60 MINS CPD COURSE MONEY PURCHASE PENSION INCOME OPTIONS

Transcription

1 60 MINS CPD COURSE MONEY PURCHASE PENSION INCOME OPTIONS

2 INTRODUCTION THE FREEDOM AND CHOICE REFORMS INTRODUCED NEW PENSION INCOME OPTIONS FOR MONEY PURCHASE SCHEMES. THIS COURSE EXPLAINS THE RANGE OF OPTIONS NOW AVAILABLE. To understand: LEARNING OBJECTIVES Flexible money purchase pension income options Guaranteed money purchase pension income options How different options or a blend of different options can meet client needs 1

3 1. RETIREMENT FREEDOMS & PENSION INCOME OPTIONS PAGE 3 BACKGROUND PAGE 4 ANTI RECYCLING ROLE OF DEFINED BENEFIT SCHEMES 2. FLEXI-ACCESS DRAWDOWN & DRIP FEED DRAWDOWN PAGE 6 FLEXI-ACCESS DRAWDOWN PAGE 7 DRIP FEED DRAWDOWN PAGE 8 SHORT TERM ANNUITIES OTHER CONSIDERATIONS 3. UNCRYSTALLISED FUNDS PENSION LUMP SUMS PAGE 10 UFPLS AS A PENSION INCOME OPTION 4. CAPPED DRAWDOWN PAGE 13 CAPPED DRAWDOWN V FAD GAD INCOME LIMITS AND REVIEWS PAGE 14 OTHER CONSIDERATIONS 5. ANNUITIES AND SCHEME PENSIONS PAGE 16 MAIN TYPES OF LIFETIME ANNUITY PAGE 17 GUARANTEED ANNUITY RATES MONEY PURCHASE SCHEME PENSIONS OTHER CONSIDERATIONS ANSWERS TO SECTION QUESTIONS PAGE 19 PAGE 11 OTHER CONSIDERATIONS 2

4 1. RETIREMENT FREEDOMS & PENSION INCOME OPTIONS BACKGROUND The Retirement Freedom reforms to money purchase (MP) pensions came into effect from 6th April This was primarily in response to widespread concerns about poor annuity rates, where low gilt yields and increased longevity were directly affecting members retirement incomes. One outcome is the increased use of drawdown by members seeking retirement income. The reforms also enabled significantly more people to take their full MP pot as a cash lump sum. For those interested in the statistics, the FCA has published a series of data bulletins. See, for example, the following comment from the March 2018 issue: Since the pension reforms, there has been an increase in the number of pension pots entering into drawdown. 30% of pots accessed since October 2015 have gone into drawdown and 12% taken as an annuity. Before the reforms, MP income options included: capped drawdown flexible drawdown originally for those with secure pension income of at least 20,000 a year, reduced to 12,000 a year from 27th March 2014 short term annuities under drawdown rules lifetime annuities scheme pensions survivors drawdown or annuities could only be paid to spouses, civil partners or dependants. Following the reforms, MP income options include: flexi-access drawdown (FAD) new uncrystallised funds pension lump sums (UFPLS) new short term annuities under drawdown rules lifetime annuities flexible lifetime annuities (with greater flexibility to vary income than previously available through investment-linked and with profits annuities) new scheme pensions survivors drawdown or annuities can be paid to anyone nominated by the member. In addition 30% OF POTS ACCESSED SINCE OCT 2015 HAVE GONE INTO DRAWDOWN AND 12% TAKEN AS AN ANNUITY existing flexible drawdown arrangements automatically converted to FAD existing capped drawdown arrangements can continue, be transferred, or be converted to FAD. Of the new options, most providers offer FAD and UFPLS, but there s been little incentive to respond to the legislative changes permitting flexible lifetime annuities, given the business mix following the reforms. All these pension income options are available from a MP scheme member s minimum pension age, currently 55 in normal circumstances. Members may be able to take benefits earlier if they have a protected retirement age. This is also possible if they meet the ill health retirement or severe ill health retirement conditions. 3

