phone calls or reading documents, particularly when in a public place such as a café or on a train
• being careful to lock away information and not leave it visible for others to read or get hold of
• making sure passwords are changed regularly and not written down for others to find.

Increased use of the internet and on-line banking has made it easier for thieves to steal personal information and sell it on to others for fraud or identity theft.In 2002 the BBC reported that identity theft cost the UK £1.3billion a year and in 2006 they reported it had increased to £1.7 billion a year.

In 2010 the Independent reported that almost 2million people have had their identity stolen each year at a cost of £2.7billion. In that article the National Fraud Authority (NFA) said that more than £1.9billion of it was money that criminals obtained  from using other people’s identity and the rest was the cost of preventing and detecting the crime and putting the damage right. The NFA also said that in very serious cases it can take more than 200 hours to resolve the problems.You can see how important it is for members to protect themselves and the National Crime Agency website has more information on this.http://www.nationalcrimeagency.gov.uk/

Scams

The FCA will take action against fraudsters involved in scams using financial or investment products. They issue alerts about firms and individuals based both overseas and in the UK who operate without FCA authorisation.Some typical scams are:

On-line Job scams

A person thinks they have got a legitimate job but their bank account is used to transfer money, usually from one currency to another.

Liberation

A pension scheme member is led to believe that by transferring their pension benefits they will be able to access the cash before the earliest retirement age of 55. Members should be wary of adverts for accessing their pension early. Pension Liberation is illegal where members do not have a statutory right to transfer. They are misled about key factors such as tax consequences, fees or how the remainder of their pension fund will be invested. Tax charges and penalties incurred may be up to 55% of the value of the member’s transfer pension savings.

Other scams

Alternatively, a member may be induced to transfer their pension benefits to take advantage of unique investment opportunity to get better returns on their pension than they are currently getting. This sort of offer can be a scam leading to the member losing the whole of their pension. The member may also incur the same tax charges and penalties as for a Liberation case.

On-line Banking scams

E-mails appear as if from legal banks asking for verification of identity and account details, more commonly known as "phishing”. AlternativelyHow to spot a potential scam:

• a company asks for financial details over the phone or in emails
• doorstep sellers using high pressure sales techniques with free demonstrations and limited time offers
• unsolicited calls from a company making a "fantastic” offer
• Guaranteed money making schemes such as pyramid schemes

Remember, if it looks too good to be true, it usually is!

Whistleblowing

If an employee suspects wrongdoing then they must report it as soon as possible to prevent the company being exposed to money laundering activities. The reporting should not be delayed whilst waiting for proof of the suspicious activity. Often it may be that something unusual has occurred e.g. a person has tried to make an exceptionally large cash payment. Maybe the customer behaved strangely or made unusual requests that don’t seem to make sense. Perhaps the transaction that they wanted to make just doesn’t add up commercially. It is important to look at all transactions carefully to see if there is anything suspicious.

Employees should follow their own organisation’s procedures first which normally involves reporting the suspicion to their nominated officer known as the Money Laundering Reporting Officer (MLRO) who is in turn responsible for investigating and reporting it to the National Crime Agency.

The Prudential Regulation Authority

The PRA is part of the Bank of England. It is responsible for prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.

The PRA sets standards and supervises financial institutions at the level of the individual firm.

For example, insurance companies dealing with Annuities or Life Insurance cover will be regulated by the PRA.

What are the different types of Adviser?

As mentioned previously firms and individuals can only provide advice if they are authorised by the FCA to do so.

In this section we will look at the different types of financial adviser.

Why might a member use a Financial Adviser?

• If they are uncertain or don’t feel confident about making financial decisions.
• They don’t really understand what they should be investing in.
• They don’t have the time to investigate all their retirement options themselves.
• A member who is considering accessing new DC flexibilities may use a financial adviser after a referral from Pension Wise.
• A member must seek appropriate financial advice (from someone who authorised by the UK FCA to carry out pension transfer business) if they are considering a DB to DC transfer with a fund value of over £30,000.

Financial Advisers are qualified and required to hold an Annual Statement of Professional Standing (SPS) certificate.

What does a Financial Adviser do?

A regulated financial adviser provides advice on:

• retirement planning
• investments
• protection.

Independent Financial Advisers – must offer advice on all types of retail investment products across the whole of the market

Restricted Financial Advisers – are those who are limited by either the range of products or areas they offer advice on

Appropriate Financial Advice - there is a requirement for all DB transfer cases over £30,000 to  receive "appropriate financial advice" from someone who is authorised by the UK FCA to carry out pension transfer business.  The adviser may be either an Independent Financial Adviser or a Restricted Financial Adviser.

All advisers must ensure that they meet the "know your customer” requirements and most approach this by completing a "Fact Find”, which is a detailed questionnaire giving information on their customer so that they can understand their financial circumstances and attitude to risk. The information is used to identify which solution / product(s) would be best suited to their client’s needs.

Independent Financial Adviser

INDEPENDENT - Free from outside control; not subject to bias or influence.An independent financial adviser gives a personal recommendation to a customer. They must:

• provide advice on the full range of retail investment products such as life policies, personal pension plans and packaged investments such as investment trusts and unit trusts
• give unbiased and unrestricted advice based on their comprehensive and fair analysis of the relevant market

Restricted Financial Adviser

RESTRICTED - Limited in extent, number, scope or action.A restricted adviser differs from an independent adviser in the following ways:

Recommendations

They may only recommend certain products, product providers or both. Consequently they may only be able to offer a product from one company or just one type of product.

Product Advice

If they work for a product provider they are often limited to only offering advice on the products that the company offers.

Specialist Advice

If they chose to focus on a particular market they may only recommend products from providers in that market.The firm must disclose the nature of the restriction in their initial disclosure to their customers before providing a service.

Independent v Restricted

What are the advantages of one compared to the other?

• The adviser has to attain the same professional standards irrespective of whether restricted or independent.
• Where a firm offers both restricted and independent advice the firm cannot hold itself out as independent and must clearly communicate to customers what type of service they are being provided with.
• An independent adviser will have to prove that they have researched the whole market relevant to the customer’s needs.
  The main difference is that the restricted adviser may be looking at a narrower range of products. From the customer’s point of view they will need to weigh this up against other factors such as cost and convenience.

Execution Only

We mentioned before that a detailed "Fact Find” is completed. However, a customer may know what they want or may choose not to receive financial advice.In this case the adviser proceeds on the specific instructions of the customer on an "execution only” basis.

As they are not giving advice on the merits of the transaction then the rules on assessing suitability do not apply. However, "clear and credible” evidence must be provided that an investment transaction is execution only. This is normally a statement signed by the customer or, if it’s an online process, there would be a disclaimer box to be ticked. The customer must agree that:

• they are aware that the transaction is execution only
• they have not asked for or received advice
• it is their decision alone to take out the product
• the business is taking no responsibility for the product’s suitability.
• In transacting business on an execution only basis customers need to be aware that they may be giving up certain regulatory protections should the transaction subsequently prove to be inappropriate. 

How to find authorised firms and advisers

FCA Website 

Check the FCA website to see if a firm is Authorised and Registered

www.fca.org.uk

The Money Advice Service 

This is an independent organization set up by the government

www.moneyadviceservice.org.uk

Other organisations that can be used to check financial advice are:

• Unbiased at www.unbiased.co.uk. Members can find independent and restricted ‘whole of market’ advisers on their website. Restricted ‘whole of market’ means advisers who can offer available products from all companies, but who may specialise in a particular area, such as pensions.
• Personal Finance Society at www.findanadviser.org. Members can find independent and restricted advisers on their website.
• VouchedFor at www.vouchedfor.co.uk. Members can find independent advisers only on this website.

Are you giving Information or Advice?

Information

Information or guidance helps people make their own decisions by giving them the information and tools to reach a reasonable outcome on their own.

Advice

Giving advice means the Financial Adviser has more responsibility in the member’s decision making. The adviser is directing the member about the best choice in the market and making recommendations based on personal and financial considerations relevant to the member.

If you direct a member, you are giving advice no matter how inadvertently you do it. 

Avoid answering when members ask what you would do.

You should not say:  "If I were you" "That sounds like the best option"

It would be better to say: "You may wish to consider" "You have a number of options"

Module 2 Options Available from Different Pension Schemes

This module is an overview to assist with guidance for members.At the end of this module you will be able to:

• Distinguish between the main types of pension schemes
• State the options available during the life cycle of pension scheme membership
• Explain how the options operate differently depending on the scheme type and benefit basis
• Describe the options available and how members’ benefits are impacted

What options may be available from a pension scheme?

On joining  

• Pay Additional Voluntary Contributions (AVCs)
• Salary sacrifice
• Transfer In

On leaving 

• Short Service Refund Lump Sum (SSRLS)
• Preserved/deferred pension
• Transfer out

Prior to April 2015, options available to members on leaving were broadly similar. However, new DC flexibilities have introduced some key differences which will be explored later in this module.

On death  

• Lump sum death benefit
• Spouse/civil partner/dependant’s pension
• Contribution refund

On retirement  

• Pension
• Pension Commencement Lump Sum (PCLS)
• Uncrystallised Funds Pension Lump Sum (UFPLS)
• Trivial commutation (DB only)
• Small lump sums

The member should be aware that, aside from legislation, many of the options available in an occupational pension scheme are governed by the Trust Deed and Rules.

These define:  

• Who is eligible to join
• Normal Retirement Age
• Salary to be applied
• Contributions payable
• Benefits payable  

and where applicable:

• Investment choices

What are the options on leaving a scheme?

The options available on leaving a pension scheme depend on the scheme rules and on how long the member has been in the scheme.

Short service refund lump sum (SSRLS)

The option of a short service refund lump sum (SSRLS) is only available to members with short service periods, the service criteria depends on the scheme benefit basis. It is a refund of the member contributions only. Tax is deducted from the contributions at prescribed rates and the member receives the net amount.

A SSRLS is never available from a Personal Pension, including GPPs.

Defined Benefit Schemes

A SSRLS can only be paid to members who leave the scheme with less than two years’ pensionable service.

Members with less than 3 months’ pensionable service normally receive a SSRLS automatically on leaving the scheme whereas members with between 3 and 24 months have alternative options.

If the scheme is contracted-out the cost of reinstating the member into the State scheme will be deducted before the tax deduction. You should be aware that contracting-out ends for all schemes from April 2016.

Defined Contribution Occupational Pension Schemes

For members joining the scheme on or after 1 October 2015 a SSRLS can only be paid if they leave with less than 30 days pensionable service.

For members who joined before 1 October 2015, the SSRLS option is normally based on the same service criteria as described above for DB schemes.  Consequently, with effect from 1 October 2017 a SSRLS will no longer be an option for members who joined before 1 October 2015.

SSRLS or Transfer Value

These options are normally given in the following circumstances:

Defined Benefit Schemes

If a member has between 3 months and 24 months’ pensionable service they can normally chose between a SSRLS or the value of their accrued benefits can be paid to another pension arrangement.

Defined Contribution Occupational Pension Schemes

The options are the same as for a DB scheme member only if they joined before 1 October 2015.

With a transfer value the member does not lose the benefit of contributions paid by the employer but you should note that the new scheme does not have to accept a Transfer Value.

Deferred Benefits or a Transfer Value

These are the options available to members under age 55 with longer periods of service.

Defined Benefit Scheme

For members with more than two years’ service.

The benefits accrued remain in the scheme until retirement. The pension is calculated at date of leaving and increases each year to offset the effects of inflation. This is normally referred to as a deferred pension or a paid-up pension.

Defined Contribution Scheme

For all Personal Pension Scheme members (including GPPs).

Also for occupational pension scheme members with more than 30 days’ service if they joined the scheme on or after 1 October 2015, and also for occupational scheme members with more than two years’ service if they joined the scheme before 1 October 2015.

The member’s pension pot remains invested until they decide to take their benefits and will fluctuate in line with the performance of the investments.

Over age 55

In addition to a Deferred Pension or a Transfer Value, if the member is over 55, there is also the option to retire or access benefits early.For members of an Occupational Pension Scheme, permission will usually be required from the:

• employer and also possibly the Trustees for active members
• Trustees and also possibly the employer for deferred members.

For members of DB schemes, contributions will normally cease and the amount of pension accrued to the early retirement date will be reduced to take into account the fact that it will be paid for a longer period of time than anticipated.

Members with DC benefits have more flexibility in the options available to them from age 55 which we will look at later.

If a member wants to take their benefits early they need to remember that they won’t be entitled to any State Pension yet so they should consider if the income received from their pension benefits will be enough to meet their income needs in retirement

What are statutory transfer rights?

Since April 2015 each type of benefit has been a separate category with separate transfer rights.

DB Benefits

A member has a statutory right to transfer their benefits if they cease accrual and apply to transfer one year or more before the Scheme Normal Retirement Age.

DC Benefits

A member with DC benefits has a statutory right to transfer the value of their benefits at any time.

One of the impacts of this legislative change relates to members of a DB scheme who have paid Additional Voluntary Contributions (AVCs). Previously all the benefits had to be transferred at the same time but now, the AVCs are classed as DC benefits so two separate benefit rights exist. The member can now transfer the AVCs and leave the DB benefits in place.

NB: From 6 April 2015, changes under the Pensions Schemes Act 2015 stopped transfers from unfunded public service pension schemes, such as the Teachers’ Pension Scheme, to pension schemes, whether in the UK or abroad, based on DC or flexible access arrangements.

What are the retirement options?

The main options a member has on retirement are:

1. A full pension 

OR

2. A Pension Commencement Lump Sum (PCLS) PLUS A residual pension

Or, for a scheme that provides flexible benefits

3. Flexible Retirement Options

Regardless of the option chosen, if the benefits, together with all other benefits which the member receives from registered pension schemes, exceed the Lifetime Allowance the member will be subject to a tax charge on the excess.

The standard Lifetime Allowance (LTA) is currently £1,073,100 (2022). In previous years the LTA was higher but there have been a number of pension reforms which have led to the amount being reduced from time to time.

For some members the reduction in the standard LTA would adversely affect the amount of retirement savings that can be taken without incurring an extra tax charge so a member may be protected against this, in which case they will have a certificate from HMRC confirming this.

This section is an overview of the main options. They are discussed in more detail in the Retirement module.

Retirement Options

Defined Benefit Scheme

In a DB scheme, the retirement pension is normally based on:

• Pensionable Service
• Final Pensionable Salary
• Accrual Rate

For example a member has 20 years’ Pensionable Service and the Final Pensionable Salary at Normal Retirement Date is £60,000 per annum. The scheme has an accrual rate of 1/60th for each year of Pensionable Service.

Option 1

The member has the option of receiving a full pension of:(Pensionable Service) x (accrual rate) x (Final Pensionable Salary) = pension20 x 1/60 x £60,000 = £20,000 per annum

Option 2

Part of this pension can be exchanged for a Pension Commencement Lump Sum (PCLS). The maximum amount which is tax free is 25% of the value of the member’s pension based on the formula:(20 x pension) / (3 + (20 / commutation factor))

The commutation factor is different for each scheme depending on the advice from the Scheme Actuary, it is the amount of pension that is given up for each £1 of cash lump sum.

In our example, if the commutation factor was 15, the PCLS would be:(20 x £20,000) / (3 + (20 / 15)) = £92,307.69

The member has to give up part of the pension to receive the PCLS so the residual pension becomes:

£20,000 – (£92,307.69 / 15) = £13,846.15 per annum

The member does not have to take the maximum amount of PCLS offered, they can take a smaller amount if required.

Trivial Commutation

For members of DB schemes, if the benefits available on retirement are small then they may be able to exchange it all for a one-off lump sum. This is known as "trivial commutation lump sum” (TCLS).

Currently, the member must be over age 55 to qualify. The total value of all their benefits across all pension arrangements must be less than a limit set by the government. The current limit is £30,000.

The commutation must take place within a 12 month window and once paid it discharges the scheme from any future liability so for example when the member dies, their spouse cannot make a claim for a spouse’s pension.

Defined Contribution Scheme

In a DC scheme, the pension is based on:

• The value of the member’s fund; and
• Annuity rates.

Options available to members of DC schemes depend on whether the scheme allows flexible access.

For those that don’t, the member has the same options as for a DB scheme member i.e. they can chose either a full pension or a PCLS plus a smaller pension, but the calculation is different.

For example, a member has a fund value at retirement of £89,910 and the annuity rate is 14.

Option 1

The member’s full pension would be £89,910 / 14 = £6,422.14 per annum

Option 2

The maximum amount of PCLS the member may take is 25% of their fund. 

In our example, it would be: £89,910 x 25% = £22,477.50. 

The fund value has now reduced to £67,432.50 so that is the amount used to purchase a pension. The pension would be: £67,432.50 / 14 = £4,816.61 per annum.

The member does not have to take the maximum amount of PCLS offered, they can take a smaller amount if required.

The annuity rate depends on the type of pension the member wants as it is tailored to suit their financial circumstances. For example, a spouse’s pension may be required or a guarantee period. These options are discussed in more detail in the Annuities module.

DC Flexibility

If the scheme rules allow this, a member has the following options from age 55:

Flexi-Access Drawdown (FADD)

A member may not wish to take all of their pension income on retirement, they may be continuing work on a part-time basis or already have sufficient income for a period of time.

At the retirement date the member can take up to 25% of the fund as a PCLS and leave the remainder in a drawdown fund. Further drawdown payments can then be made or the funds can be used to purchase an annuity. FADD gives the member flexibility to receive income when it is needed.

Uncrystallised Funds Pension Lump Sum (UFPLS)

With this option there is no "one” retirement date. 

The member can phase receipt of benefits with each withdrawal consisting of 25% tax free cash and 75% is taxed as income. With this option the funds cannot be used to purchase an annuity.Small Pots

For members of DB or DC schemes, if the value of the benefits is very small then they are costly for the scheme to administer and not particularly beneficial to the member so they may have the option of a "Small Pots Lump Sum” payment up to £10,000. 