5 ANTI-RECYCLING PROVISIONS Anti-recycling provisions are a consideration for members who want to start taking pension benefits, but keep making contributions, or benefitting from employer contributions. The anti-tax free cash (TFC) recycling provisions pre-date pension freedoms. The money purchase annual allowance (MPAA) was introduced as part of the reforms. For HMRC s anti-tfc recycling rules to bite, all four conditions listed below must apply: 1. The TFC payment, plus any other TFC payments in the previous 12 months must exceed 7, The total of any additional contributions must exceed 30% of the TFC in the two tax years before or after receipt of the TFC. 3. The additional contributions must exceed 30% of the original normal pattern of contributions. 4. The use of TFC to pay any additional pension contributions must be pre-planned. HMRC can impose significant penalties linked to the unauthorised payments regime if it concludes these measures have been breached. The MPAA effectively restricts saving into MP schemes to 4,000 a tax year. The member is liable for an annual allowance charge on any excess contributions at their marginal rate of income tax. The MPAA doesn t apply to pension accrual in DB schemes, but the complications are only relevant to active members of both MP and DB schemes. ROLE OF DEFINED BENEFIT SCHEMES The pension freedom reforms don t apply to DB schemes. However, many individuals who can benefit from the reforms will reach retirement age with a mix of pension provision including one or more DB schemes. DB scheme pensions are guaranteed, payable for life and usually indexed with the scheme bearing the longevity risk. The member s DB pension income depends on the scheme rules. It s usually linked to their pensionable service and either their final salary or increasingly career average earnings. DB scheme death benefits can include lump sums and survivors pensions. DB scheme pensions can be inflexible in terms of both income and death benefits. Members looking for more flexible options can transfer to MP schemes, but must obtain advice if the DB scheme cash equivalent transfer value is over 30,000. The main MPAA triggers are taking a UFPLS or FAD income. Crystallising into FAD and taking just the TFC doesn t trigger the MPAA. Lifetime annuities and scheme pensions don t usually trigger the MPAA, but flexible lifetime annuities and scheme pensions from very small MP schemes can. The other triggers are taking a stand alone lump sum under primary protection provisions, and some payments from overseas pensions. 4

6 Section 1 Test your knowledge a) Which three new pension income options became available from April 2015? b) What two approaches including the consequences of breaching the rules does HMRC use to limit pension recycling? c) What are the main features of DB pension income? 5

7 2. FLEXI-ACCESS DRAWDOWN & DRIP FEED DRAWDOWN FLEXI-ACCESS DRAWDOWN FAD was introduced from 6th April 2015, replacing capped and flexible drawdown. All flexible drawdown arrangements automatically converted to FAD on 6th April Existing capped drawdown plans in place by 5th April 2015 can continue or be converted to FAD. When a member crystallises into FAD, they normally take 25% of the total as TFC subject to having sufficient remaining lifetime allowance (LTA). They can take the balance as a taxable lump sum immediately, or keep it invested in their drawdown plan using it to provide as much or little taxable income as they choose. FAD isn t guaranteed to provide the member with an income for the rest of their life. Advisers have to factor in anticipated life expectancy, projected inflation, potential investment returns and fund volatility in arriving at a predicted sustainable income level. If a member takes what proves with the benefit of hindsight to be unsustainable withdrawals, they risk their funds running out before they die. Wary clients could also lead a less comfortable retirement than necessary if they overly restrict their withdrawals. Unlike capped drawdown, there s no external framework of GAD limits and three-yearly reviews to help keep a client s funds on track to provide a sustainable income. Advisers have to develop their own approaches to managing these risks, perhaps accessing provider and third party tools and investment strategies. Some members can combine FAD with a secure source of pension income, such as a DB scheme pension or the state pension. Others might use FAD mainly to fill in the gap between moving to part-time work or ending paid work and reaching state pension age. An annuity could also fulfil the role of providing secure income and a hedge against longevity. Example When Mike turned 60 in January 2018, he started receiving a 5,000 a year DB pension. He s also got a MP pot worth 200,000. In addition, he s in his employer s separate MP automatic enrolment scheme. Mike is looking for a lump sum towards repaying his interest only mortgage. He also wants to reduce his working hours and replace gross income of 4,000 a year until he reaches state pension age at 66. If Mike moves his MP pot into FAD, he can take 50,000 as TFC and use this for mortgage repayment. He can use the balance of 150,000 to provide 4,000 a year taxable income for the six years until he reaches SPA. Taking FAD income triggers the MPAA so his total workplace pension contributions will be limited to 4,000 a year. Mike has no plans to increase his pension contributions, so shouldn t trigger the TFC recycling provisions. Let s move forward to January 2024 when Mike reaches SPA of 66 and fully retires from paid work and assume that: Mike fully encashes his auto enrolment pot worth 10,000 via UFPLS (see later), using these funds to clear his final debts his DB pension is now 5,798 a year his new state pension is a week or 10,907 a year his drawdown fund has grown to 172,230 and he increases withdrawals to 6,890 a year 4% of the current fund value. Mike s total income is now 23,595 a year including 16,705 of secure income. 6

8 DRIP FEED DRAWDOWN Drip feed drawdown is a FAD variation that can provide tax-efficient pension income for clients with no specific need for their TFC as an up-front lump sum. It involves phased crystallisations of pension savings into FAD, providing pension income by combining small, more regular amounts of TFC and taxable withdrawals. This can minimise tax on each income payment and potentially give rise to a greater value of total TFC over time. Until the member has used up their TFC entitlement, each crystallisation can create: an income payment made up entirely of TFC with the balance kept invested in FAD 25% TFC plus 75% taxable income any mix between these two limits of TFC, taxable income and funds left in FAD. Example 1,000 pension income funded from drip-feed drawdown three approaches 1. Crystallise 4,000 take 1000 as tax free cash 2. Crystallise 1,000 take 250 tax free cash and 750 taxable income 3. Crystallise 2,500 take 625 tax free cash and 375 taxable income TFC 1,000 Taxable 0 FAD 3,000 TFC 250 Taxable 750 FAD 0 TFC 625 Taxable 375 FAD 1,500 As less of the total withdrawal is subject to income tax, this both saves the member tax and has the potential to improve how long their pension savings last. Paying less tax on withdrawals, particularly in the early years, means more funds can remain invested and have a longer opportunity to produce further growth. Example Cate is 60, has just left employment and started to receive a 3,750 DB pension. She also has a 105,000 MP pot. She needs to supplement her DB income until her state pension starts. She s also considering returning to part time employment after an extended break. Her current income needs are around 14,500 a year. In year one Cate withdraws 10,800 from her pension made up of 2,700 TFC and 8,100 taxable income. The 8,100 plus her DB pension income of 3,750 uses up all her 11,850 personal allowance (2018/19), meaning the full 14,550 can be received free of tax. Alternatives, such as taking full TFC, or perhaps 10,800 of TFC to fund her income would have wasted her personal allowance and used up her TFC unnecessarily. Cate can continue to receive income payments made up of a mix of TFC and taxable income each year and adjust the level of withdrawals as the tax bands change or if she decides to start working part time. 7