Unlike the trivial commutation payment mentioned earlier, the member’s benefits in other pension arrangements are not taken into account. This option is also available under a personal pension scheme, where the member can have up to three such lump sums under the same scheme.

Retirement Date

For an Occupational Pension Scheme, the Normal Retirement Age for members is stated in the scheme rules, but members are normally allowed to retire earlier if they wish and also possibly to retire later. 

Members will normally need to seek consent to retire early.

Defined Benefit Scheme

Early Retirement – The pension will be calculated in the normal way but it will be reduced by an early retirement factor to offset the cost of paying it for longer than anticipated.

Late Retirement – In some schemes the pension contributions must cease at Normal Retirement Age so that no further benefits accrue. A late retirement factor would be applied from Normal Retirement Age until the member does retire so the pension would benefit from some increase. In other schemes members are allowed to continue to contribute and accrue further benefits.

Defined Contribution Scheme

The benefits will always be based on the value of the member’s fund when they actually retire.

Regardless of the scheme benefit basis the member will need to seek consent to retire early.

• Active scheme members normally require consent from their employer.
• Deferred scheme members normally require consent from the Trustees.

For personal pension plans (including GPPs) members can take their benefits at any time after they reach age 55 – no consent is required.

Ill-health Retirement

If a member is too ill to work then they may be allowed to retire on ill-health grounds at any age. This will be subject to an independent medical report and not just the opinion of the member’s GP.

Defined Benefit Scheme

Schemes have different terms and conditions, the scheme rules will state how a pension is to be calculated such as:

• The pension accrued to the early retirement date has an early retirement factor applied – in other words there is no difference for ill-health.
• The pension accrued to the early retirement date does not have an early retirement factor applied.
• The pension is calculated to include some or all prospective service up to Normal Retirement Age.

Defined Contribution Scheme

The pension will be based on the member’s fund at retirement. However, a member may be able to obtain an impaired life annuity which will give them a higher pension.

What happens on divorce?

If a member is going through a divorce the court is required to take the value of both parties pension rights into account when valuing the matrimonial assets.

This is also covered in more detail in the Divorce module.

The member must provide a transfer value to the court and the options for dealing with the benefits are:

Offsetting

• The pension rights are offset against other financial assets such as the family home.
• This option will only be available if there are other assets of a comparable size to the pension rights.

Earmarking

• An attachment order is made against the member’s benefits that comes into effect when the benefits come into payment.
• The earmarked pension ceases when the member dies.
• The pension reverts to the member if the ex-spouse dies or remarries.

Pension Sharing

• The pension rights are shared at the time of the divorce thereby offering a "clean break”.
• The ex-spouse will acquire pension benefits in their own right.
• The ex-spouse’s pension may remain in the member’s pension scheme or the scheme rules may insist that ta transfer value is paid for the ex-spouse to set up their own arrangement.

Module 3 Financial Considerations When Making Pension Benefit Decisions

This module is an overview to assist with guidance for members.At the end of this module you will be able to:

• State the main sources of income and how expenditure may differ in retirement
• Identify the main allowances and how tax impacts on the net income
• Explain how effect of the Annual Allowance and the Lifetime Allowance and when to test benefits
• Understand when this may be applicable and the link with continuing employment

Are there any limits for pension saving?

There are two important allowances.

Annual Allowance

The member should be aware of the Annual Allowance. It is the maximum amount of pension savings a member can make each year that benefit from tax relief including any contributions paid by their employer. There is no restriction on the amount that can be saved, but only a certain amount will get tax relief and if the Annual Allowance is exceeded an Annual Allowance charge may be payable.

The rules apply to everyone who is a member of a registered pension scheme.

From 6 April 2023, the AA increased from £40,000 to £60,000.

The adjusted income limit will increase from £240,000 to £260,000 and, where tapering applies to reduce the AA for an individual, the minimum tapered AA will be £10,000 (up from £4,000).

Lifetime Allowance (LTA)

This is the amount of pension savings an individual can accumulate from all registered pension arrangements, anything above this amount will be subject to a lifetime allowance charge.

If the member had built up substantial pension savings as at 6 April 2006 then they may have applied to HMRC for protection against the lifetime allowance charge. Members may also have applied for Fixed Protection 12, Fixed Protection 14 and Fixed Protection 16, they can also apply for Individual Protection 14 or Individual Protection 16.

A member could have applied for a Lifetime Allowance which is higher than the standard Lifetime Allowance. 

A lifetime allowance test is triggered on certain events such as:

• Taking benefits such as on retirement
• Reaching age 75
• Transferring the pension to a qualifying recognised overseas pension scheme (ROPS)
• Increases to a pension that are above a certain level
• On the payment of certain lump sums such as due to serious ill-health and for some types of death benefit lump sums.

Starting to take pension benefits is the most common event that triggers the test. The member must advise full details of all pensions they are entitled to as they are jointly responsible with the scheme administrator for paying any tax charge due.

Each time the member takes pension benefits the scheme administrator calculates how much of the lifetime allowance as been used up.If the lifetime allowance has been used up then the member will be told the tax charge that is due.

LTA CALCULATION EXAMPLE

The current (2022/23) standard Lifetime Allowance is £1,073,100.

A member is retiring and the pension is calculated as £10,000 p.a.

This amount is multiplied by a factor of 20 to get a cash value.

The percentage of the LTA used up is therefore: (£10,000 x 20) / £1,073,100 x 100 = 18.6%

You have seen that income can come from a variety of sources but how much will the member actually receive?

The amount actually received depends on whether the income is taxable or not.

What are the different tax rates?

Earnings are taxed at three different rates. The rates differ between Scotland and the rest of the United Kingdom.In England, Wales and Northern Ireland, rates for the 2017/18 year are:

In Scotland, rates for the 2017/18 year are:

Tax on Savings Interest

Most people can earn some interest from their savings without paying tax.

Their allowance for earning interest tax-free is made up of the following:

• Personal Allowance
• starting rate for savings - depending on your other income
• Personal Savings Allowance - depending on your Income Tax band

This allowance applies each tax year. The tax year runs from 6 April to 5 April the following year.

Personal Allowance

Members can use their Personal Allowance to earn interest tax-free if they haven’t used it up on their wages, pension or other income.

Starting rate for savings

Members may also get up to £5,000 of interest tax-free. This is their starting rate for savings.

The more they earn from other income (for example wages or pension), the less their starting rate for savings will be.

• If other income is £16,500 or more
  Members are not eligible for the starting rate for savings if they have other income of £16,500 or more.
• If other income is less than £16,500
  The starting rate for savings is a maximum of £5,000. Every £1 of other income above the Personal Allowance reduces the starting rate for savings by £1.

Example

Sarah earns £15,000 of wages and receives £200 interest on her savings.

Her Personal Allowance is £11,500. It’s used up by the first £11,500 of her wages.

The remaining £3,500 of her wages (£15,000 minus £11,500) reduces her starting rate for savings by £3,500.

Her remaining starting rate for savings is £1,500 (£5,000 minus £3,500). She won’t pay tax on her savings interest.

Personal Savings Allowance

Members may also receive up to £1,000 of interest tax-free depending on which Income Tax band they are in. This is their Personal Savings Allowance. 

Net Income Example 1

Dave lives in Cardiff.  What will Dave’s net income be after tax in the following circumstances?

• Dave is 65 on 1 January 2018
• His pension will be £42,000
• Interest on his savings is £2,000

Would his circumstances be different if he lived in Dundee?

Less the Personal Allowance £ 11,500

Taxable Income £ 32,500

Tax on £32,500 @ 20% = £ 6,500

The net income received is therefore £44,000 - £6,500 = £37,500

Net Income Example 2

What if Dave’s total income was £65,000 (including £2,000 savings interest)?  What will the net income be after tax?

Total Income £65,000

Income above £16,500 so no starting rate for savings.

Less the Personal Allowance £11,500

Less reduced Personal Savings Allowance £500 (as higher rate tax band)

Taxable Income £53,000Tax on £33,500 @ 20% = £6,700

Tax on £19,500 @ 40% = £7,800

Total Tax £14,500

The net income received is therefore £65,000 - £14,500 = £50,500

Tax Codes

During employment the taxpayer pays tax on earnings and the amount is deducted by the employer in accordance with the tax code, known as PAYE (Pay As You Earn). This method of collecting tax will not change when the member retires, the pension provider will deduct the tax before paying the net amount.

The tax code is calculated from:

1. Total Tax Allowances such as the Personal Allowance

2. Total income which tax has not been paid e.g. untaxed interest or part-time earnings

1–2 = Total tax-free income

The total tax-free amount is then divided by 10 and a letter added that relates to the member’s individual circumstances.If someone has a tax code of 117L  it means:

• They are entitled to the Basic Personal Allowance
• They have income of approximately £10,330 on which tax has not been paid
• £1,170 must be deducted from the total taxable income and tax is paid on the balance.

The tax code spreads the tax free amount equally over the year.

If a member has more than one job or more than one pension when they retire they may have more than one tax code.

The Personal Allowance will apply to the main pension or job.

The BR code (Basic Rate) will apply to the second job or pension if basic rate tax is payable on all income from this source. Similarly, if the person is subject to the higher rate tax on the whole of the second income they will have a DO tax code.Different tax codes will apply in other circumstances.

Net Income Example

Income from a Company Pension and the State PensionLet’s look at an example of a net income calculation for someone retiring at age 65 in the 2015/16 tax year.The member will receive:

- a company pension of £6,000 p.a.

plus

- a State pension of £8,296.60 p.a.Work out the tax code

• The member is entitled to the personal allowance of £11,500.
• Deduct the State pension of £8,296.60
• The amount that can be earned tax free is £3,203.40 (£11,500 - £8,296.60)
• The tax code become 320L   (£3,203.40/10)

Work out the taxThe company pension is £ 6,000.00

Less the tax free amount £ 3,203.40

The taxable amount is £ 2,796.60

This amount of taxable income is in the basic tax band so the rate to be applied is 20%Tax on £2,796.60 @ 20% £ 559.32

The amount of tax to be deducted is therefore £559.32.

Work out the net incomeThe company pension is £ 6,000.00

Less the tax £ 559.32

The net pension is  £ 5,440.68 (This is paid to the member by the pension provider).

PlusThe State Pension  £ 8,296.60 (This is paid to the member by the State).

Total income  £13,737.28  (£5,440.68 + £8,296.60)

Inheritance

If a member receives an inheritance this may mean that they have disposable capital which they invest. In this circumstance tax may due on the investments or on any assets received which are sold enabling them to invest more.

• Income tax is paid on items that generate money e.g. interest, dividends, rent
• Capital Gains Tax (CGT) may be payable if the member sells, gives away or exchanges assets that increase in value from the date of death. The CGT allowance for 2017/18 is £11,300.

Income from means tested benefits could also be affected.

Expenditure

The member needs to consider their expenses such as:

• Mortgage / loans / credit cards;
• Regular payments such as council tax, water rates, rents etc;
• Food;
• Heating.

How will expenses differ when a member retires?

There will no longer be travel expenses for getting to work but staying at home means higher heating costs. There may still be family to support. What standard of living does the member wish to enjoy in relation to holidays and entertainment.

Retirement checklist

Let’s recap on the information you have seen so far. 

Check out each step the member needs to take when retiring.

Income - The member needs to identify where all the sources of income will come from.

Tax – Once the income sources are known, the member needs to check which are taxable and which are not and take into account tax allowances.

Timing – The member needs to know when the income will be received – from what age will the benefits be received, what will the payment dates be and how often will the income be received.

Also will it be paid in fixed amounts or will it increase, if so by how much each year.

Amount – Once the member has all this information he can work out how much the net amount will actually be.

Expenditure – The member should work out all the expected outgoings once retired.

Is the amount of net income sufficient to meet the member needs – Remember retirement could last for 20-30 years.

Module 4 Lifestyle Factors That Impact on Pension Benefit Decisions

This module is an overview to assist with the provision of guidance for members.

At the end of this module you will be able to:

• Describe the lifestyle factors which should be taken into account when making decisions at or in retirement.
• Identify the impact of retirement age on a pension
• Recognise health factors to be considered
• Explain the importance of marital status
• Understand the impact of inflation
• Describe the impact of taking funds as cash rather than pension

You will see that age, health and marital status are major lifestyle factors. The member needs to consider these when making decisions. 

Cash or income?

From age 55 a member has the option of taking some of their pension savings as cash and many members think this is the best option as the lump sum is tax free. 

Members should be made aware that they do not have to take the full amount of PCLS offered, a smaller amount can be taken if preferred.

There are many financial considerations to making this decision. 

In this module we are concerned with lifestyle factors.The main ones that have an impact on this decision are:

• Life expectancy; and
• Health

Life expectancy

What is the average life expectancy?

According to the Office of National Statistics a new born baby boy could expect to live 79.1 years and a new born baby girl 82.8 years if mortality rates remain the same as they were in the UK in 2013–2015 throughout their lives.

Life expectancy at birth has increased by 13.1 weeks per year on average since 1980–1982 for males and 9.5 weeks per year on average for females in the UK.

In 2013–2015 a man in the UK aged 65 had an average further 18.5 years of life remaining and a woman 20.9 years.

The most common age at death in the UK for men was 85 and for women was 89.

There was an increase in deaths in 2015 and this has had a very slight impact on life expectancies, resulting in life expectancy at birth in 2013–2015 remaining virtually unchanged from the 2012–2014 life expectancy estimates.

If the member is in good health, doesn’t need a cash lump sum and expects a long and happy retirement then it may be more important to have the higher pension coming in on a regular basis that is guaranteed.

If the member is not in good health then the option of taking some cash may be more attractive if they do not expect to live for many years.

The longer a member survives after retirement, the financially better off they will be by taking income even though it is subject to income tax.

DB schemes

A member’s pension will (unless the PCLS is provided separately) be reduced as a result of their taking a PCLS. The more a member takes as a PCLS, the greater the reduction in their pension will be.

DC schemes

The PCLS option will materially affect the amount of both the pension paid to the member and any spouse’s pension. The PCLS is deducted from the fund value, the amount left is then used to purchase the pension.

Flexible benefits

A member could access their funds as either a one-off lump sum or multiple lump sums. These are known as Uncrystallised Funds Pension Lump Sums (UFPLS).

The member needs to consider carefully what future income requirements they may have.

• If they expect to live for a long time, is their fund large enough to sustain multiple lump sums?
• Similarly, if funds are drawn down to provide income, is this sustainable or should an annuity be purchased so that income is guaranteed

What is the impact of health status?

"The greatest wealth is health” - Virgil

The member’s state of health is one of the main considerations particularly for those with money purchase benefits who intend to purchase an annuity as annuity rates are affected by factors such as:

• Poor health
• Being a smoker
• A family history of medical conditions

Medical Conditions

The medical conditions that are taken into account by insurance companies are wide and varied. 

For example:

• Being under or overweight
• High blood pressure or cholesterol
• Type 2 diabetes

If medical conditions exist, the member should consider an "impaired life annuity.” The annuity rates are enhanced as life expectancy is deemed to be shorter than for a person in good health. We will learn more about this next.

Impaired Life Annuity

David had a heart attack and could no longer work. The annuity that was originally quoted was £780 per annum. When he looked at impaired life annuities and his heart attack was taken into account; the amount increased to £969 per annum.

Heart attacks and strokes are common medical conditions, particularly as we get older.

How much an annuity provides will increase if a member has an impaired life annuity instead of a normal annuity. 

For example, the amount of annuity a smoker receives would be higher than for a non-smoker as they are not expected to live as long.

The table illustrates the difference that being a smoker can make assuming the fund value is £100,000 and the member is purchasing an annuity at age 60.

DB schemes and Ill-health

The scheme rules will state the level of benefits to be paid to a member with ill-health. For example the early retirement factor may not be applied or the member could receive benefits based on prospective service to Normal Retirement Age.

The Trustees will decide if enhanced early retirement benefits can be paid, based on medical evidence received

What about marital status?

Legally married?

A member may have been in a relationship for many years but if they are not legally married or in a civil partnership, this could impact on their decision.

State Pension

Currently, a legal spouse can inherit some of a member's state pension, but an unmarried partner cannot.

However, since 6 April 2016, with the introduction of the New State Pension, a legal spouse has not been able to inherit any of the member's State pension unless they qualify under limited transitional provisions.

Pension Scheme Rules

The Pension Scheme Rules may only provide for a pension on the member's death if financial dependency exists.

Financial Dependence

Insurance companies may insist on financial dependency being proven.

What is the impact of inflation?

Food prices have risen since 2007.  This has impacted significantly in the last 12 months (2022/3).

The member needs to consider the future costs of everyday items such as:

Beer per pint
1993 - £2.04
2003 - £2.18
2013 - £3.00
2015 - £3.31
2020 - £3.68
2023 - £4.36
Petrol per litre
1993 - £0.46
2003 - £0.77
2013 - £1.36
2015 - £1.14
2020 - £1.27
2023 - £1.56
Average loaf of bread
1993 - £0.40
2003 - £0.53
2013 - £1.30
2015 - £1.35
2020 - £1.05
2023 - £1.51
Milk per pint
1993 - £0.34
2003 - £0.37
2013 - £0.46
2015 - £0.46
2020 - £0.43
2023 - £0.68

Why join a pension scheme?

The biggest risk of not saving is that you won’t have enough money to retire on and do the nice things in life such as holidays.

There is a general pensions industry suggestion that people need to aim for a retirement income of 60 to 65% of their pre-retirement income, including the Basic State Pension.

For example if you earn £30,000 per annum, you need to save enough for a retirement income around £18,000 per annum to maintain your lifestyle.

Everyone who pays National Insurance Contributions is entitled to at least part of the Basic State Pension at retirement, the full rate of which is currently £122.30 per week or New State Pension, whose full rate is £159.55 per week (2017/18 rates).

Even with the reforms that introduced the New State Pension on 6 April 2016, many people will find it hard to live on State pensions alone.

Remember also that the government has been changing State Pension Age. It’s getting later and later, so some people have to wait longer to receive their State Pension.

Pension contributions are a tax efficient way of saving – we will look at how this works later.