9 This example demonstrates how it s possible to manage funds to pay no tax at all along with minimum use of TFC. Drip feed drawdown can also be used to reduce an income tax liability in other ways. For example, by using a suitable mix of TFC and taxable income to keep a client s total taxable income within the basic or higher rate bands if they re close to these margins. Another benefit of taking TFC gradually is that a member retains more of their funds in the uncrystallised part of their pension fund. They ll potentially increase the total monetary amount of TFC they receive from their pension fund. If a member crystallises their full pension pot and takes all their TFC in one payment, no further TFC will become available unless they make further contributions. Spreading their TFC offers the possibility that the uncrystallised part of their pension fund will benefit from investment growth, generating additional TFC entitlement over time. SHORT TERM ANNUITIES SHORT TERM ANNUITIES PROVIDE INCOME FOR UP TO 5 YEARS OTHER CONSIDERATIONS Crystallising benefits into FAD triggers a benefit crystallisation event (BCE). The TFC and the amount moved into FAD are both tested against the member s remaining available LTA. If the drawdown funds are still in FAD when the client reaches age 75, a second BCE test against the member s remaining available LTA applies to any growth on the FAD funds since the first BCE. Clients can convert all or part of their FAD fund to an annuity at any time. If they do so before age 75, there s a second LTA test. Taking any income from FAD triggers the MPAA. However, if a member crystallises funds into FAD and takes just their TFC, this doesn t trigger the MPAA (assuming they don t do anything else to trigger it). Funds in FAD fall outside the member s IHT estate provided the scheme has the discretion over who they re paid to. If the member dies under age 75, any remaining FAD funds can be used to provide their chosen beneficiaries with tax-free lump sums, beneficiary FAD or annuities. On death from age 75, the same death benefit options apply, but the funds are taxable at the recipient s marginal rate of income tax. Short term annuities fall under FAD or capped drawdown rules. This type of annuity is purchased out of funds previously designated for FAD or capped drawdown. It provides an income for an agreed amount of time of up to 5 years. With a short-term annuity contract the member s annuity is paid by the insurance company rather than directly from their drawdown pension fund. It s possible to include a guarantee period of up to five years. No other death benefits can be provided. 8

10 Section 2 Test your knowledge a) What factors might affect the sustainability of FAD income? b) Does crystallising benefits into FAD always trigger the MPAA (give reasons)? c) What s the main difference between ordinary FAD and drip-feed drawdown? 9

11 3. UNCRYSTALLISED FUNDS PENSION LUMP SUMS UFPLS AS A PENSION INCOME OPTION UFPLS enables members to withdraw lump sums from their pension savings without having to move into drawdown. Every UFPLS is made up of 25% tax-free cash and 75% taxable income. So UFPLS can be used to provide a restricted form of drip-fed pension income. Example Unlike the flexibility offered by drip feed drawdown, a UFPLS withdrawal is always 25% TFC, 75% taxable income. UFPLS 4,000 UFPLS 1,000 UFPLS 2,500 TFC 1,000 Taxable 3,000 TFC 250 Taxable 750 TFC 625 Taxable 1,875 However, some providers set high minimums for UFPLS, treating it mainly as a means of enabling full encashment of smaller MP pots or accessing ad hoc lump sums. In this case, UFPLS might be more suitable for supplementing other, regular sources of pension income. Example Becca s 65 and receiving a DB pension plus the state pension, giving her an annual taxable income of 30,000 in 2018/19. She s got no interest in making further pension contributions, so she isn t worried about triggering the MPAA. She s also got a MP pot worth 30,000 and wants to gift her daughter 10,000 towards house purchase. Using a UFPLS to supplement her regular pension income could be a solution. UFPLS 11,800 25% is tax free 2,950 75% is taxable 8,850 20% tax 1,770 Net payment 10,030 Becca might find her provider deducts too much tax from her UFPLS payment, as PAYE rules don t work well for ad hoc lump sums. If so, she can reclaim the excess from HMRC. 10

12 OTHER CONSIDERATIONS The member must have at least some available LTA to take a UFPLS. If the withdrawal exceeds their remaining available LTA, the part within their LTA is a UFPLS and the balance is taxed as an LTA excess lump sum. It s not possible to take a UFPLS from a disqualifying pension credit ie one that was paid out of the ex-spouses crystallised funds if the member has valid enhanced or primary protection plus protection for a pre-a day lump sum exceeding 375,000 If the member has a LTA enhancement factor and the available portion of their LTA is nil or less than 25% of the sum being paid. UFPLS is also unsuitable for those with scheme protected TFC greater than 25% who want to take advantage of this. Taking a UPFLS automatically triggers the MPAA. 11