There are a number of reasons, including:

• Pension contributions benefit from tax relief
• The employer usually pays contributions so it’s like receiving additional pay and it provides a significant boost to pension savings
• The pension scheme often provides other valuable benefits such as life assurance and spouse’s benefits
• In a DB scheme a pension at retirement is guaranteed and the amount normally increases each year when in payment
• DC funds do not have to be taken in the form of a pension
• Many employers pay the administration costs and investment fees
• Many schemes offer early retirement over a minimum age (currently 55)
• A member may be able to retire earlier on ill-health grounds
• A member may be able to choose to increase their benefits by paying AVCs

Why may an individual not want to join a scheme?

There are a number of reasons:

• They don’t intend to stay with the employer very long

The options available on leaving the scheme depend on how long they are a member. The earliest age a member can access benefits is 55.

• They don’t like the investment choices offered

The member may prefer to set up their own arrangement with a wider range of funds e.g. a Personal Pension Plan.

• They can’t afford it

Low paid workers and younger people often join, opt out and join again later when they have more money.

NB: A point for a person to consider is that they may not be entitled to any life cover if they don’t join the pension scheme when they become eligible.

What is involved in joining a scheme?

For those who are not automatically enrolled into the pension scheme, the pension scheme rules will state when a person can join and the benefits available.

In this section we will look at what happens when an employee joins an employer’s scheme.

Eligibility Conditions

An employee can normally join the employer’s pension scheme when they meet the eligibility conditions. These could include:

• Minimum age for entry e.g. over age 18 or 21
• Maximum age for entry e.g. under age 60 or 65
• Permitted entry dates e.g. at the scheme renewal date such as 6 April or on a set day each month
• Waiting period e.g. after 6 months’ continuous employment

Previously it was normally the case that only one offer to join the scheme was made and if the member declined then they may only be allowed to join later at the trustees’ discretion.

Similarly if someone joined and then opted-out, they may not be allowed to re-join at a later date. Opting out is where the member leaves the scheme but remains employed.

However, as employers must now automatically enrol employees into a suitable pension scheme, if a member declines to join or opts out they will be automatically re-enrolled three years later if they are eligible. Automatic re-enrolment occurs every three years.

Contributions and Investment

The employer will deduct the relevant amount of contributions from the date a member joins the scheme and invest them together with the employer’s contributions. 

Contributions must be passed from the employer to the trustees by the 22nd of the month following the month of deduction where payment is made electronically (19th if payments are made by cheque). 

Defined Benefit Scheme

The cost of the scheme benefits is calculated by the scheme actuary. 

The member’s contributions are a percentage of salary and the employer will pay the balance of the cost of the liabilities in the scheme; this is considerably more than the amount the member pays.

All the contributions are invested with the fund managers chosen by the trustees.

If a member thinks that the scheme benefits will not provide sufficient income in retirement they may wish to pay Additional Voluntary Contributions (AVCs) (if permitted). The member normally has some choice in where these can be invested.

Alternatively a member can choose to pay AVCs into a policy not connected with the employer, these are known as Freestanding AVCs. Or, the member can chose to make contributions to a personal pension plan.

Defined Contribution Pension Scheme

A member of a DC scheme normally has some options on where contributions are invested.

The scheme will have a Default Investment Option for those who don’t want to choose their own investments from the range offered, traditionally this has been known as a lifestyle option where contributions are automatically switched into safer investments around 5 or 10 years before a member reaches normal retirement age.

However, the ability to access benefits flexibly from age 55 will impact on the member’s investment strategy. Their decision will depend on how financially aware they are and they may wish to seek financial advice in this matter.

Risk Benefits

Employers often provide benefits to be payable on the death of an employee and this is provided through a Group Life Assurance Scheme.

Sometimes this cover exists at a lower level as soon as a person joins the employer or has completed their probationary period. These are known as life assurance only members and the amount of cover is normally 1x to 2x salary.

Once they join the pension scheme the amount of cover is often higher, up to 4 x salary and also a dependant’s pension would be payable.

Unless it is a large pension scheme this benefit is normally insured under a group policy. No forms or medicals are usually required provided the benefits insured are below the Free Cover Level (FCL) which is the maximum amount the insurance company will pay out. The FCL is set by the insurance company based on the:

• total amount insured for the scheme
• gender and age profile of members
• geographic locations where the members are based
• industry or type of work.

If the member’s benefits do exceed the FCL they will be required to complete a questionnaire giving health details and possibly attend a medical. In some cases the benefits may be restricted by the insurer.

It is important to ensure that any documents sent to the member such as the annual statement of benefits reflect any restricted life assurance amount. If the amount shown is not restricted then the employer could be liable to pay the excess in the event of the member’s death.

Forms

When joining a scheme, aside from the automatic enrolment scheme, the member will need to complete an application form which authorises the employer to deduct pension contributions from their wages.

It is also important for the member to complete an expression of Wish or Nomination Form.

This tells the trustees who they would like the lump sum death benefit to be paid to. The scheme benefits are set up under trust so the lump sum does not form part of a deceased member’s assets and is tax free, consequently the lump sum is paid at the trustees’ discretion. 

The Expression of Wish form is not legally binding but the trustees will take the member’s wishes into account. 

The member should always keep this form up to date as their circumstances change.

Disclosure Requirements

Members must receive basic information about the scheme automatically within one month of joining where automatic enrolment applies and the scheme has received jobholder information; or if a person is choosing to join the scheme, basic details should be provided within 2 months of joining. Some schemes issue a membership certificate.

In addition, if changes are made to the scheme they must be notified automatically within 3 months of the effective date of change.

A member with DB benefits has the right to request an annual statement of their benefits whereas, members with any form of DC benefits must receive a statement automatically every twelve months.

The annual statement must include certain information such as the member’s basic details, benefits accrued to the date of the statement and potential benefits at retirement date. In addition, for DC benefits the annual statement must include a Statutory Money Purchase Illustration (SMPI Statement).

For members with DC benefits, the annual statement must continue to be provided automatically even if they leave the scheme, whereas, for members with DB benefits, no such requirement exists.

What is a transfer in?

We will now look at various things members should consider if they want to transfer in benefits from a previous scheme.

Transfers In

If a member has benefits in a scheme from previous employment they may wish to consider transferring it into the new scheme they are joining. 

An advantage of doing this is that all pensions are in the same place but there are two factors to consider first.

1. Will the scheme allow a transfer in and if so, are there any time limits?

There are no legal requirements for a scheme to accept a transfer, if the scheme rules do allow it they may state it has to be done within 12 months of joining or something similar.

2. How the benefits compare between the old scheme and the new scheme?.

The member would need to provide a letter of authority so that a transfer value from the previous scheme can be obtained. The member should be made aware that the previous scheme has 3 months in which to provide the information.

Once the information is received the member will be told of the benefits the new scheme will offer in lieu of the transfer value amount.

It is important to note that benefits are not transferred on a like for like basis and the member may wish to seek regulated financial advice before making a decision.

Defined Benefit Scheme

If the transfer buys defined benefits in the new scheme, the Scheme Actuary will determine how much benefit the transfer value will purchase in the scheme. This will normally be stated as:

• extra pension at retirement
  or;
• extra pensionable service

A member may have been in the previous scheme for 10 years and have a pension at date of leaving of £6,000 per annum. The benefits will not be the same in the new scheme. There are lots of things that could be different in the new scheme such as salary definition, accrual rate, funding assumptions etc.

The benefits offered may seem lower but for example if extra pensionable service is offered, the pension will be calculated using that extra service and based on the salary near retirement.

The extra pension or service would also be taken into account if the member dies before retirement so the benefit could possibly be higher in the new scheme when compared with death benefits for deferred pensioners in the old scheme.

The member needs to determine if the pension in the old scheme is likely to produce a higher pension in retirement than the benefits offered in the new scheme. The member should compare accrual rates and check if the old scheme has any benefits that cannot be replaced in the new scheme.

Defined Contribution Scheme

If the new scheme is on a Defined Contribution basis the transfer value will be added to the member’s pension pot so the decision to transfer is around investment performance and charges.

If the old scheme was also on a Defined Contribution basis then the member needs to consider if the investment funds in the new scheme are likely to perform better and provide a higher fund value at retirement than those in the old scheme, do the investment options suit the member’s investment strategy any better or offer more flexibility.

Other factors they might like to consider are:

• quality of administration
• Any charges that apply – if they are not met by the employer are they higher or lower?
• Any options the new scheme may have that the previous scheme doesn’t

It is important to note that transfer values from Defined Contribution schemes are not guaranteed so the amount actually received may be lower than the amount quoted. There is nothing the member can do about this as it is based on the value of the fund when it is disinvested.

Risk Area

A member should not generally consider transferring benefits from a Defined Benefit scheme into a Defined Contribution scheme. They would be giving up a guaranteed pension amount for an unknown pension amount however, there may be circumstances specific to the individual where transferring fixed benefits into a money purchase arrangement is beneficial.

Members may transfer into a DC scheme from a DB scheme in order to access benefits flexibly. However, there are various procedures that must be followed if the transfer value exceeds £30,000, including a requirement to take financial advice from an authorised person.

Schemes in Wind-Up

There are circumstances under which a pension scheme may be wound-up, for example, where a DB scheme is being replaced by DC arrangements.

If a member’s previous scheme is going through this process it can take several years to complete and it may not be possible to obtain a transfer value during this period.

Some of the pros of transferring from one scheme to another might be:

• The new scheme may offer a benefit package than the old scheme. For example, the new DB scheme could have better early retirement options, pensionable salary definition or accrual rate etc. The new DC scheme may offer the full range of flexible access options.
• The DC scheme provides a better range of investment options and / or if the member has to pay charges, they may be lower.
• The member’s pension funds are all in one place and therefore easier to manage.
• If the member had a poor relationship with their previous employer, transferring the pension breaks the connection.

Transferring from a scheme with any form of guaranteed benefits to one which doesn’t have the same, or similar guarantees, would impact the benefits received on retirement. The member would be giving up those guaranteed benefits.

What is the impact of life events?

There are some events that can occur during scheme membership that may impact on pension benefits.

Parental Leave

This covers maternity, paternity and adoption leave.

The benefits from a DB scheme are based on the member’s salary before the leave begins and contributions continue to be paid.

The member’s contributions will be based on their actual salary received during parental leave whereas the employer contributions are based on the salary before leave commences.

If a member extends parental leave from the statutory period that extra period is classed as unpaid leave and will not count towards pensionable service. Membership before and after the period of unpaid leave must be treated as continuous service. A member can make up the deficit for the unpaid period when they return to work by paying additional voluntary contributions.

Secondment Overseas

If a member is seconded abroad to work for an overseas resident employer they can remain a member of the UK pension scheme irrespective of how long they remain abroad.

If the member transfers abroad permanently and loses UK taxpayer status, they cannot remain a member of the UK pension scheme.

Sabbatical

If a member has an extended period of leave, the impact on their pension benefits depends on whether or not they continue to receive pay.

If their pay continues then contributions continue to be paid and benefits continue to accrue.

If they do not receive any pay for the sabbatical then the period is classed as a break in service and no pension benefits are earned.

The member should check with the employer if life cover remains in place during the sabbatical.

Change in Working Hours

Members may change their working pattern and move from full time to part time or vice versa, they may also do this a number of times during their scheme membership. For members of defined Benefit schemes the benefits are calculated using pensionable service so this has to be adjusted by the change in working hours.

Example:

A member works full time and joins the scheme on 1 October 1988 with a retirement date of 30 September 2020.

From 1 July 2013 the member reduces their hours from 5 days to 3 days per week.

Assuming the member remains in the scheme until retirement date the pensionable service will reduce from: 

• 01.10.1988 to 30.09.2020 = 32 years 

to:

• 24 years 9 months plus 4 years 4 months = 29 years 1 month

Bankruptcy

If a member becomes bankrupt they will be assigned a trustee in bankruptcy or official receiver who will take charge of their financial affairs. The member has a duty to provide information about their pension scheme benefits.

After 29 May 2000

If the member has a bankruptcy order made on or after this date then all schemes approved by HMRC remain outside the bankrupt’s estate and cannot be claimed by the trustee in bankruptcy.

Before 29 May 2000

If a member was made bankrupt before this date then the trustee in bankruptcy may claim all or part of the pension whether it is due now or in the future.

They cannot claim benefits from an Occupational Pension Scheme if it has a forfeiture clause which means that when a member is made bankrupt they automatically lose their rights to pension benefits from the scheme. If this clause does not exist the trustee in bankruptcy may claim those rights.

In the case of a Personal Pension Plan the trustee in bankruptcy can claim the pension rights from the date of the bankruptcy order regardless of a forfeiture clause being in place.

The trustee in bankruptcy will tell the member which part, if any, is being claimed as an asset.

Regardless of when a member is made bankrupt the trustee in bankruptcy cannot claim any part of their State Pension or SERPS/S2P pension.

The member can obtain advice from: "http://www.insolvency.gov.uk/"

Module 6 - Leaving an Occupational Pension Scheme

At the end of this module you will be able to:

• Identify who is eligible and explain the process to the member
• State who is eligible, how the benefits are calculated and how they will increase in the different scheme types. Explain what happens if they die before retirement and how to claim benefits at retirement
• Explain how they differ between defined benefit and defined contribution schemes, what members need to do and the types of schemes to which the member may transfer
• Understand the leaver process and requirements to help manage member expectations

In this module you will see the options on leaving a scheme. Often it is important to look at the options alongside lifestyle factors and financial considerations. 

What are the options on leaving?

You will remember from previous modules that the options available depend on the scheme rules and there are statutory requirements relating to Transfers.

DB schemes

Less than 3 months

• Short Service Refund Lump Sum (SSRLS)

Less than 24 months

• Short Service Refund Lump Sum (SSRLS)
• Transfer Value

More than 2 years and under age 55

• Deferred Pension
• Transfer Value

More than 2 years and over age 55

• Deferred Pension
• Transfer Value (up to 12 months before NRD)
• Early Retirement

DC schemes

Less than 30 days

• Short Service Refund Lump Sum (SSRLS)

More than 30 days and under age 55

• Deferred Pension
• Transfer Value

More than 30 days and over age 55

• Deferred Pension
• Transfer Value (up to 12 months before NRD)
• Early Retirement

Care is needed in this area!

Before we look at the different options there are a few things that need to be considered.

AVCs

They must not be forgotten! In a DC scheme these benefits may be held with different investment managers. They may provide DC benefits in a DB scheme and therefore, usually, will be treated differently e.g. transfer rights will be different and exercisable separately.

Transfer In

A member may have received a transfer in from another scheme, in which case there may be no entitlement to an SSRLS.

Opt out

This is where a member leaves the scheme but remains employed. They normally have the same options as any other member but scheme rules will need to be checked first.

Automatic Enrolment

The term "opt-out” means something different in the joining window of automatic enrolment schemes. Workers who have been automatically enrolled into their employer’s scheme may "opt out” within 30 days of having been enrolled. This is considered later in this module.

What issues can cause delays in providing a member's leaving service benefits?

To help manage member expectations when they leave a scheme, there are a few common issues to be aware of that may cause a delay in providing details of a member’s leaving service benefits.

Date of Leaving v Payroll Runs

An employer normally runs its payroll on a regular basis and may use an external contractor for this.

Delays can occur particularly for monthly paid people due to timing issues. For example if someone leaves the scheme early in the month but the payroll is not run until the end of the month it may be a few weeks before the scheme administrators are notified of leavers.

Final Contributions

Contributions must be paid across to the trustees’ bank account before the 19th of the month for non-electronic payments, and the 22nd of the month for electronic payments, following their deduction.

For members of DC schemes in particular, this may mean that final contributions are not received until several weeks after the member has left. As benefits are based purely on the value of the pension fund, it is not possible to advise members of their units or the fund value until the final contributions have been received.

This issue does not arise with members of DB schemes unless they pay Additional Voluntary Contributions.

Scheme Renewal Date

Most schemes have an annual renewal date when all the members’ data is updated including salary data.In a DB scheme the benefits are salary related so if the member leaves around the time of the renewal date, the latest salary information may not have been received from the employer.

In some instances the employer may even be involved in pay disputes which can cause further delays.

Other Parties

For members of defined benefit schemes who pay Additional Voluntary Contributions (AVCs), those benefits are normally held separately from the main scheme benefits, for example with an insurance company or building society.

AVCs can now be transferred independently of the main DB scheme benefits but when a member leaves it is better to provide all the information to the member at the same time.

However, as the other parties involved have their own work priorities and timescales, this is not always possible.

Disclosure Regulations

Just a final note of which the member may not be aware but which administrators must always keep in mind.Many schemes have agreed target times in which to provide the member with their leaving service options but there are also disclosure regulations that must be adhered to. 

Regardless of this it is helpful to provide a member with leaving service options as soon as possible after they have left

What happens to the benefits of leavers who remain in the pension scheme?

In this section we will look at leavers who benefits remain in the pension scheme when they leave (deferred members). This generally applies to:

DB schemes – Members with more than 2 years’ pensionable service

DC schemes – Members who joined the scheme before 1 October 2015 and left with more than 2 years’ pensionable service, or, members who joined the scheme on or after 1 October 2015 and left with more than 30 days’ pensionable service.

The deferred benefits are calculated at date of leaving, they may also be referred to as preserved or paid-up benefits.

The benefits will increase from date of leaving to retirement date in different ways depending on the benefits basis and the scheme rules.

Benefits at date of leaving

For a member of a DB scheme the pension calculated at date of leaving is based on three things defined in the scheme rules:

1. Pensionable Service

2. Final Pensionable Salary

3. Scheme Accrual RateSet out below is a basic calculation based on the following:

• Pensionable Service of 20 years
• Final Pensionable Salary of £60,000
• Scheme accrual rate of 60ths.