13 Section 3 Test your knowledge a) What s the make-up of a UFPLS payment? b) In what two ways can a member use UPFLS to provide pension income? c) Identify two situations where a member cannot have a UFPLS 12

14 4. CAPPED DRAWDOWN CAPPED DRAWDOWN V FAD It s not been possible to set up any new capped drawdown arrangements from 6th April However, existing ones can continue or be transferred. It s also possible to increment existing capped drawdown arrangements. This is so long as the provider took the approach before April 2015 of crystallising increments into an existing capped drawdown arrangement. Providers that used to set up a new arrangement for each capped drawdown increment have only been able to offer FAD for new crystallisations since 6th April The main advantage of remaining in capped drawdown is that receiving taxable income from this source doesn t trigger the MPAA. The disadvantage is that the review requirements make the administration more complex than for FAD. It s possible to convert capped drawdown to FAD in two ways: asking the provider to convert a capped drawdown fund to FAD withdrawing more than the GAD limit. It s more likely that a member will ask their provider to convert capped drawdown to FAD. If so, they trigger the MPAA the day after they receive the first income payment following their request. If a member withdraws more than their current GAD limit in a pension year, they re automatically converted to FAD. They trigger the MPAA the day after they exceed the GAD limit. However, converting to FAD doesn t trigger the MPAA if the entire capped drawdown fund derives from a disqualifying pension credit. GAD INCOME LIMIT AND REVIEWS There s no minimum income requirement for capped drawdown. The current maximum income is 150% GAD, but it s been 100% GAD and 120% GAD in the past. Official GAD tables link the upper limit on capped drawdown income to long-term gilt yields, the member s age, and their fund value. While a member is under age 75, the provider recalculates GAD every third pension year giving three year reference periods. Each capped drawdown arrangement has its own pension year, which it s not possible to change before a member reaches age 75. A member can shorten the reference period with the provider s agreement by requesting an early review. Crystallising additional funds via an existing capped drawdown arrangement during a reference period triggers an immediate GAD recalculation. If this results in an increased income, this applies immediately. Any reduction applies from the start of the next policy year. Example Ben is in capped drawdown. 150% GAD is 9,540 based on a 120,000 fund value for the reference period 20th September 2015 to 19th September He crystallised a further 50,000 on 20th April 2017 at age 64, taking 25% tax free cash and incrementing his existing arrangement by 37,500. He had sufficient lifetime allowance (LTA) to do this without triggering an LTA charge. The provider recalculated GAD on 20th April 2017, using Ben s age and the new fund value of 162,500 (including growth since the last review as well as the increment) and the 15 year gilt yield for 15th March 2017, which was treated as 2%. This gave revised GAD of 8, and he was entitled to 150% GAD. Ben could now take maximum pension income of 12, in the policy years ending 19th September 2017 and 19th September 2018 with the next three year review still due on 20th September If the review had led to an income reduction, this would have applied from 20th September 2017, again with the next review due on 20th September

15 Using part of a capped drawdown fund to buy an annuity before age 75 triggers a GAD review. A pension debit paid out of a capped drawdown arrangement also does so. The income is adjusted at the start of the next pension year. There s a switch from three yearly to annual reviews from age 75. All increments to capped drawdown funds for members aged 75 plus trigger immediate income reviews and any income increases apply immediately. Annuity purchase and pension debits stop triggering immediate reviews. If a member has several capped drawdown arrangements, the provider can align pension years on one occasion after a member has attained age 75. The reviews and GAD limits must still be calculated separately for each arrangement. OTHER CONSIDERATIONS The BCE treatment and death benefit options are the same as for FAD. 14

16 Section 4 Test your knowledge a) What options are available to a member who was in capped drawdown on 5th April 2015? b) What factors are taken into account when setting the GAD income limit? c) When do capped drawdown reviews take place? 15