DB Pension per annum:  20 x 1/60th x £60,000 = £20,000

For a member of a DC scheme the pension cannot be calculated at date of leaving because a pension can only be purchased when the member actually retires. At date of leaving the only benefit that can be calculated is the value of the member’s investments. In the case of unitised funds this would be:

• the number of units in the member’s pension fund purchased by both the member and employer contribution, plus any units from transferred-in benefits and/or AVCs
• Unit price at date of leaving

Set out below is a basic example of a unitised fund calculation at date of leaving based on the following:

• 15,000 units at leaving
• Unit price of £1.65

DC fund value:   15,000 units x £1.65 = £24,750

Due to the different forms in which the benefits are provided, it is often difficult to compare the benefits provided by the two different types of schemes. 

DB benefits are generally regarded as more valuable, but for an accurate analysis, members can speak to an Independent Financial Advisor to get an idea of how the two compare. It is now a legal requirement for a member to obtain independent financial advice if they wish to transfer from a DB scheme to a DC scheme if the transfer value is over £30,000.

The member may have transferred-in benefits and they must be included. The form of benefits provided by the transfer-in will depend on how the receiving scheme treats transfers-in. 

If the receiving scheme provided DB benefits in exchange for the transfer value, then the member would usually be granted additional pensionable service, or they may be granted a fixed pension which is payable at Normal Retirement Date. 

If the receiving scheme provided DC benefits in exchange for the transfer value, then the additional benefits would be in the form of additional DC funds.

The member will receive a statement of benefits at date of leaving. Some schemes may also show estimated benefits at retirement by applying notional increases to either the pension or the fund value however, these are for illustration purposes only and cannot be guaranteed.

Increases to benefits after leaving a defined benefit scheme

When a member leaves a DB scheme the pension will increase from the date of leaving to retirement date.

Care!

It is important to determine when a member left a scheme as different increase rates apply. Also some schemes may apply different rates for different periods.

The pension is generally calculated into two elements and each one is treated differently.

1. Guaranteed Minimum Pension (GMP)

This applies to members in contracted-out service in schemes between 6 April 1978 and 5 April 1997. The scheme rules will state whether the GMP increases annually either:

• in line with Average Earnings (Section 148 orders) or;
• at the fixed rate set by the government – currently 4.75%

The rate of increase applies to all leavers, it is not something a member can choose.

The increase is applied for each complete tax year from date of leaving to age 60 for females and age 65 for males. 

There is also an additional increase for females who retirement date is between age 60 and age 65.

2. Excess Pension

This is the amount of pension earned in excess of the GMP. If a scheme is not contracted-out, or a member has no GMP because they did not accrue any benefits in the scheme before 1997, then the whole pension is treated as excess pension. 

The excess pension is divided into two further elements:

• Pension earned up to 5 April 2009 – this increases either by the increases in the Retail Prices Index (RPI) (or Consumer Prices Index (CPI) depending on the scheme rules) up to a maximum of 5% per annum.
• Pension earned after 5 April 2009 increases as above but with a cap of 2.5% per annum.

The increase applies to each complete year from date of leaving to the scheme’s Normal Retirement Age.

If a member left the scheme before 1 January 1991, then some of their pension may not be guaranteed to increase in deferment.

The member’s leaving service statement will show each part of the benefit and how it will increase. There is no obligation on trustees to provide deferred members with regular updates of their pension entitlement, the member may of course request an update.

It is important for members to notify the scheme if they change their name or address so that they can be contacted when they approach retirement, this will normally be done 3 months before their retirement date. 

However, if a DB member also has DC benefits they would be contacted between 4-6 months before their retirement date.

Increases to benefits after leaving a defined contribution scheme

When a member leaves a DC scheme their fund will remain in the existing investment. If the investment is in unitised funds, the number of units remains fixed.

No guarantees apply to the value of the investment which will fluctuate up to the time benefits are taken. For example, the fund could be performing well but on the day the units are disinvested, the stock market could crash and the value would then plummet. This is why a member in the traditional lifestyle strategy will find that their funds have been placed into safer investments 5 to 10 years before retirement. 

However, with the introduction of the new flexibility for DC members, lifestyle strategies are being revised to reflect the fact that members may not buy annuities.

Legislation states that leaving service statements just have to show the member’s rights and options (if any) however, most schemes will provide more information such as the number of units in each investment fund. Each year the member will receive a Statutory Money Purchase Illustration (SMPI) Statement showing the current value of their funds and an estimate of the projected benefits at Normal Retirement Age and the assumptions used.

This is for illustration purposes only and cannot be guaranteed but it will give the member an idea of the amount of pension the fund may purchase.

It is important for members to notify the scheme if they change their name or address so that they can be contacted when they approach retirement. They will be provided with an estimated quotation of benefits 4-6 months before they are due to retire.

Death after leaving a scheme

When a member leaves a scheme and then dies before the benefits come into payment the benefits normally paid out are shown below. However, remember the scheme rules may differ.

DB scheme member

• A refund of contributions – this relates to member contributions only and is usually payable at the discretion of the trustees.
  PLUS
• A spouse, civil partner or dependant’s pension – this is often 50% (but not always) of the member’s pension at date of leaving increased to date of death. If the scheme was contracted-out then the widow must receive a pension of at least 50% of the member’s GMP. In the case of a widower, this only applies to the GMP earned after 6 April 1988.  The pension will increase in the same way as the member’s pension would have increased if it had been in payment. There is more information on pension increases in the module "Pension Scheme Retirement Benefits”.

DC scheme member

• The value of the member’s fund relating to their contributions will be payable. Normally the trustees will have discretion as to whom it is paid.
  OR
• Part or all of the fund may be used to provide an income for the member’s spouse, civil partner or dependants in the form of an annuity or income drawdown.

Death benefits are discussed more fully in the module "Pension Scheme Death Benefits”.

Additional Voluntary Contributions (AVCs)

If a member pays AVCs they can be left in the scheme and taken with the main scheme benefits. Alternatively they can be transferred leaving the main scheme benefits behind.

The provider will issue a statement each year showing the current value of the AVCs.

What about those who opt out?

A member may decide that they wish to opt-out of the pension scheme even though they continue to be employed at the company.

This decision should not be taken lightly as the member is giving up valuable benefits and protection for their family. Some people simply find that they can’t afford the contributions but others are wary of pensions and the financial industry in general and simply want to walk away.

Leaving the Scheme – continuing in employment

Introduction

A member may decide that they wish to leave the pension scheme even though they continue to be employed at the company.

This decision should not be taken lightly as the member is giving up valuable benefits and protection for their family. Some people simply find that they can’t afford the contributions but others are wary of pensions and the financial industry in general and simply want to walk away.

Leaving the scheme – continuing in employment

For a member wishing to leave a non-automatic enrolment scheme the options available are normally the same as for people who are leaving the company.

The member may only be allowed to rejoin the scheme at the trustees’ discretion. 

They will, however, still be covered by the automatic enrolment requirements and automatically enrolled into their employer’s automatic enrolment scheme as appropriate.

Automatic Enrolment

You will remember from the module "Joining an Occupational Pension Scheme” that every employer has a legal duty to help workers save for retirement and certain workers will be automatically enrolled if they meet the eligibility conditions.

Opt-out period

Specific rules apply for opting-out of an Automatic Enrolment scheme. Members may choose to leave whenever they want. However, there are specific opt-out provisions that apply for a limited period after the member has been automatically enrolled.

For Occupational Pension Schemes the opt-out period is one month from the later of:

• the date the worker became an active member or;
• the date the worker was provided with written enrolment information

Refund of Contributions

The member will be refunded with any contributions paid once they have opted out of the Automatic Enrolment scheme and their record will be unravelled to put them in the same position as if they had never joined the scheme in the first place.

A member may not be able to get their contributions refunded if they decide to leave the scheme at a later date. 

Re-enrolment

Unlike other schemes, opting out is not the end of the matter for the member as the automatic enrolment process is repeated every three years. If they are still eligible they will be automatically enrolled to the scheme again at that time

Module 7 - Transferring Pension Benefits

At the end of this module you will be able to:

• List the types of arrangements to which a member can transfer benefits 
• Describe the information that must be supplied to members if an incentive exercise takes place
• Explain the rules around overseas transfers
• Identify the warning signs of pension scams

In this module we look at some of the wider issues concerned with pension transfers.

Transferring a pension is a major decision and members should weigh up all the options carefully to try to ensure they will be no worse off. 

They should also keep copies of all documents and not be rushed into making a hasty decision that will affect them for many years to come.

Members should consider taking financial advice from a regulated adviser and we have seen that in some situations taking appropriate independent advice is a legal requirement. 

What incentives may be offered to transfer?

Due to the high costs of funding defined benefit schemes, employers are looking at ways to reduce risks or costs associated with their schemes by offering the option to transfer benefits where the transfer value amount is more than the statutory minimum.

The Pensions Regulator has a statutory duty to protect members and they have taken a keen interest in employer incentive exercises as members may be disadvantaged if they don’t make properly informed choices.

Code of Practice

The Government policy is to promote saving for retirement so, inducing people to transfer benefits which may mean that they are giving up some rights, goes against the government’s aim.

A voluntary code of practice was produced in June 2012 and the details can be found on the Pensions Regulator's website.  

Compliance is voluntary but it will be used by the Pensions Ombudsman and the Financial Ombudsman Service when dealing with complaints.

Incentive exercises to transfer benefits

Introduction

Incentive exercises can be costly for employers but what about the members?

What do members need to be aware of when they are offered an incentive to transfer their benefits?

Let’s look at some key questions a member may ask.

What are the risks?

With a transfer incentive exercise there is a greater risk that a member may suffer a loss of benefits in the long term. This loss could be due to:

• life expectancy
• investment choices
• economic and market environment in the future.

Offers are often set below "cost-neutral” terms in order to reduce the employer’s pension liabilities, this means there is a greater risk that the member will be worse off. 

When designing incentive exercises, trustees are often advised to start with the presumption that they are not in the best interest for most members.

What information should I receive?

The offer should be clear, fair and not misleading in any way so that the member understands the implications and can make decisions that are right for them.

The information should:

• be honest and contain no inaccuracies, ambiguity or exaggeration, it should not omit or hide anything;
• not cause fear or distress to the member without good reason; and
• be open and transparent – in other words the member should be made aware of the reason the offer is being made.

All communications should be unbiased and information from the employer should simply inform the member of the offer and the process. It should not attempt to influence the member’s decision in any way other than to encourage them to engage with the adviser process.

The initial employer communication should include:

• a clear statement that the member does not need to accept the offer and the default position if the member takes no action;
• a description of the offer – what is being given up, what is being offered, the risks and benefits of all alternatives;
• the reason the employer is giving the offer;
• warnings of potential risks of accepting the offer;
• contact details that are easy to find including those for TPAS and the Pensions Ombudsman;
• an explanation of the roles of the PPF, FCA and TPR;
• prominent statements that the Code is being followed and that any other areas of compliance have been met; and
• charts, tables and/or figures that illustrate risks and benefits in a fair and balanced way. For example, illustrations of risk should include a suitably wide range of possible future inflation, investment returns and annuity price outcomes.

After receiving regulated financial advice, the member should get a written, tailored recommendation that is in their best interests and that explains the reason for the recommendation.

Should I take independent financial advice?

Yes!The employer should make fully independent and impartial advice accessible to the member and it should be promoted in the strongest possible terms. The offer should require that members take advice from an authorised financial adviser. As the employer has initiated the exercise, it should pay for the advice and any associated services such as help-lines and the Transfer Analysis Report.

The contract between the member and the regulated adviser should make it clear that the member has legal recourse to the adviser if necessary in the future and clearly state the complaints process, limitations in liability and refer to any Professional Indemnity Insurance.

The regulated advice should include at least one face to face or telephone meeting with the member and advice must be tailored to the individual and their circumstances as a whole.

It is a legal requirement for members to take appropriate independent advice from a regulated financial adviser if they are considering transferring DB benefits to a DC arrangement where the transfer value is over £30,000.

How long do I have to make a decision?

Members must be given sufficient time to make up their mind with no undue pressure applied. Suggested timescales for the member are listed below:

1. At least three months to make the decision from the date the member received the information and offer.
2. Once the member has received the final piece of regulated advice they should be given two weeks to make a decision.
3. Once the member has returned the option form there should be a two week cooling off period.

I have been offered some extra money, can I accept it?

A member should not receive any cash incentive that is only available if the offer is accepted.

Cash payments that are designed to encourage the member to engage with advisers before making a decision are allowed but should be of small material value such as a £50 retail voucher. 

However, it must be made clear that accepting this payment will not put the member under any pressure to accept the transfer offer.

What about overseas transfers?

A member moving abroad may want to transfer pension benefits to a scheme in their new country.

A Qualifying Recognised Overseas Pension Scheme (QROPS) is one that has told HMRC that they meet the relevant conditions to be a Recognised Overseas Pension Scheme (ROPS) as defined in the Finance Act 2004.

Common questions

How does the member know if their scheme is a ROPS?

• There is a list on the HMRC website which the public can view.
• Not all schemes are on it so if the member cannot find their scheme listed, they would have to check the status with their new scheme directly.

What if the overseas scheme is not a ROPS?

• If the transfer is paid to a scheme that is not a ROPS, both the member and the UK scheme will have to pay a tax charge as it will be considered an unauthorised payment.
• If the UK scheme is not satisfied that the overseas scheme meets the requirements it will refuse to make the transfer payment.

Will a transfer into the ROPS be automatically allowed?

• This is the same as transfers between UK schemes.
• If the new scheme does not allow transfers to be received, a transfer cannot take place.

Will a ROPS transfer be taxed?

• The schemes on the ROPS list have told HMRC they meet the relevant conditions to be a ROPS as defined in the Finance Act 2004. However, HMRC can’t guarantee they are ROPS or that any transfers to them will be free of UK tax.
• Further due diligence needs to be carried out and it is the member’s responsibility to find out whether they have to pay tax on any transfer of pension savings.

After the ROPS transfer

When a transfer takes place, the UK scheme will notify HMRC within 60 days.

If the member is under age 75, the UK scheme will perform the LTA test and advise the member of the percentage. If the transfer value is more than the member’s available LTA, the excess is taxed at 25%.

If the ROPS subsequently makes any unauthorised payment it must be reported to HMRC by the member.

If the ROPS invests in taxable property, the member will be charged. 

However, this tax charge doesn’t apply if the member is a non-UK resident and hasn’t been a UK resident at any time during that tax year, or the previous 5 tax years, in relation to when the investment was made.

What deadlines are applicable?

The deadlines for dealing with transfers are prescribed by:

• The Occupational Pension Schemes (Transfer Regulations) 1996; and
• The Pension Schemes Act 1993.

We will now find out more about deadlines.

Legal

The deadlines for dealing with transfers are prescribed by:

• The Occupational Pension Schemes (Transfer Regulations) 1996; and
• The Pension Schemes Act 1993

Transfer in

A member should receive a statement of prospective benefits in respect of a transfer value within 2 months of the request.

Transfer out - DB

If a member has benefits in a defined benefits scheme the transfer value must be calculated within 3 months of the request and passed to the member with 10 working days of the calculation date.

The transfer value will normally be guaranteed for 3 months and must be paid within 6 months of the calculation date.

Transfer out - DC

If benefits are held in a defined contribution scheme, a quotation must be provided within 3 months of the request and paid within 6 months of the application to transfer.

Remember, a transfer value cannot be guaranteed and the amount eventually paid may differ from the quotation as the amount depends on the value of the fund at the time they are disinvested.

Divorce

If a transfer value is requested and the scheme is aware that it is required for divorce purposes, a quotation should be provided within 6 weeks of the request or by the date specified by the court. 

However, the trustees or administrators may be able to charge for providing an expedited transfer value.

Divorces in England and Wales are treated differently to divorces in Scotland. There is more detail regarding these differences in Module 8 – Divorce and Pension Benefits.

Module 8 - Divorce and Pension Benefits

At the end of this module you will be able to:

• Identify the three ways of dealing with assets on divorce 
• Describe the advantages and disadvantages of each method of dealing with assets on divorce
• Explain the process involved with pension sharing including pension debits and credits, internal and external transfers
• Understand the stages that members have to go through and the requirements at each stage

In this module you will see that there are three ways to deal with pension benefits on divorce and some of the advantages and disadvantages of each. 

A member may not have a choice if a PSO is issued but it is important that they understand the impact on their benefits whether they have a pension debit or credit applied. 

What are the different ways of dealing with pension benefits?

There are three ways of dealing with pension benefits upon divorce.

1. Offsetting

2. Pension Attachment/Earmarking

3. Pension Sharing

We will look at each one in turn.

Offsetting

This is the simplest way to deal with the pension benefits. The total value of the pension benefits are offset against other assets – for example a greater share of the family home is given to the ex-spouse in return for the member keeping all of his or her pension.

Advantages:

• Settled out of Court
• Achieves a clean break

Disadvantages

• How is a fair value achieved?
• The value of pension may be higher than other assets
• Pension values may fluctuate more than house prices

Simple scenario

Jack and Jill are in the process of getting divorced.

• Jack is a member of a final salary pension scheme which promises to pay a pension at retirement. The value of this pension is £500,000.
• Jill has no pension rights but the matrimonial home is also valued at £500,000.

Jack gets to keep his pension and Jill gets ownership of the family home.

Not so simple scenario

Mr & Mrs Jones are getting divorced after 22 years of marriage.

• Mr Jones retired at age 65 and receives a pension that includes a spouse’s pension payable on his death. He also has some savings.
• Mrs Jones is age 45 and still working and is a member of a good pension scheme that includes a spouse’s pension payable on her death.

The capital value of Mr Jones‘s pension rights exceeds that of Mrs Jones, a significant part relates to a widow’s pension paid on his death. Once divorced Mrs Jones would not benefit from this.

It was decided that "offsetting” was the most appropriate solution. Mr Jones also had to pay some money to Mrs Jones from his savings.

Why do you think age could be an important factor in this scenario?

At 45 Mrs Jones is still young enough to continue working for a higher pension at retirement, but:

1. Prior to the divorce Mrs Jones would have been entitled to a widow’s pension when her husband died. As she is 20 years younger there is a strong possibility she would have received this pension and for a long period after his death.

2. The pension scheme to which Mrs Jones belongs also had a widower’s pension if she dies first but as there is a twenty year age difference, Mr Jones would be unlikely to receive it – due to mortality she would be expected to outlive him.

This scenario shows that the loss of potential future benefits should also be taken into account.

Pension Attachment/Earmarking

If this option is selected, part of the member’s benefits are set aside for the ex-spouse/civil partner as directed by the Court. The amount is specified at the time of divorce/dissolution and an Attachment Order is made against the member’s benefits. It takes effect when the member’s benefits come into payment.

Both pensions and lump sums (including death lump sums) can be earmarked except in Scotland, where orders can only be made against lump sums.

A copy of the application to the Court is sent to the scheme administrator outlining the order to be sought (Form P2). The trustees may request further information about it, object to it and be represented at any hearing.

If the application is an agreed Order, the trustees have 21 days to object. Once an Order has been made the ex-spouse/civil partner must serve it on the pension scheme.

Earmarked Pensions

Some aspects to consider regarding earmarked pensions

• There is no clean break for the member and no guarantee of benefits for the ex-spouse/civil partner.
• The ex-spouse/civil partner only receives the benefits when the member does.
• If the member dies, the earmarking order falls away.
• If the ex-spouse/civil partner remarries or the ex-civil partner forms a new civil partnership, the earmarking order ceases, although generally lump sum earmarking orders don’t fall away on remarriage or on forming a new civil partnership.
• The ex-spouse/civil partner will need to know how the income will affect tax payments.
• The pension to the ex-spouse/civil partner is taxed as though paid to the member and the ex-spouse/civil partner has no income tax liability at all.
• Any earmarked lump sum will still be tax free.

Pension Sharing

Introduction

The Pension Sharing option only applies to divorce proceedings from 1 December 2000 only.

The member may not have a choice as the Court can order pension sharing to take place.

The Order is sent to the scheme administrator who must implement it as directed.

It separates the member’s pension entitlement so there is a clean break; it offers greater flexibility than earmarking/offsetting.

It applies to all pension assets belonging to the couple except for Scotland where it only applies to pension assets built up during the period of marriage/civil partnership.

Some Basic Rules

To enable a Pension Sharing Order (PSO) to be implemented, the member must provide the scheme administrator with the decree absolute.

A PSO cannot be made where:

• There is already a PSO on the pension arrangement in respect of the same marriage;
  or
• If an earmarking/attachment order exists in respect of any marriage

It does not apply where a member has less than 3 months’ pensionable service, unless they have preserved pension rights.

You should note that a UK pension provider cannot comply with an order for pension sharing that has been made against it by an overseas court. A UK court order would need to be granted before the scheme could act on it. Without a UK court order the scheme would be accused of assignment of benefits which is prohibited under the Pensions Act 1995 and would result in unauthorised payments being made.

Pension Debit and Pension Credit

The PSO states the percentage of the member’s benefits to be given to the ex-spouse/civil partner. It can be anything between 1% and 100%.

The member’s pension is reduced accordingly. This is known as a "Pension Debit”.

If a member has benefits in a DC scheme, the amount is simply deducted from the value of the member’s pension pot. The ex-spouse/civil partner will then transfer their benefits, either internally (so that the benefits are held under their name in the same scheme as the member) or externally, to a different pension scheme. The ways in which those benefits can be paid out to them on retirement will depend on the scheme into which they transferred them.

However, if the benefits are in a DB scheme, it is more complicated and the scheme administrator has to keep track of the pension debit. The PSO percentage is applied to the member’s pension rights and that amount is revalued in accordance with statutory revaluation orders, the amount is then deducted from the member’s benefits at retirement.

See below an example of how this works in practice.

Now

• Active member, age 50, earns £30,000 p.a., NRA is 60
• Accrued pension = 1/60 x 20 x £30,000 = £10,000 p.a.
• PSO states 40%
• Pension debit = £10,000 x 40% = £4,000 p.a.

NRA

• Accrued pension = 1/60 x 30 x £60,000 = £30,000 p.a.
• Pension debit of £4,000 p.a. is revalued in accordance with the scheme rules and increases to £6,000 p.a.
• Pension to the member after applying the debit = £30,000 - £6,000 = £24,000 p.a.

With either scheme, the member will need to consider how they can rebuild the funds they have lost.

The ex-spouse/civil partner receives a corresponding "Pension Credit”. This benefit is completely independent of the member’s benefits and will be used either as an internal or external transfer. The pension credit amount counts against their LTA unless it arose from benefits that came into payment after 6 April 2006, as they will already have been tested against the LTA.

When the ex-spouse/civil partner retires, they will be able to take a PCLS from the benefits provided in respect of the pension credit, unless the member’s benefits were already in payment when the pension share occurred.External Transfer

The scheme rules will state if an eternal transfer is allowed and in many cases they insist on it.

An external transfer simply means that the ex-spouse/civil partner must transfer the pension credit to a suitable qualifying arrangement.

If the scheme is in deficit the pension credit may be reduced by the percentage by which the scheme is underfunded at the valuation date. In such cases, the requirement for an external transfer cannot be imposed. The ex-spouse/civil partner can choose to delay an external transfer until the scheme becomes fully funded again.If the ex-spouse/civil partner does not respond to requests for information about the arrangement to which the pension credit should be paid, the trustees can propose an alternative arrangement on his or her behalf.

Internal Transfer

With an internal transfer, the pension credit remains in the scheme and the ex-spouse/civil partner is treated as a deferred scheme member.

The ex-spouse/civil partner becomes entitled to all other benefits of the scheme, although they do not have to mirror those of the scheme. For example, the ex-spouse/civil partner can make further contributions (subject to scheme rules), retire at scheme Normal Retirement Age and take a PCLS at retirement.

If the member’s scheme is underfunded then the ex-spouse/civil partner can still choose an external transfer with a reduced pension credit. 

Protected Benefits

Pension sharing may have an impact on members who have protected benefits.Primary Protection – Pension Debit

If the member has this, HMRC must be notified and the protection reduced accordingly. The reduced personal LTA will apply to all future Benefit Crystallisation Events (BCE) after the benefits have been reduced by the pension debit.If the pension debit brings the value of the member’s benefits to below £1.5million, primary protection will be lost. The member will revert to the standard lifetime allowance.

Primary Protection – Pension Credit

Primary Protection is not affected if a member receives a pension credit. This may lead to the member’s benefits exceeding their personal LTA on retirement.

Enhanced Protection – Pension Debit

If the member is in a DB scheme they may be able to rebuild some or all of the lost pension rights but need to take care that "relevant benefit accrual” does not occur as that will result in enhanced protection being lost.

For members of DC schemes, if any contributions are made by a member to restore pension rights, this will result in the loss of enhanced protection."Relevant benefit accrual”

The relevant benefit accrual test for a defined benefits arrangement is done when benefits come into payment or are transferred. Contributions may continue after 5 April 2006 without causing loss of enhanced protection. Benefits may continue to accrue after 5 April 2006 (for example rebuilding lost pension rights following a pension debit as outlined in this module).

But the extent to which further benefits may accrue is set in legislation. For an explanation of the method to test relevant benefit accrual please see link to HMRC’s Pensions Tax Manual below.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm092400

NB: You will not be expected to answer questions on how to test whether there has been relevant benefit accrual but you should be aware that rebuilding lost pension rights may cause enhanced protection to be lost.

Enhanced Protection – Pension Credit

Where the member is the ex-spouse/civil partner receiving the pension credit and they have enhanced protection on the scheme, if they set up a new arrangement to accept the pension credit, they will lose their enhanced protection. 

They should ensure that the credit is transferred into the arrangement where they have the enhanced protection. If the member is in a DB scheme the pension credit could later result in relevant benefit accrual having occurred by the time they retire or transfer, so enhanced protection could then be lost.

Fixed Protection – Pension Debit

This protection will be retained but members may wish to revoke it if they want to make further contributions or accrue additional benefits to make up the pension debit shortfall.

Fixed Protection – Pension Credit

Where the member is the ex-spouse/civil partner receiving the pension credit and they have fixed protection, they can retain it if the pension credit is transferred to an existing registered money purchase arrangement.

Pension Sharing Problems

Some of the common problems are shown below:

• There could be delays in collating information, particularly where the member has several pension arrangements.
• If the member has several schemes, which one should have the pension debit? The member needs to consider carefully, as we have seen earlier particularly where there are protected benefits involved.
• Payment of charges – these can be expensive (around £1,000). On the PLSA website there are example charges. Delays can occur if one party refuses to pay the charges, even though they are required to do so by the Court Order. In general charges can be recovered by asking for direct payment by the member and/or ex-spouse/civil partner, or by deduction from the benefits. However, the latter method can be used only if the charges are not required to be paid before the implementation of the pension share.
• Sometimes the Court forgets to send the scheme administrator the PSO, or it’s not properly stamped.
• If an external transfer is taking place to an overseas scheme, additional checks may be required.
• If the member is already in receipt of their pension then there could be some overpayments while the PSO is being implemented. These overpayments will have to be taken into account and could affect income tax. It is important that the scheme makes it very clear to the member, if an overpayment is expected, that it will be reclaimed once the PSO has been implemented – this is a common area for complaints to arise.

A divorcing couple agree to equal pension benefits and a PSO is received for 50%.

The CETV from the DB scheme is £200,000 so £100,000 is transferred into a Personal Pension Plan for the ex-spouse.

On retirement a few years later, it transpires that the share of the DB scheme benefits is much greater than the share in the Personal Pension Plan.

What do you think the problem was in this case?

The couple agreed to equal benefits but what did they actually mean?

• A simple split of the transfer value amount 50/50 does not provide for "equal benefits”.
• It was found that to equalise benefits, the amount transferred to the PPP should have been higher to account for the fact that the retained share in the DB scheme was subsidised by the employer, whereas the amount transferred to the PPP was not.
• In this case, a further payment had to be made to cover the shortfall of "equal benefits” including loss of growth between the transfer date and retirement date.

It was suggested that pension sharing on an income basis could have been a fairer approach for both parties.

How does the treatment of pension rights on divorce differ between England & Wales?

The treatment of pension rights differs according to jurisdiction and it may be appropriate for members to consider under which legal jurisdiction they wish their divorce settled.

Difference between England & Wales and Scotland

England & Wales

• Both pensions and lump sums can be earmarked.
• Pension sharing can only take place by Court orders.
• All pension assets are taken into account.
• The Pension Sharing Order will state the percentage of the rights to be shared.

Scotland

• Only lump sums can be earmarked.
• Pension sharing can take place by Court order or by qualifying agreement between the parties.
• Only pension assets accrued during marriage are taken into account.
• The Pension Sharing Order will state the percentage of the rights to be shared or specify an amount to be transferred.

What has to be done when someone dies?

When someone dies it can be a very confusing time so first of all we will look at what needs to be done.

First few days

There are three things to do in the first few days after someone dies:

1. Obtain a medical certificate from the GP or hospital – this is required to register the death.
2. Register the death at the council Register Office within 5 days of the date of death.
   If possible you should take the person’s birth and marriage certificates and medical card, you will also have to tell the registrar certain things such as place of birth, occupation, address, whether they were getting state benefits. You will be provided with the death certificate and other documents required to arrange the funeral. You can purchase additional death certificates if required for sorting out the person’s affairs.  
3. Arrange the funeral either yourself or with a funeral director.

Coroner

If a death is reported to a coroner then you can’t register the death until the coroner gives permission.

A death will be reported to a coroner in the following circumstances:

• the cause is unknown;
• it was violent or unnatural;
• it was sudden and unexplained;
• the person was not visited by a medical practitioner during their final illness;
• a medical certificate is not available;
• the person was not seen by the doctor who signed the medical certificate within 14 days before death or after they died;
• death occurred during an operation or before the person came out of anaesthetic;
• the medical certificate indicates that the cause is industrial or poisoning.

Post Mortem

The coroner may decide that a post mortem is required to find out how or why the death occurred and no-one can object to this.If subsequently no further examination is required the coroner will release the body for the funeral.

If the coroner decides to hold an inquest they will provide a certificate to prove the person is dead and when the inquest is over, they will tell the registrar what to enter in the register.

Who else needs notifying

Most councils have a "Tell Us Once” system which can be used to notify all government departments such as:

• HM Revenue & Customs;
• National Insurance Contributions and Employer Office;
• Child Benefit Office;
• Tax Credit Office;
• DVLA;
• Council Tax.

Other organisations such as pension schemes, banks and other financial organisations will also need to be contacted individually, they will each require a copy of the death certificate and will have their own requirements and procedures to pay out benefits.

What is a Life Assurance only member?

A life assurance only member is covered from lump sum death benefits but does not accrue pension benefits. 

As a consequence of provisions in the European Pensions Directive, effective from 22 September 2005, it is more usual for life assurance only benefits to be provided through a separate group life assurance scheme but some pension schemes may still have life assurance only members.

Life assurance only cover through a pension scheme may be provided where:

• The member has not yet met the eligibility conditions for joining the pension scheme.
• The member has "opted-out” of the pension scheme but still qualifies for life cover.

The death lump sum payable in respect of a life assurance only member is usually less than the amount payable in respect of an active member.

What lump sum death benefits are available?

Lump sum and dependant’s pension

• The lump sum is often a multiple of salary.
• In addition, a pension may be paid to a spouse or dependant.
• Unless the scheme is very big, these benefits are normally insured up to a certain amount known as the free cover level (FCL).

Free cover level/limit (FCL)

• This is the maximum amount an insurance company is prepared to insure a member of a group policy without any forms or medical information being required.
• The member is automatically covered and each year the benefit statement from the scheme will show the amount of cover.

Exceeding the FCL

• If a member is entitled to benefits that exceed the FCL, those benefits may be restricted to the FCL amount until a medical has taken place.
• Depending on the medical results, the limit will either be removed or remain in place.
• In some cases an additional premium may be required.

What would some examples look like?

We will now look at some scenarios to help you understand how trustees come to their decisions.

Many families have complicated relationships and sometimes beneficiaries don’t understand why they aren’t automatically entitled to the scheme benefits.

SCENARIO 1

SITUATION:

• a member dies who is in the process of a divorce.
• The decree absolute has not yet been issued but a financial settlement has been reached.
• There is no expression of wish form but the member’s will leaves the estate to the children.

OUTCOME:

• The scheme rules state that if there is no expression of wish form but a legal spouse exists, the spouse gets the lump sum death benefit.
• The trustees pay the money to the spouse.

DISAGREEMENT:

• The children make a complaint.

Do you agree with the trustees’ decision?

Let’s see what the Pensions Ombudsman said.

SCENARIO 1 – PENSIONS OMBUDSMAN

DECISION:

• The Pensions Ombudsman found that the trustees acted correctly even though the outcome was not what the member wanted.
• Money could only be paid in accordance with the rules and these were clear if no expression of wish existed.
• There was no decree absolute so there was a legal widow.

SCENARIO 2

SITUATION:

• A member dies leaving a will which states that his fiancée should inherit his house but that everything else should go to his daughter.
• An expression of wish form also exists, dated 3 months after the will, saying that the lump sum death benefit should go to his fiancée who was financially dependent on him.

OUTCOME:

• The trustees considered the documents and that the fiancée would inherit the house
• They also took legal advice and decided that the will was clear and took precedence.
• The trustees pay the money to the daughter.

DISAGREEMENT:

• The fiancée makes a complaint.

Do you agree with the trustees’ decision?

Let’s see what the Pensions Ombudsman said.

SCENARIO 2 – PENSIONS OMBUDSMAN

DECISION:

• The Pensions Ombudsman found that the will was clear and an expression of wish form is not legally binding.
• Whichever way the trustees had decided the decision was not perverse.

SCENARIO 3

SITUATION:

• A member dies leaving an expression of wish form stating that the lump sum death benefit should go to his daughters.
• The form was dated some time ago and he had since remarried

OUTCOME:

• The trustees pay the money to the daughters.

DISAGREEMENT:

• The member’s widow makes a complaint.

TRUSTEES’ RESPONSE:

• The trustees responded that as the widow received the spouse’s pension and the member’s estate would pass to her, the member might have wanted the lump sum to be paid to his daughters.
• The trustees also believed that it would be an invasion of personal privacy to investigate the financial situation and the extent of the dependency of any potential beneficiaries.

Do you agree with the trustees’ decision?

Let’s see what the Pensions Ombudsman said.

SCENARIO 3 – PENSIONS OMBUDSMAN

DECISION:

• The Pensions Ombudsman found that it was wrong of the trustees to try and guess what the member would have wanted and they did not agree that investigating financial circumstances was an invasion of privacy.

What is probate?

Based on the law in England and Wales this is the legal term given to the process to be followed when someone dies, it is normally undertaken by the executor of the will.

The Probate Registry gives the executor a document called a Grant of Probate which is a questionnaire listing the deceased assets and family members. It needs to be provided along with the death certificate.

Probate is required:

• To release monies over £5,000 in a bank account.
• To sell a property.
• To sell or transfer shares.
• To release funds under a death benefit policy.

The time taken for probate to be completed depends on the complexity of the case. It is normally between 3 to 12 weeks.

It is important to make a will

Introduction

"The lack of money is the root of all evil” ~ Mark Twain.

You can see from the previous case studies that the expression of wish form is not binding on the trustees and if a will exists it should be taken into account although, it is also not binding.

If a will does not exist then the estate is subject to Intestacy Rules that set out an Order of Entitlement and who can apply for probate. The person applying is known as the Administrator and the legal document is known as the Grant of Letters of Administration. 

In Scotland the position is different and probate is called "confirmation”.

Many people think that it is not important to have a will but consider the following scenarios. 

I don’t need a will - 1 

"I don’t need a will, the family will take care of my assets when I die.”

A member dies leaving 5 children, 4 of which live outside the UK.

Without the others knowing, the son living in the UK takes out a grant of letters of administration to the estate.

He subsequently empties his mother’s bank account and spends it.

Consequence of not having a will in place - 1

The other 4 children are powerless to stop this as no will was made appointing executors.