17 5. ANNUITIES AND SCHEME PENSIONS MAIN TYPES OF LIFETIME ANNUITY Annuities are sometimes referred to as longevity insurance. With the most basic form of lifetime annuity, the member takes their 25% TFC and uses the balance of their MP pot to provide a fixed, level income payable for life. However, there are many variations and different options can be combined to create an annuity tailored to a client s requirements. With a standard annuity, the rates determining the amount of income someone gets were historically based on normal life expectancy at whole population level. Most providers now use post code linked rates, reflecting local variations in life expectancy. Annuity income amounts also depend on the precise options selected. Example Steve is 65 years old, in good health, with a 50,000 personal pension. He wants to take his 25% TFC and a regular income for the rest of his life. One option is buying a level annuity, payable monthly in advance, with a 5 year guarantee. He might get: Pension fund: 50,000 Tax-free lump sum: 12,500 Monthly annuity income: 171 ( 2,063 a year) Alternatively, if he opts for a level annuity, payable annually in arrears, with no guarantee he might get: Yearly annuity income: 2,134 (equivalent to 177 a month) It s also possible to arrange a joint annuity, which provides an ongoing survivor s income for any beneficiary the annuitant chooses typically their spouse, civil partner or cohabitee. The survivor gets an agreed percentage of the annuitant s income such as 50%, 66% or 100%. This option reduces the original pension scheme member s initial income. Enhanced or impaired life annuities enable someone with a qualifying medical condition such as cancer, or lifestyle factor such as smoking that lowers their life expectancy to get higher payments. It s possible to set up a standard, enhanced or joint annuity to provide pre-determined income increases. Escalating annuities increase each year at a set percentage. Index linked annuities increase in line with inflation. As the starting income is lower than for a level annuity, these options will only prove good value if the annuitant lives for a long time. 16

18 Example Stacey is 65, in good health and her family has a history of longevity. She s worried about what inflation will do to her pension income over the longer term. After taking TFC from her 50,000 MP pot, she s considering a 3% escalating annuity. If she buys an annuity payable monthly in advance, with a 5 year guarantee, she might get: Pension fund: 50,000 Tax free lump sum: 12,500 Monthly annuity income (level annuity): 175 Initial monthly annuity income (3% escalation): 125 An initial annuity of 125 increasing by 3% a year would reach a month after 12 years. However, it would take another 10 years before the total income paid out overtook the level annuity. To put that into context, UK life expectancy for a 65 year old female is 20.9 years (September 2017, Office of National Statistics). However, that s at whole population level, so it will include women with impaired life expectancy. An annuity can include a guarantee of, say, five or ten years. If the annuitant dies during this period, the income continues until the end of the guaranteed period. If the annuitant lives longer, their income is paid for the rest of their life. 100% CAPITAL PROTECTION Capital protection pays out a lump sum if the annuitant dies without having received the full value of their pension fund. 100% capital protection means the lump sum is the purchase price less the gross income paid to the date of the annuitant s death. GUARANTEED ANNUITY RATES In the 1980s and 1990s, many providers offered MP pensions with guaranteed annuity rates (GARs), which are typically significantly higher than current open market annuity rates. GARs can incorporate restrictions on when the member can take their benefits and the type of annuity the guarantee applies to. GARs are treated as safeguarded benefits. So the member must seek advice if their transfer value is over 30,000 and they want to give up their GAR to access flexible benefits, including a UFPLS. There s no advice requirement if they want to purchase an alternative form of lifetime annuity. MP SCHEME PENSIONS MP schemes must offer their members the option of securing a lifetime annuity directly with their own choice of annuity provider. However, they also have the option of offering scheme pensions. The scheme can promise to pay guaranteed pension income benefits for life out of its own resources. Or it can buy an annuity from a third party, or offer to fund a scheme pension purchased by the member from their own choice of provider. OTHER CONSIDERATIONS The TFC plus annuity purchase price are tested against the member s available LTA. It s also possible to use funds previously designated for any form of drawdown to purchase an annuity. If this happens while the member is under age 75, a second LTA test applies to the drawdown funds. Survivor s annuities, guarantee payments and capital protection lump sums are outside the member s IHT estate provided the annuity provider has the discretion over who they re paid to. If the member dies under age 75, all these death benefit options are paid tax-free. On death from age 75, the same death benefit options apply, but the funds are taxable at the recipient s marginal rate of income tax. Since 6th April 2015, starting to take a scheme pension from a MP scheme with less than 12 pensioners triggers the MPAA. Survivor s scheme pensions are taxable, whether or not the member dies under age