I don’t need a will - 2

"We are living as common-law husband and wife so I don’t need a will as she will get everything when I die.”

Tony and Cheryl are a happy young couple with a 3 year old daughter. They plan to marry one day but haven’t got around to it yet. Tony is the sole financial provider and gives Cheryl money every week, they have their own bank accounts.

Tony dies suddenly in a car accident.

Consequence of not having a will in place - 2

Under the rules of intestacy Cheryl is not entitled to any of the estate as they were not married.

Tony’s bank account is frozen.

Their 3 year old daughter inherits everything including the home and all the money but won’t be able to access it until she is 18.

Cheryl has no option but to make a claim against the estate – effectively claiming against her own daughter.

This is a costly process.

What dependant's pensions are payable?

On the death of a member a pension may be payable.In this section we will look at who may receive a pension and how much it may be.

HMRC definition of a dependant

HMRC define a dependant as someone who is:

1. Married or in a civil partnership with the deceased at the time of their death.

2. A child of the deceased member who at the date of death is:

a. under age 23 or;

b. over age 23 and, in the opinion of the scheme administrator, is dependent on the member due to physical or mental impairment.

3. None of the above but in the opinion of the scheme administrator, is financially dependent, mutually financially dependent, or dependent due to physical or mental impairment.

It is important to note that a stepchild cannot be treated as a dependant under definition 2 above unless the member had legally adopted them.

Scheme rules definition

The scheme rules may differ within the HMRC definition, for example:

• They may not pay a pension to a partner if they were not married or in a civil partnership.
• The pension may be reduced if the spouse or civil partner is more than 10 years younger than the deceased member.
• The pension may cease if the spouse or civil partner remarries.
• Children’s pensions are not paid for life but to an upper age as defined in the scheme rules, for example up to age 18 or age 21 if in full-time education.
• The number of children’s pensions may be restricted e.g. to a maximum of 4 children, or if more than 4 children, the maximum based on 4 children may be shared equally.

Amount of scheme pension

The amount of pension paid to a dependant will depend on the scheme rules, it is often:

If the scheme is a defined benefit scheme:

To the spouse – 50% of the deceased member’s pension at date of death.

If the scheme was contracted-out the pension must be at least equal to 50% of the deceased member’s guaranteed minimum pension (GMP). If the spouse is a widower then this minimum relates to the GMP earned after 6 April 1988 only.

To children – this often totals 50% of the spouse’s pension.

The pension will increase in the same way as the deceased member’s pension increased.

If the scheme is a defined contribution scheme or money purchase arrangement

The dependants’ pensions will be based on the value of the member’s fund at the date of death and the age of the dependants. They must be given the right to choose the insurer and they can tailor it to their circumstances, such as whether or not it should remain level or increase, and the frequency of payments.Regardless of the scheme benefit basis:

• If the dependant is not the member’s child it is paid until their death or remarriage.
• If a child’s pension is payable it will cease when they reach the relevant age or if they die.
• If a pension is paid due to financial dependency it may cease if that dependency changes.

As can be seen from the above setting the pension up may not be the end of the matter.

The dependant may have an obligation to inform the trustees or the insurer of any change in circumstances from time to time.

Trivial pensions

If the dependant’s pension is a small amount then very often they will have the option of commuting it for a one-off lump sum which discharges the scheme of all liability to further benefits.

The maximum amount that can be paid from a scheme £30,000 and the whole amount is taxed as pension income. The scheme administrator will deduct tax using PAYE and pay the net amount to the dependant.

The pension can be trivially commuted at outset or at a later date. There is no time limit for making this payment.

Commuting a small pension for a one-off lump sum saves the scheme on-going administration costs. However, is it beneficial for the dependant?

The dependant needs to consider how this may interact with any means-tested state benefits they may receive such as housing benefit or council tax. If a lump sum is taken it will increase their capital and therefore may impact on their eligibility to claim these benefits.

Similarly, additional capital may also reduce or extinguish entitlement to pension credit.

A dependant may wish to consider taking regulated financial advice before choosing to take a trivial lump sum instead of the pension.

State benefits

Provided the member paid the relevant national insurance contributions then the spouse or civil partner may receive the following benefits from the State.

Bereavement allowance

These are weekly taxable payments paid up to 52 weeks if the spouse or civil partner are aged between 45 and State Pension Age at the date of the member’s death; and they are not bringing up any children.

Bereavement payment

This is a one-off tax-free lump sum.

Widowed Parent’s allowance

This is a taxable benefit for those under State Pension Age with at least one child who qualifies for child benefit. It is also paid if the spouse or civil partner is expecting the member’s child at the date of death. 

State pension

The Basic State Pension cannot be passed on to someone else when the member dies.

However, if this pension had been deferred to a later date then the spouse or civil partner may be able to claim some of the deferred amount.

The spouse or civil partner may be able to claim some of the deceased member’s additional state pension.

If the spouse or civil partner does not qualify for the full amount of the Basic State Pension in their own right they may be able to claim some of the deceased member’s qualifying years. If the spouse or civil partner is over State Pension Age they can check this with the Pension Service. If they are under State Pension Age then any pension they may inherit from the deceased member will be included when they claim their own state pension.

Under the new single tier State Pension which was introduced on 6 April 2016, there is no ability to inherit or derive rights from a spouse or civil partner.

Benefits for Minors

The family situation may mean that the lump sum death benefit from the pension scheme is destined for a young child who is classed as a minor.

If the money due to the minor is paid to a parent or guardian, issues for the trustees include:

• Will the money actually be used for the minor or will it be misused?
• Does the parent or guardian have the ability to invest the money wisely?
• Should the money be held in trust until the child is older e.g. 23 or 25?
• Can the parent or guardian deal with the investment and tax issues involved in trusts?

Trustees have a duty to ensure that the money benefits those for whom it is intended.

Trusts for Minors

The Trustee Act 2000 for England & Wales, imposes a high level duty of care on any trustee. This means:

• Trustees must not profit from, or cause loss to, the trust.
• The Standard Investment Criteria must be met – for example if the beneficiaries are entitled to both income and capital, the trustees must invest to achieve both.
• Investments must be diversified and suitable for the trust.
• Trustees must understand tax implications and how administration costs impact the trust.

The scheme rules should be checked to ensure that payment can be made to another trust.

If the fund is small and will only run for a short period, the pension scheme trustees may set up and run the trust themselves.

For large sums of money or more complicated trusts the pension scheme trustees may prefer to use an external professional trustee company.

The benefit is paid to the professional trustee who liaises with the parent or guardian over the needs of the child.

The professional trustee invests the money, produces annual accounts and deals with all tax reporting and compliance. They make payments for educational or other purposes as necessary during the term of the trust.

Overpaid pensions

This occurs in two main circumstances:

1. Children’s pensions – quite often these continue to be paid after the child has reached the relevant age limit or finished full-time education. The main reason this occurs is that the end date has not been set on the administration system or diarised.
2. Death of a pensioner – the pension continues to be paid after the member has died. The main reason this occurs is due to payroll not being advised to cease the payment on a timely basis.

Trustees have a duty to get the money back and will write to the child/estate requesting repayment of the overpaid amounts.

Concealment Fraud

This type of fraud occurs when an individual fails to notify the trustees or insurance company of a pensioner’s death and continues to receive the deceased pensioner’s benefits.

Some schemes will periodically perform a Certificate of Existence exercise where they send a form to all pensioners who must sign and return it to basically confirm that they are still alive. Some pensioners find this a strange request and may even complain but, as payments to deceased members are estimated to cost the UK £200 million per annum *, this type of fraud is a major concern to pension schemes.

(* source: Tracesmart)

Of course an individual could still fraudulently complete this form and forge the pensioner’s signature, consequently many schemes now employ agencies to perform regular checks on their behalf. The agencies use various methods to verify the recipient is still alive, they have access to the Register of Deaths and links with the Identity and Passport Service.

If a Member is Divorced

Any dependant’s pension depends on how the member’s benefits were treated at the time of divorce.

Attachment Order

The ex-spouse and member benefits are inter-dependent so quite often when the member dies the order lapses, so the ex-spouse could get nothing.

If the member was already in receipt of a pension the amount earmarked for the ex-spouse ceases as the member’s pension ceases.

If the member dies in service then any benefits will be paid as indicated on the attachment order.

Pension Sharing Order

There is no impact when the member dies as the ex-spouse’s benefits are independent.

The ex-spouse has pension benefits in their own right.

The benefits payable when the ex-spouse subsequently dies will depend on the terms of the scheme or contract that holds the ex-spouse’s benefits.

Flexible Drawdown

A pension scheme which provides money purchase benefits may offer flexible drawdown for the dependant’s pension.

This has no limit, the dependant may draw as much or as little as they like.

The dependant must not be an active member of a scheme in the tax year that they opt for flexible drawdown.

A child can also qualify to receive their pension as flexible drawdown. They can make contributions to a pension scheme in future years but all the contributions will be liable for the Annual Allowance Charge.

Pension Increase Exchange (PIE) Offer

The member may have agreed to a PIE offer before they died and this could mean that the dependant’s pension does not increase.

A dependant could also be offered a PIE from the trustees and before coming to a decision they will need to consider their health and life expectancy in the same way as for offers to other members.

What happens in the case of death after retirement?

In this section we will look at the benefits that may be payable if a member dies who is retired and is in receipt of a pension.

Stop the pension

The pension should be stopped immediately and the death certificate obtained.

If the pension was paid in advance the trustees or the insurance company are obliged to reclaim the amount in respect of the period after the date of death so the family will receive a letter requesting this.

Pension Protection Lump Sum

For members of defined benefit schemes a lump sum may be payable known as the pension protection lump sum.

When the member retired the pension was guaranteed to be paid for a certain number of years (normally 5 years) and if death occurred before the period expired, the balance of the remaining period is paid as a lump sum.

The scheme rules will normally set limits on who they will pay this benefit to and the trustees will refer to the member’s expression of wish form to assist with their decision.

Inheritance tax will not apply if the payment is made at the trustees’ discretion.

This benefit is not tested against the Lifetime Allowance but there is a maximum amount, which if exceeded, is subject to a special lump sum death benefit charge.

The scheme administrator or insurance company is liable for the charge and may deduct tax depending on how old the member was when they died. 

If the member was under age 75 when they died, the lump sum payable is tax free. If the member was aged 75 or over when they died, a special lump sum death benefits charge at the rate of 45% is due on the payment.

Annuity Protection Lump Sum

This lump sum will only be provided if the deceased member was in receipt of a pension as a lifetime annuity or a scheme pension from a money purchase pension or cash balance arrangement.

If the member chose a guaranteed period when they retired and they die before that period has expired, the balance is paid as a lump sum.

DC Scheme Dependant’s Pension

In a defined contribution scheme or other type of money purchase arrangement the member may have purchased an annuity when they retired. 

At that time they had the option of purchasing a joint life pension.

If a joint life pension was purchased then their dependant will receive the amount stated. If the joint life pension was purchased "with overlap” then they may receive two payments for a period of time.

1. The dependant’s pension they are entitled to, paid until they die; and

2. The balance of the guaranteed pension continues to be paid in pension form (as opposed to an annuity protection lump sum).

In other words the member’s pension continues to be paid to the dependant until the end of the guarantee period.

If the member had chosen a single life pension at retirement then all payments cease on their death.

DB Scheme Dependant’s Pension

In a defined benefit scheme the dependant’s pension is normally a percentage of the member’s pension before any was commuted for a Pension Commencement Lump Sum.

The amount is often 50%.

As with death in service dependant’s pensions, the scheme rules will state who is classed as a dependant and their birth and marriage certificates will be required before this pension can be set up.

Drawdown Pension Fund Lump Sum

If a member receiving a drawdown pension dies then the remainder of the fund may be paid as a lump sum. It cannot be more than the value of the fund left when the member dies including any investment growth.

A Drawdown Pension Fund Lump Sum is only payable in respect of capped drawdown that began on or before 5 April 2015.

The deceased member may have taken independent financial advice to limit the inheritance tax liability by setting up a trust. Inheritance tax planning is a specialist area and any queries from relatives regarding this should be referred to the member’s adviser. 

Inheritance Tax

This is paid when someone dies if the value of their estate exceeds the Inheritance Tax threshold which is currently £325,000 for the 2017/18 tax year.

The estate includes:

• Property
• Investments
• Chattels and gifts or trusts set up within 7 years before the member died.

The tax charge is:

• 40% on any excess amount above the threshold or,
• 36% on some assets if 10% or more of the "net value” of their estate is left to charity.

Married couples and civil partners can increase the threshold, up to a certain limit, when the second partner dies.

Executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold to the surviving spouse or civil partner when the first spouse or civil partner dies.

It is recommended that specialist advice is taken for Inheritance Tax planning.

Who pays inheritance tax?

The executor or personal representative must pay any Inheritance Tax due from the person’s estate within 6 months of the member’s death. A

fter this, interest will be charged on any amount outstanding.

Some or all of any Inheritance Tax due must be paid before a grant of probate can be issued.

The executor or personal representative may have to borrow money to meet this liability as it is common for the money from the estate to be tied up in assets that have to be sold, for example – the house.

Inheritance Tax generally comes out of a deceased’s estate before the inheritance amount is passed on.

A beneficiary or "donee” will usually owe Inheritance Tax if:

• it says in the will they should pay any Inheritance Tax due or;
• if the deceased estate is unable to pay it.

A beneficiary or "donee” has to pay Inheritance Tax if they:

• receive a share of the deceased’s estate;
• receive a gift within 7 years’ of the person’s death;
• benefit from assets in a trust or receive income from the assets at the time of death;
• are the joint owner of a property (this excludes the spouse or civil partner).

EXAMPLES

Gifts

Someone gives you a gift and they die less than 7 years later. The value of the estate, including the gift, is over the Inheritance Tax "IHT” threshold and there is not enough money in the estate to pay the tax.

You must pay the Inheritance Tax on that gift.

Joint Property

Someone dies and they are a joint tenant with you but you are not their spouse or civil partner.

IHT is paid on the deceased’s share of the joint property if the total value of their estate is over the threshold. 

As the surviving joint owner you are responsible for paying the tax.

If the deceased’s will stated that the joint property is held as "tenants in common” and should be given "free of tax”, the IHT will come from the rest of their estate. 

However, if there is not enough money in the estate you will have to pay the difference.

When can a member retire?

Employees can no longer be forced by employers to retire at a certain age except in specific circumstances such as poor job performance. 

However, the date from when a member can receive benefits from the pension scheme, depends on the scheme rules.

The pension scheme rules state the Normal Retirement Age (NRA) for the scheme.

For members of defined contribution schemes, they usually have the option to select a target retirement age (TRA).

Can a member retire early?

The earliest age from which a member can retire, or access their benefits, is currently age 55. 

If a member wants to retire early from an occupational pension scheme, they will normally require permission from their employer if they are an active member or if they are a deferred member, from the trustees or the employer, or both. No consent is required for members of Personal Pension Plans.

In earlier modules, we have looked at financial, health and lifestyle factors that a member needs to take account when considering early retirement.

If a member is sick, they may be able to take their benefits before age 55 on ill-health grounds. Also, certain occupations have allowable retirement ages before age 55 for particular reasons e.g. professional sports people or those in hazardous occupations. 

These special Normal Retirement Ages are approved by HMRC.

How much will my pension be?

You know the answer to this question is not straightforward!

It very much depends on the type of scheme, retirement age, membership status and options chosen.

In this section we will look at defined benefit schemes.

Active Member status

From other modules you have studied you know that for active members of defined benefit schemes the amount of pension at normal retirement age depends on how long they have been a member of the scheme, the accrual rate and the salary definition. 

As a basic example, if a scheme has 60ths accrual, the member has 30 years pensionable service and the final salary is £25,000, the pension would be:

• 30/60 x £25,000 = £12,500 per annum

However, if the member with the same details was retiring before normal retirement age, an early retirement factor would be applied. 

This reduction is to take account of the fact that the member will be receiving the pension for a longer period of time. Some  early retirement factors are prescribed in the scheme rules. 

As an example, if a member was retiring 5 years early, the factor may reduce the pension by 20% so the member would receive £10,000 per annum. 

Early retirement may be possible without a reduction applying, such as in redundancy or ill-health cases.

As a result of equalisation there may be different tranches of benefits for which separate calculations need to be made. The scheme rules should be checked for further details regarding this.

Pensionable Service can also be discontinuous owing to periods of non-pensionable absence such as extended maternity leave, strike action and sabbatical. 

If a member did not elect to make up missed contributions on returning to work, the pensionable service may be less than the dates suggest. The scheme rules may also allow for prospective pensionable service to Normal Retirement Age to be included, for example in ill-health cases.

Periods of part-time employment will be reflected by pro-rated pensionable service or pro-rated salary according to the scheme rules.

If a scheme was contracted-out, the pension must be at least equal to the GMP at the GMP due date. If it is not, the member may not be able to retire early.

Deferred Member status

If the member has already left a defined benefit scheme, the accrued pension at date of leaving will already have been calculated at that time.

Some of the pension may increase between date of leaving and retirement, and some of it may not. Legislation regarding this has changed over the years so the pension has to be split between different tranches of service and the relevant rate for the periods of those tranches applied. 

The most common tranches are:

• Pre 6 April 1978 benefits
• Guaranteed Minimum Pension (GMP)
• Pre 6 April 1997 excess benefits above the GMP
• 6 April 1997 to 5 April 2009 benefits
• Post April 2009 benefits

For leavers after 1 January 1991 the statutory revaluation applies to the whole of the pension accrued in excess of the GMP for each complete year between date of leaving and the retirement date. The revaluation amount is the increase in the Consumer Prices Index up to a maximum of 5% for benefits accrued before 6 April 2009 and; a maximum of 2.5% for benefits accrued after that date.

For leavers before 1 January 1991 the position is slightly different. 

Members who left between 1 January 1986 and 31 December 1990 – the revaluation applies to excess benefits accrued after 1 January 1985 only; and members who left before 1 January 1986, don’t receive any revaluation increase on their excess benefits.

If the pension includes a GMP in respect of contracted-out benefits, different revaluation rates apply depending on when the member left the scheme and the type of revaluation adopted by the scheme.

If a deferred member is retiring before normal retirement age, an early retirement factor will be applied to reflect the longer period over which the pension will be paid.

If a scheme was contracted-out, the pension must be at least equal to the GMP at the GMP due date. If it is not, the member may not be able to retire early.

Preserved benefits from Public Service schemes are increased in line with increases in price inflation. This follows the provisions of the Pensions (Increase) Act 1971.

Bridging Pension

Some schemes allow bridging pensions when a member retires before age 65 or 60.

Bridging pensions may also be known as "temporary pension” or "state offset” and are designed to smooth income and alleviate possible financial hardship before the state pension becomes payable.

Originally, a bridging pension had to cease at 65 by law but with the legislative changes to State Pension Age, the trustees may have amended the scheme rules to take into account the new state pension ages, in which case, the pension may be paid for longer.

When planning retirement finances it is important for the member to understand that their income from the scheme will reduce at a certain time and be replaced from a different scheme. The member needs to be sure to understand when this reduction will take place, the impact it will have on their income and if there will then be any gap before they actually become entitled to receive the state pension.

The State Pension and the Bridging Pension may not directly correspond – the bridging pension from the scheme is only broadly similar to the basic State pension.

Late Retirement

A member may wish to continue working to maintain their lifestyle, even on a part time basis. When members need to make such decisions, the factors they need to consider include their health and for how long they think they will live. Continuing to work for a few more years may be financially beneficial to help with the fact that, in general, we are living longer. 

For some people who started retirement saving later in life, it is a financial necessity to continue working. There is no longer a Default Retirement Age, and attempting to compel a member to retire at a scheme’s NRA is no longer lawful.

The scheme rules will either allow:

1. The member to continue contributing to the scheme and accrue further benefits (up to age 75 for most schemes);

or

2. Membership must cease whereupon the benefits are calculated at normal retirement age but can remain in the scheme. 

When the member eventually retires, the pension is increased by a late retirement factor so the member receives a higher amount to reflect the later payment. The member will need to investigate if the increase applied would provide a higher amount than if they received the pension and invested it.

If a member is allowed a choice, they must also consider the death benefits payable. Life assurance may be provided under a separate scheme so the member will need to check if/how late retirement impacts on these benefits.

What are the DC options?

A member with DC benefits has the right to access flexible benefits from age 55. The member has the option to use the benefits for:

• Uncrystallised Funds Pension Lump Sums (UFPLS)
• Flexi-Access Drawdown (FAD)
• Annuity purchase

A scheme does not have to offer UFPLS or FAD. 

However, it must still tell the member about them and the member has a right to transfer their benefits into an arrangement that does offer these flexibilities.

We will now consider these options.

What is UFPLS?

This is where you can withdraw the whole fund as cash or take a series of withdrawals as and when you need access to cash.

Each payment is a separate crystallisation event and tested against your LTA. For each payment, up to 25% can be taken tax free with the remaining 75% taxed as income at the member’s marginal income tax rate.

This effectively means you don’t have one "retirement date”. 

A few things you need to consider with this option are:

• If you want to secure regular income the money can’t be used to purchase an annuity.
• The amount of income tax you pay may increase if the amount of cash you take pushes you into the next tax bracket.
• If you take a series of UFPLS in particular, how long will it be before the pension pot runs out of money and what will you live off then.
• If you have primary protection then this option is not available. Nor is it available if you have primary or enhanced protection with lump sum rights over £375,000.

EXAMPLE:

A member is 58 and has a pension pot of £80,000.

She’s happy with the investment performance so doesn’t want to change anything right now, but wants £15,000 for a well-deserved holiday.

Initial portion £15,000

25% tax free = £3,750

75% taxable = £11,250

Left Invested in scheme £65,000

How does FAD differ from UFPLS?

You can only take one tax free cash sum of up to 25% of the value of the fund at the point of retirement, which is when the fund crystallises and is the only time the LTA test is applied.

The remaining 75% of the drawdown fund remains invested, but when you do take further payments, the whole amount taken each time will be taxed as income.

As with UFPLS you still need to think about the tax implications and budget properly to make sure you don’t run out of money.

Money Purchase Annual Allowance (MPAA)

Once benefits have been accessed flexibly, any further contributions that receive tax relief will be limited to the MPAA which is currently £10,000. 

UFPLS V FAD Summary

What if I want regular income?

This can be achieved by using all, or some of the pension pot to purchase an annuity. 

The amount of pension received will depend on the value of the fund, your age and the annuity rate when you retire for the benefits you decide to take. 

For example you can choose if the annuity is:

• Single or joint life;
• Level or increasing;
• Paid for a "guaranteed period”;
• Payment frequency.

Before purchasing an annuity you will be asked to complete a questionnaire about your health, lifestyle and income requirements. It may also include questions about your finances. The information is used to ensure that quotations provided meet your needs as currently once purchased, the annuity cannot be changed.

There is more information about annuities in the module "Annuities and Pension Benefits”.

Open Market Option (OMO)

This only applies where a member is looking to purchase an annuity. It allows the member to "shop around” and buy their annuity from the insurance market rather than taking the pension offered by the scheme.

Why should a member do this?

The default rates offered by their own pension scheme may not be competitive.

The member may qualify for an Impaired Life Annuity which pays higher income if there is a health problem.

What is ill-health early retirement?

Requesting early retirement on ill-health grounds is a stressful situation for members, particularly as requests are often rejected and the member doesn’t understand why.

Rejected requests form the basis of many complaints with which TPAS or the Pensions Ombudsman get involved.

Here we will look at some of the common questions.

What is ill-health retirement?

Legislation requires the scheme administrator to have qualified medical evidence that the member is not only unable to carry out their current occupation (either physically or mentally), but also that they will not be capable of returning to that occupation at a future date. This could be due to injury, sickness, disease or disability.Ill-health pensions may be paid at any time, including before age 55.

For members of defined benefit schemes, normally the pension is not reduced for early payment, and it may possibly be enhanced, for example by basing the amount on prospective pensionable service up to the member’s normal retirement date.

The rules will define what ill-health means to the particular scheme but it normally means that a member is permanently incapacitated and no longer able to carry out duties due to physical or mental illness. 

Some scheme rules will refer to any job, not just the member’s job.For members with DC benefits who use them to purchase an annuity, they may be entitled to better rates with an enhanced or impaired life annuity.

Ill-health pensions or annuities with enhanced rates are often subject to periodic review to ensure continued eligibility. 

Is serious ill-health different?

Yes.

HMRC defines serious ill-health as having a life expectancy of less than 1 year. Due to this short period, all the member’s benefits in excess of any GMP can be exchanged for a cash sum which is tax free.

The member should not have used up all of their lifetime allowance at the point payment is made. Any payment made that exceeds the available lifetime allowance creates a chargeable amount at the rate of 55%. This chargeable amount is normally deducted by the scheme administrator before paying the serious ill-health lump sum, so the member receives the net amount.

If the member is married or has a civil partner at the point of crystallisation then 50% of the benefits relating to contracted-out rights must be retained by the scheme to provide a survivor’s pension.

What medical evidence is required?

The member must provide a report from their own doctor. In addition, the trustees will require a further report from an independent medical examiner and they will normally meet the cost for this.

Information will include a prognosis in relation to the impact on their ability to work both now and in the future i.e. are they likely to remain unfit for work or could improvements in their condition be expected so they could resume some or all duties.

The independent examiner may come to a different conclusion to the member’s doctor.

Medical information is complicated but the trustees need to know whether or not there is reasonable medial evidence to conclude that the health problem is likely to be permanent or cause permanent or temporary impairment in the member’s ability to carry out his/her job.

The evidence may suggest that although the current role cannot be performed, the member is capable of carrying out other work. In this case the trustees may look to find the member an alternative role. 

What do the trustees consider?

In order to carry out their duties fully and avoid a complaint being upheld, the trustees must be able to prove that:

• They have taken all reasonable steps to obtain relevant information;
• They have correctly applied the scheme provisions; and
• They have followed a process that is consistent for them.

Above all, the trustees must reach a decision that is not perverse i.e. one which other decision makers, with the same evidence, would make.If there is uncertainty over whether a member may be able to work in future, the trustees must make their decision on the balance of probabilities.

For example – a person may require an operation but it’s not known if it will help improve the condition. A decision on the probability of the operation being successful should be made at the time but alternatively, the trustees may defer a decision and advise the member that on current evidence the incapacity does not appear to be permanent but they are willing to wait until after the operation to find out.

Trustees also have the ability to award early retirement benefits temporarily enabling them to re-assess a member’s medical condition and ability to obtain gainful employment, at a later date.

What benefits are payable?

For members of defined benefit schemes, the benefits are normally either:

• An unreduced pension – the pension is calculated to the date of retirement but the early retirement factor is not applied;
  or
• An enhanced pension – the pension is calculated to the date of retirement plus a percentage of future service  to NRA is included. In more generous schemes, the total pensionable service to NRA may be included. No early retirement factor would be applied. However, such enhancements may well cause the annual allowance to be exceeded – in some cases, to a significant extent. In such cases, the resulting tax liability may be met by applying a ‘scheme pays’ offset to the starting rate of pension.

The above provisions are expensive to provide and a member could be receiving them for many, many years. Consequently, the rules that allow ill-health early retirement have strictly defined terms. 

For members of defined contribution schemes the situation is much simpler. The rules will still define the conditions under which a member can apply to take their benefits before age 55 for ill-health reasons but generally there is no additional cost to the scheme. The benefits are still based on the value of the member’s fund and, if an annuity is to be purchased, their age at the date of the purchase. The difference is that a member may be able to obtain enhanced or impaired life annuity rates which provide a higher amount of pension than those for a healthy person at the same age.

Do I need to be on sick leave to apply for ill-health retirement?

No, a member does not normally have to be on sick leave when making an application.

How are spouse’s benefits affected?

If the member is in a defined benefit scheme, the spouse’s benefits payable on the death of the member are not affected by ill-health early retirement.

If retirement is on serious ill-health grounds, a survivor’s pension will be payable in respect of contracted-out rights only.

For members of defined contribution schemes, it will depend on how the member has accessed the benefits.

What happens if the application is not successful?

If a member’s application is not successful, they can go through the scheme’s internal dispute resolution procedure (IDRP). Information regarding what to do will be in the scheme booklet, but members would normally have to write to a specific person and include all relevant facts and evidence.The member can contact TPAS during the IDRP process or afterwards if their application has not been successful, and ask TPAS to investigate their case.

After going through the above, if the member is still not happy with the decision, the case can go to the Pensions Ombudsman. The member must contact TPAS before going to the Pensions Ombudsman. The ombudsman’s decision is final and binding to the extent that it is correct in law.

If the Pension Ombudsman’s decision is in their favour, the benefits will be paid to the member in accordance with the ill-health provisions and possibly backdated.

If the Pensions Ombudsman upholds the trustees’ decision to reject the claim, the member will not be allowed to receive the ill-health benefits. The member will then need to decide if they want, or can afford, to retire early on the normal benefit basis. If they are under age 55, they will need to wait until they reach that age before applying for early retirement on normal grounds. 

What is a PHI scheme?

Some employers provide permanent health insurance (PHI) cover. This is not a pension scheme benefit but is closely related to pension scheme membership.

If the member is covered by PHI, they may be able to receive income until NRA, when PHI ceases as the scheme pension becomes payable. The PHI cover is provided by an insurance company and the amount of income depends on what the employer has selected under the policy but it will not be the same as the member’s salary. 

For example, PHI could be up to 75% of the member’s salary less the Statutory Sick Pay.

Some PHI policies will also cover pension contributions whilst the member is off sick.

Medical evidence is also required for PHI claims and if the claim is agreed, the evidence will be reviewed, normally annually by the insurer. If the member is showing improvement in their condition, the cover may cease or be reduced, so it is not guaranteed to be paid continually to NRA.

What is the payment process?

A member is retiring, all the relevant forms have been sent in and he or she wants to know when the benefits will be paid.

Despite the best of intentions, sometimes benefits are not paid on time so we will look at some factors a member should be aware to avoid a period of financial hardship immediately after retiring.

1. Defined contribution schemes

For members of defined contribution schemes, the money in the member’s pot needs to be disinvested before any benefits can be paid.

Timing is crucial!

If the pension pot is disinvested too soon there is potentially a period of investment loss.

The scheme should have a financial management policy in place which states how far in advance a disinvestment can take place. Administrators need to ensure that the following are taken account of in the timing:

• Trustee or authorised signatory requirements; and
• Investment managers’ dealing dates

The member may receive several quotations leading up to the time the benefits are to be accessed but the value of the fund is not known until the monies are actually received. If there has been a change in the value of the investment, this will have an impact on the final benefits so for example the final PCLS amount may differ from the amount originally quoted.

If the money is being used to purchase an annuity and there has been a change in the fund value and/or the annuity rate, this will have an impact on the amount of income the member will receive.

Also, with regard to any annuity to be purchased, it can take several weeks before the member actually receives any income, even though the purchase price is paid to the insurance company on the required date. Most insurance companies take 4 to 6 weeks to set up an annuity and unfortunately, there is nothing that can be done about this so the member needs to be aware of this time gap. When the member does receive the first payment, it will be backdated to their retirement date.

2. Defined benefit schemes

Due to the way defined benefit schemes are funded timing is not so crucial. However, a disinvestment may be required to cover any PCLS so it is important to ensure there are sufficient monies available in the scheme bank account in order to make the payment on time.

In some circumstances the benefits may need to be recalculated, particularly if the retirement date falls around the scheme renewal date and final salary details need to be updated.

The pension will be paid by the scheme and the rules will state when the first payment will take place for example, on the first of the month after the member’s retirement date etc.

The member should also be made aware of whether the payment is made in advance or arrears. If the payment is made in arrears, the first amount may only be small so the member needs to ensure they have sufficient income for the period until the next payment date.

3. AVCs

If a member has paid AVCs they may be invested separately from the main scheme assets and if an external party is involved, there may be a timing delay in settlement of which the member should be made aware.

4. Pay As You Earn (PAYE)

The pension quoted to a member is always the gross amount. As the pension is income, it is subject to tax, normally on a PAYE basis. National Insurance Contributions do not apply, only tax.

If a member is not able to provide a P45 on retirement then the pension will be taxed under the emergency code until HMRC notifies the pension provider of the tax code to use. Once the correct tax code is applied, if too much tax has been deducted, the scheme will pay any refund due through subsequent pension payments.

The member’s personal allowance is reduced to take into account any state pension the member receives.

Example of the State pension collected via a company pension scheme

Step 1

Step 2

5. Overpayment of benefits

Sometimes a pension is overpaid due to an error in the benefit calculations. It can also happen if the pension is paid in advance and the member dies so some of the pension needs to be reclaimed.

The law states that no-one is allowed to profit from a mistake therefore the scheme trustees normally ask for the overpayment to be paid back to the scheme. If it is a large amount that needs to be repaid, it may be possible for the member to agree with the trustees that it can be repaid in instalments over a period of time so that they do not suffer financial hardship.

The member may want compensation for distress or inconvenience and a small amount may be agreed upon. 

In such cases, the member should be advised of the process that applies for making such applications for compensation.

What about pension increases for DB schemes?

When a member retires they want to know how their pension will increase each year as part of their financial planning.

There are certain statutory increases applied to different tranches of pension and this becomes quite complicated for members of defined benefit schemes that were contracted-out. 

With regards to the examples shown in this section, it is important to note that:

• The increases shown are the minimum in law and scheme rules WILL be different, for example, not all schemes moved from 5%LPi to 2.5%LPI; 
• Many schemes still use RPI not CPI, for price inflation because of their rules;
• Sometimes schemes grant discretionary increases.

Contracted-in Schemes

For any tranche, a scheme may give higher increases or the pension tranches may be different periods but a scheme cannot provide anything less than shown in the table.

If part of the pension was purchased by AVC benefits, they are exempt from these statutory increases.

Contracted-out Schemes

Part of the pension may be in respect of the GMP which has to be split out between the GMP earned pre and post April 1988. Any pension in excess of the GMP is known as the excess pension.The table below shows each tranche of pension and the increase to be applied.

For any tranche, a scheme may give higher increases or the pension tranches may be different periods but a scheme cannot provide anything less than shown in the table.

If part of the pension was purchased by AVC benefits, they are exempt from these statutory increases.

Retirement before the GMP Due Date

If a member of a contracted-out scheme retires before the GMP due date (age 60 for women and age 65 for men), all of their pension is treated as excess pension.

When they reach the GMP due date, the pension is then split between the GMP and excess pension and the relevant increases applied.

Bridging Pension

If the member is in receipt of a bridging pension, this will normally cease at SPA or, if the scheme was contracted-out, at the GMP Due Date.

If the member has any GMP, the ongoing pension will be split to reflect the GMP and the relevant increases will be applied going forward.

Females over age 60

For female members of contracted-out schemes, the GMP Due Date is age 60 but very often the scheme normal retirement date and State Pension Age is later.

On retirement the GMP at age 60 is increased by the scheme by 1/7th x 1% for each week late and statutory increases are applied to the post 88 GMP (the change in the Consumer Price Index up to a maximum of 3% pa).

The State will not pay any increases due on the pre 1988 GMP until the member reaches SPA.

Just to recap on the different dates:GMP Due Date is fixed at age 60 for females and age 65 for males.

State Pension Age depends on when the member was born. 

A member can find this date by going to the website: www.gov.uk/calculate-state-pension if under age 55, and www.gov.uk/state-pension-statement if over age 55.

What is an annuity?

An annuity is a product normally purchased from an insurance company which, in exchange for a lump sum, pays out income on a regular basis from retirement for the lifetime of the member.

The amount of income and the frequency of payment depends on a variety of factors, some of which the member can choose.It is important for a member to understand:

• The type of annuity that would be best for them
• How it can be tailored to suit their circumstances
• The impact of the benefits they choose

Once purchased, the type of annuity cannot currently be changed so it is essential to make the right choices at the outset.