19 Section 5 Test your knowledge a) What are the main types of lifetime annuity? b) What s the difference between an annuity with a five year guarantee and an annuity with 100% capital protection? c) What are the possible benefits and disadvantages of GARs? 18

20 ANSWERS TO SECTION QUESTIONS 1a) Flexi-access drawdown, uncrystallised funds pension lump sums, flexible lifetime annuities became available from April b) Anti-tax free cash recycling provisions where breach of the rule can trigger an unauthorised payments charge. Money purchase annual allowance limit of 4,000 a year on all contributions to money purchase schemes once a member s taken flexible benefits. Breaching the MPAA triggers an annual allowance charge. 1c) DB pension income depends on the scheme rules. Usually linked to the member s pensionable service and final salary or career average earnings. Income is guaranteed, payable for life and usually indexed with the scheme bearing the longevity risk. 2a) Factors affecting the sustainability of FAD income could include the member s anticipated life expectancy, projected inflation, potential investment returns, and fund volatility. 2b) It s possible to crystallise benefits into FAD without triggering the MPAA. It s taking flexible income from FAD that triggers the MPAA, so member can avoid this by taking just their TFC. 2c) With ordinary FAD, the member usually crystallises their whole fund and takes all their TFC as a one-off lump sum, using the balance of the crystallisation to provide ongoing taxable income. With drip-feed drawdown, the member crystallises smaller amounts of their pension savings over time, so each income payment can be made up of a mix of TFC and taxable income. 3a) Each UFPLS is made up of 25% tax free cash and 75% taxable income. 3b) A member can use UFPLS as a restricted form of drip-fed pension income. They can use UFPLS to provide ad hoc lump sums to supplement other sources of pension income. 3c) Any two out of the following situations where a member cannot take a UFPLS: member has no remaining LTA member s funds derive from a disqualifying pension credit member has valid enhanced or primary protection plus protection for a pre-a day lump sum exceeding 375,000 member has a LTA enhancement factor and the available portion of their LTA is nil or less than 25% of the sum being paid member has scheme protected TFC greater than 25% and wants to take advantage of this. 4a) The following options are open to a member who was in capped drawdown on 5th April 2015: continue in capped drawdown increment capped drawdown if provider can add new funds to the existing capped drawdown arrangement transfer capped drawdown to a new provider convert capped drawdown to FAD. 4b) Factors taken into account when setting the GAD income limit are: maximum GAD limit currently 150% long long-term gilt yields member s age member s fund value. 4c) Capped drawdown reviews take place every three years up to age 75 as standard, but sooner if the member requests an ad hoc review. And annually from age

21 ANSWERS TO SECTION QUESTIONS 5a) The main types of lifetime annuity are: standard annuity, enhanced annuity, single or joint annuity. 5b) If someone dies within 5 years of purchasing an annuity with a five year guarantee, the income payments will continue for the balance of those five years. If someone takes out an annuity with 100% capital protection, when they die a lump sum is available if the total of their income payments up to the date of death is less than the annuity purchase price. 5c) GARs or guaranteed annuity rates are typically higher than open market annuity rates. But there are often restrictions on when a GAR is available and the type of annuity that s available with a GAR. 20

22 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number (PI) 08/18