There are various types of annuity:

CONVENTIONAL ANNUITY

• The most common type, also known as lifetime annuities or compulsory purchase annuities.
• As soon as the pension funds are paid to the insurance company, an income starts to be paid to the member.
• They provide a guaranteed income stream for the remainder of the annuitant’s life. The annuitant could be the member’s spouse/dependant if the annuity was purchased on a joint life basis.

INVESTMENT ANNUITY

A type of lifetime annuity where part of the income is guaranteed and part is linked to investment performance.

• The member selects the guaranteed level of income required and additional income paid based on the investment returns received.
• Income would be higher if investments are performing well but only the minimum guaranteed amount would be paid if investments are not performing.

FIXED TERM ANNUITY

• Also known as temporary annuities, they pay an income for a fixed term or until the member dies, if earlier.
• This type of annuity is likely to offer a higher amount of income than a conventional annuity due to the shorter payment period.
• HMRC consider short-term annuities (less than five years) to be a form of drawdown.

DEFERRED ANNUITY

• A type of annuity that allows a person to defer receipt of income payments until a future date.
• There are various types that can be set up with a lump sum, or more often, the annuitant makes regular payments into it. During this accumulation phase the payments gather interest.
• The distribution phase is when the provider begins to pay out the annuity which is paid for life.
• There is no access to any tax free cash.

PUCHASED LIFE ANNUITY

• This is purchased with a lump sum and is generally for people who want to maximise their income on retirement and receive a guaranteed income for life.
• Purchased Life Annuity rates generally provide a lower level of income than Compulsory Purchase Annuity rates but the tax treatment is more favourable consequently, a higher net income is generally payable.
• Payments received consist of two parts – capital and income. The amount of capital depends on various things such as age and gender and is free of tax; the interest element is taxable.
• Flexi-access Drawdown

An alternative to buying a lifetime annuity.

• The member leaves their pension pot invested and takes an income directly from it.
• The member controls the amount of income that is withdrawn.

Open Market Option (OMO)

A defined contribution pension scheme will allow a member to "shop around” and buy their annuity from the insurance market rather than taking the pension offered by the scheme.

Why would a member do this?

• The default rates offered by their own pension scheme may not be competitive.
• The member may qualify for an Impaired Life Annuity which pays a higher income if there is a health problem.

THE PURCHASE PRICE OF AN ANNUITY

Where can the member get the money from to purchase an annuity?

The cost of purchasing an annuity is known as the purchase price.

For a defined contribution scheme member, where units are purchased, it is calculated as:the number of units in the pension fund x the unit price at retirement.

For example:

•  41255.604 units x £1.56 = £64,358.74

Which is the amount available to purchase an annuity.

• Each time the member paid contributions into the pension scheme an amount of units was purchased which keeps accumulating until retirement.
• The unit price is provided by the investment fund manager. It will fluctuate daily depending on how well the fund is performing so the actual purchase price is not known until the units are disinvested.

A member has the option of taking part of their pension benefits as a tax free cash sum (usually up to 25%) therefore, the amount available to purchase an annuity would be reduced accordingly.

For a defined benefit scheme member the benefits are calculated in accordance with the scheme rules and the insurance company then calculates the cost of providing those benefits.

A member usually has the option of surrendering part of their pension benefits in exchange for a tax free cash sum. The insurance company will calculate the amount required to provide the residual pension and any dependant’s pension payable.

ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVCs)

The member may have paid AVCs whilst a member of an Occupational Pension Scheme to increase their pension in retirement.

The funds from these AVCs can be used to purchase an annuity.

OCCUPATIONAL PENSION SCHEMES

These are employer sponsored schemes and the most common type where an annuity has to be purchased on retirement is a defined contribution/money purchase scheme. However, there are some defined benefit schemes who extinguish future liability by purchasing a member’s pension (and any dependant’s pension payable) with an insurance company when they retire.

Other arrangements

A couple of other pension arrangements the member may have are:

• Self-Invested Personal Pension Schemes (SIPPS)
• Automatic Enrolment Pension Scheme

PERSONAL PENSION PLAN

The member may have an individual personal pension plan if they have not always been in a scheme arranged by an employer or if they have contributed to a personal pension plan rather than making AVCs. An employee may also have a personal pension plan through membership of an employer’s workplace group personal pension arrangement.

COMBINING PENSION FUNDS

A member may have worked in different companies and have more than one pension fund when they come to retire. It may be possible to combine them to purchase one annuity.

ADVANTAGES

• Retirement income comes from one source so is easier to manage.
• The amount of income is maximised due to a higher purchase price.
• Only one set of initial charges when purchasing the annuity.

DISADVANTAGES

• The charges to surrender the different pension arrangements may be high.
• The scheme rules may not allow it.
• The pension scheme may provide a guaranteed annuity rate (GAR) that provides a higher level of income through the scheme than the open market can offer.

What other issues must be considered?

There are a number of other issues to consider and some of these are covered below.

Death after TRetirement

The issues that arise in this scenario were covered in Module 9 Pension Scheme Death Benefits.

Contracted-Out Schemes

If the member was in a scheme that was contracted-out pre-April 1997 on a final salary basis then  the scheme is responsible for paying a pension at least equal to the Guaranteed Minimum Pension (GMP) from their GMP due date (65 for men, 60 for women).

The annuity purchased must take this into account and increase the GMP element of the annuity each year in accordance with legislative requirements i.e.

• Pre 88 GMP – no increase is applied
• Post 88 GMP – must increase in line with increase in the Consumer Price Index up to a max of 3% p.a. The rate is notified by the Government.

When to purchase an Annuity

From April 2015, a member’s DC pot does not have to be used to purchase an annuity. 

It will continue to be a common way of turning pension savings into income for life, but as there are now greater flexibilities available to members, an annuity may only be one part of a member’s retirement solution.

Annuity rates vary with market conditions and it may be best for the member to wait until rates get better. Generally the older a member is the more pension they will receive as they are not expected to live as long. Alternatively, the new flexibilities allow the amount of income from an annuity to be varied so for example, a member could choose to take less when they start to receive their State Pension.

These options allow the member to consider their changing needs during retirement and long term care to be included in any decision making.

Deferring an Annuity

Deferring an annuity does not necessarily mean getting a higher pension!

The member should consider:

Deferring an annuity - Example

A member is 60 years and 8 months old.

If he was 65 now

BUT

In this example, by deferring their annuity to age 65, the member would need to live for approximately 44 years to break even (£26,793 / £609) with the amount they would have received had they drawn their annuity from age 60 years and 8 months.

In reality

The funds would earn interest/investment growth until the annuity is purchased.

Mortality Drag

A member needs to consider the negative impact of "mortality drag” if they take regular withdrawals from the fund whilst deferring the annuity purchase. Mortality drag is the increasing risk that annuity rates will fall as deferring the annuity purchase continues. The risk grows exponentially the longer the member defers the annuity purchase.

In effect

Will the extra investment return justify the delay?

Poor health

When purchasing an annuity the member must also take into account their health and life expectancy. We looked at this in the Lifestyle module. But here is a reminder:

Annuity Rates

Annuity rates are affected by:

• Poor health
• Being a smoker
• A family history of medical conditions.

Enhanced Annuity

These rates could be up to 20% higher than normal annuity rates.

Examples of medical conditions are:

• Smokers
• Overweight
• Blood pressure
• Cholesterol
• Diabetes

Impaired Life Annuity

If a member has a short life expectancy – typically less than 5 years – impaired life annuities offer significantly higher rates.

Cancer and heart problems are examples of serious medical conditions that would qualify for an impaired life annuity.

Module 12 - Communicating with Pension Scheme Members Seeking Guidance

In this module we will look at some ideas on how to communicate better with members. 

At the end of this topic you will be able to:At the end of this topic you will be able to:

• Recognise barriers, be clear and concise and apply emotional intelligence to communicate effectively with members. 
• Explain the different stages of listening and implement them when talking to members. 
• Describe the different types of questions in the question funnel and understand when they should be used. 
• Respond sensitively to complaints by letter or phone. 

In this module we will look at different communication skills and some hints and tips to help you improve the way you communicate with members. 

What is emotional intelligence?

Have you ever wondered why others react to you in the way that they do?

For example there are two people, one sees you as open and honest, the other as private and withdrawn. 

Why does this happen and what can you do about it?

Emotional Intelligence has two aspects:

1. it is the ability to express and control our own emotions; and
2. it is our ability to understand, interpret and respond to the emotions of others.

We each have different ways of looking at things and determining how we perceive events and people. If we understand the way someone else looks at things, and us, we can adapt our behaviour to have greater impact.

Dealing with member queries and providing them with the information to make better pension benefit choices can be stressful – the speed in which queries come in and the amount of technical or process knowledge to sift through quickly and accurately to provide a response. This can leave you feeling agitated, frustrated, anxious or stressed, it can keep you from thinking clearly and hamper communications. It can also encourage you to give answers under duress that are misleading, inaccurate or may constitute advice.

When a member contacts you for some help, he or she can sense these emotions and could form a distorted opinion of you and the business and not view the interaction with you as a pleasant experience.

To help improve awareness of your impact on others, here are 10 basic questions –

1. How do you see your actions?
Imagine being someone else watching you and judging your actions.
2. How do your actions influence others?
You may see a pattern in the way that you choose to treat different groups of people.
3. Do you realise the power of your actions?
Don’t underestimate how a person feels when they interact with you. You have the power to influence.
4. What are the alternative actions you can take?
Don’t just make a decision or deal with something without considering alternatives.
5. What are the needs of others around you?
Understand others’ needs and make sure you address them without creating a future problem.
6. How can you adjust to the needs of another?
Identify their needs – they may be emotional or have a disability. How can you address or adapt the information you are giving – a different communication channel may be required.
7. Do you understand how much the actions you make now matter?
Be aware – an action may not make much difference now, but could have a larger impact going forward.
8. How can you be a better observer?
Learn how to listen and see things from a different perspective. Pay attention to the way people respond to you.
9. How can you be more open-minded?
Don’t judge situations on your own behaviours, attitudes and beliefs.
10. Do you realise that awareness is a process?
Understanding how your actions influence others takes time and patience. Never be tempted to judge or draw conclusions about people on age, gender, race or walk of life – you can be very, very wrong.

When continuing through this module, consider your level of emotional intelligence and how you can improve it.

There are many emotional intelligence tests on the internet – try one and see how you score!

Are we good listeners?

What are good questioning skills?

In order to assist the member in making an informed decision, you may have to ask questions to gather information, seek opinions or gauge feelings.

Good questioning skills put you in control of the call and help you anticipate concerns or queries.

A poor response is a result of a weakly constructed question.We will now consider the main question types.

OPEN QUESTIONS

These help more information to be more forthcoming and free flowing. Examples are:

• What can I do for you today?
• Tell me what happened?
• What would you like to do?

PROBING QUESTIONS

These are open questions that enable you to gather information and the "5 whys” is particularly useful to gain a better understanding of things.

For example, a member is unhappy and contacts you:

Why – because he didn’t receive his PCLS on time

Why – because we didn’t have sufficient funds in the trustee bank account

Why – because we didn’t arrange a disinvestment of funds in time

Why – because we didn’t remember

Why – because we were working on other things

Action – clearly the process needs reviewing for prioritising work.

A simple scenario with one powerful word!

CLOSED QUESTIONS

These are clarifying questions used to test understanding and gain commitment. 

Examples are:

• Where, what, who
• Can you?
• Would you?
• Could you?

A simple "yes” or "no” answer can effectively stop the conversation.

RECALL QUESTIONS

These simply ask the person to recall something from memory.

For example, a typical security question is "What is your mother’s maiden name?”

LEADING QUESTIONS

These try to lead a person in a particular direction and tend to be closed questions.

They are good for getting the answer you want whilst leaving the other person with the feeling they had a choice!

Be careful when using these type of questions with members. 

QUESTION FUNNEL

This starts with general questions then you would hone in on various points by asking more detailed questions at each level.

Typically there may be several layers from the top to the bottom of the funnel:

1. Awareness/Statements
2. Clarifiers: Who? What? when?   Open questions to help fully understand the situation
3. Probes: Options? Exceptions Obstacles?  Probing questions to help broaden or re-frame thinking
4. Action: Closed questions to help identify action

What makes good written communication?

Written communication may be the only experience a member has with you. The letter or email is a personal statement about you and the situation you are dealing with. Remember, the member has entrusted you with his or her retirement benefits – do you want them to see you as:

• An incompetent amateur,
• Arrogant and domineering, or
• A rational, skilled professional?

The letter or email needs to be structured like a sandwich.Always keep the purpose of the letter or email in mind.

How do you handle complaints?

Communicating with members involves dealing with their complaints! 

There are a number of reasons why members complain and they may be....

• ANGRY
  Demanding or aggressive. Try to intimidate you.
• FRUSTRATED
  They don’t understand why things aren’t done. They feel ignored.
• SELF-IMPORTANT
  They only want to deal with someone in charge.
• CONFUSED
  Overwhelmed. Unfamiliar with the situation.

Or they may just be in a hurry.

BEST PRACTICE

When dealing with complaints a lot of the same communication rules apply that we have already looked at. 

However, there needs to be a greater deal of sensitivity and empathy.

We will take a look at some best practice when handling complaints by letter and phone.

RESPONDING TO COMPLAINT LETTERS

Dear Mr J

I have received your letter and I’m very disappointed that you felt the need to complain.

I have looked at your records and we have dealt with your case within timescales allowed by disclosure regulations so we haven’t actually don’t anything wrong.

I agree that we are at fault for not keeping you informed of progress and that things have taken quite a long time so I’m sorry about that. If you are not happy with the service then please contact your HR department as they will be able to tell you is you are eligible to use the IDRP procedure.

Yours sincerely

Administrator

How would you feel if you got a letter like this in response to your complaint?

We previously looked at projecting the right attitude on the phone, can any of these steps also be used in letters?

OPENING PARAGRAPH

I have received your letter and I’m very disappointed that you felt the need to complain.

The opening paragraph of a letter sets the tone and in this case it is very abrupt and unprofessional.

This member felt the need to complain regardless of whether you think it is justified.

State the purpose of your letter and frame letters in the right context, using appropriate language and tome to acknowledge their feelings and convey that you understand the complaint. This immediately puts them in the right frame of mind to accept your message.

Acknowledge the complaint and thank them for contacting you and bringing the matter to your attention.

FACTS

I have looked at your records and we have dealt with your case within timescales allowed by disclosure regulations so we haven’t actually don’t anything wrong.

Investigate the case, compile the facts and check for accuracy so that you understand why the member is complaining and whether or not it is justified.

Acknowledge the problem using empathy.

This paragraph is too defensive and doesn’t explain anything. It also uses jargon – the member probably has no idea what disclosure regulations are.

DON’T ADMIT LIABILITY

I agree that we are at fault for not keeping you informed of progress and that things have taken quite a long time so I’m sorry about that.

The letter should apologise and sympathise but under no circumstances should you admit liability. Sympathise with the fact that they have cause for complaint without accepting the blame. Use sentences like....

• Whilst we do not accept responsibility for the situation, we want to assist you by.....
• Whilst we regret that previous information provided may have been misunderstood.....

Explain your perspective of the situation and if they are wrong, tell them in a polite and informative way for example:

• As a result of our investigation, we could find no cause for the problems described in your letter...

Use the impersonal "we”, "us” and "our” rather than "I” to depersonalise the situation. The complaint is usually against the company not an individual, even if an individual is responsible. 

OWN THE PROBLEM

If you are not happy with the service then please contact your HR department as they will be able to tell you is you are eligible to use the IDRP procedure.

Don’t blame the problem on others, accept responsibility and own it!

Complainants are only interested in you owning the problem and rectifying it. Blaming other people, departments or processes only discloses weaknesses and undermines integrity.

State the action you are taking to rectify the situation. Reasonable people understand that mistakes or delays occur, they will be pleased that you are sorting it out.

This response has not resolved anything and is not helpful. All members are entitled to go down the IDRP route and details of the procedures will be in every scheme’s handbook so you can explain what it is and provide the necessary forms for them to complete. 

However, always try to resolve the matter with the complainant amicably. Do default to the IDRP or present it in a way that suggests it might be the correct next step.

COMPLAINTS BY PHONE

When someone is complaining by phone, how should you handle it?

Here are 7 steps to projecting the right attitude on the phone.

1. THANK YOU

Thank the person for contacting you and bringing the matter to your attention.

They may have received poor service previously from us or from others, the amount of pension they have been quoted may not have met their expectation or whatever they are complaining about is simply happening at an inconvenient time.

No-one makes mistakes on purpose, there may not even have been a mistake.

Remember they have the right to complain!

2. LISTEN

Listen to what they are saying, particularly their emotions and the emphasis being placed on certain things.

This will help you identify what is causing them to be angry or frustrated etc. so that you can concentrate on the primary problem.

3. BE PATIENT

Be patient and don’t interrupt, particularly when they’re in full flow!

Wait for the waves of emotion to recede.

Acknowledge the problem then speak softly and in a steady tone.

Don’t enter into a verbal battle as they won’t be listening.

Express empathy but don’t acknowledge any fault.

4. FOCUS

When the person has calmed down and is listening to you, focus on the problem.

5. REPEAT

Make sure you are addressing their concerns and repeat the problem.

Reiterate the priorities as per your understanding.

Ask them to confirm your understanding.

6. OWN THE PROBLEM

Yes that’s right, regardless of the situation take ownership of the problem.

Explain the action to be taken and that you will personally look into it and follow up on their concerns.

If a person is angry or frustrated don’t say you need to refer it to another department, that will make them feel like they are dealing with someone who is powerless to help which may make the angry or frustrated again.

7. IT’S NOT PERSONAL!

Complaints are not personal so don’t take them personally.

At the end of the conversation thank them for their understanding, this ends the conversation on a positive note.

And remember....... you have taken ownership so follow up on the actions