Diploma in Financial Planning SPECIAL NOTICES

Transcription

1 J05 Diploma in Financial Planning Unit J05 Pension income options October 2018 Examination Guide SPECIAL NOTICES Candidates entered for the April 2019 examination should study this examination guide carefully in order to prepare themselves for the examination. Practice in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

2 J05 Pension income options Contents Important guidance for candidates 3 Examiner comments 7 Question paper 10 Model answers 16 Test specification 22 Tax tables 23 Published February 2019 Telephone: Fax: customer.serv@cii.co.uk Copyright 2019 The Chartered Insurance Institute. All rights reserved. 2

3 IMPORTANT GUIDANCE FOR CANDIDATES Introduction The purpose of this Examination Guide is to help you understand how examiners seek to assess the knowledge and skill of candidates. You can then use this understanding to help you in your preparation for this examination. Before the examination Study the syllabus carefully This is available online at All the questions in the examination are based directly on the syllabus. You will be tested on the syllabus alone, so it is vital that you are familiar with it. There are books specifically produced to support your studies that provide coverage of all the syllabus areas. However, you should be prepared to read around the subject. This is important particularly if you feel that further information is required to fully understand a topic or an alternative viewpoint is sought. The reading list which can be found with the syllabus provides valuable suggestions. Note the assumed knowledge For the Diploma in Financial Planning, candidates are assumed to have studied the relevant units of the Certificate in Financial Planning or the equivalent. This knowledge is set out on the relevant syllabus. Read widely If you do not have experience in advising clients whose financial needs are relatively sophisticated, it is quite unrealistic to expect that the study of a single textbook will be sufficient to meet all your requirements. While books specifically produced to support your studies will provide coverage of all the syllabus areas, you should be prepared to read around the subject. This is important, particularly if you feel that further information is required to fully understand a topic or an alternative viewpoint is sought. It is vital that your knowledge is widened beyond the scope of one book. The reading list which can be found with the syllabus provides valuable suggestions. 3

4 Make full use of the Examination Guide This Examination Guide contains a full examination paper and model answers. The model answers show the types of responses the examiners are looking for and which would achieve maximum marks. However, you should note that there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. This guide and previous Examination Guides can be treated as mock examination papers. Attempting them under examination conditions as far as possible, and then comparing your answers to the model ones, should be seen as an essential part of your exam preparation. The examiner s comments on candidates actual performance in each question provide further valuable guidance. You can purchase copies of the most recent Examination Guides online at CII members can download free copies of older Examination Guides online at Know the layout of the tax tables Familiarise yourself with the information contained within the tax tables printed at the back of each Examination Guide. These tax tables will be provided to candidates as part of the examination paper. The tax tables enable you to concentrate on answering the questions without having to worry about remembering all the information. Please note that you are not allowed to take your own tax tables into the examination. Know the structure of the examination Assessment is by means of a two-hour written paper. All questions are compulsory. The paper is made up of 15 short questions. Each question part will clearly show the maximum marks which can be earned. The paper will carry a total of 130 marks. Appreciate the standard of the examination Candidates must demonstrate that they are capable of advising clients whose overall levels of income and capital require a more sophisticated scheme of investment than is normally prepared by a level 4 qualified adviser. These clients require a critical appraisal of the various financial planning options available to them. Read the Assessment information and Exam policies for candidates The details of administrative arrangements and the regulations which form the basis of your examination entry are available online at This is essential reading for all candidates. 4

5 In the examination The following will help: Spend your time in accordance with the allocation of marks: The marks allocated to each question part are shown on the paper. If a question has just two marks allocated, there are likely to be only one or two points for which the examiner is looking for, so a long answer is wasting valuable time. Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate answer. Always remember that if the paper is not completed, your chances of passing will be reduced considerably. Do not spend excessive time on any one question; if the time allocation for that question has been used up, leave some space, go on to the next question and return to the incomplete question after you have completed the rest of the paper, if you have time. Take great care to answer the question that has been set. Many candidates leave the examination room confident that they have written a good paper, only to be surprised when they receive a disappointing result. Often, the explanation for this lies in a failure to think carefully about what the examiner requires before putting pen to paper. Highlighting key words and phrases is a technique many candidates find useful. The model answers provided in this Examination Guide would gain full marks. Alternative answers that cover the same points and therefore answer the question that has been asked would also gain full marks. Tackling questions Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any questions which you find challenging until you have attempted the questions you are confident about. Candidates should avoid mixing question parts, (for example, 1(a)(i) and (ii) followed by 2(b)(ii) followed by 1(e)(i)) as this often leads to candidates unintentionally failing to fully complete the examination paper. This can make the difference between achieving a pass or a narrow fail. It is vital to label all parts of your answer correctly as many questions have multiple parts to them (for example, question 1(a) may have parts (i), (ii) and (iii)). Failure to fully distinguish between the separate question parts may mean that full credit cannot be awarded. It is also important to note that a full answer must be given to each question part and candidates should not include notes such as refer to answer given in 1(b)(i). 5

6 Answer format Unless the question requires you to produce an answer in a particular format, such as a letter or a report, you should use bullet points or short paragraphs, since this allows you to communicate your thoughts in the most effective way in the least time. The model answers indicate what is acceptable for the different types of question. Where you are asked to perform a calculation it is important to show all the steps in your answer. The majority of the marks will be allocated for demonstrating the correct method of calculation. Provided handwriting is legible, candidates will not lose marks if it is untidy. Similarly, marks are not lost due to poor spelling or grammar. Calculators If you bring a calculator into the examination room, it must be a silent, battery or solar-powered, non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. The majority of the marks will be allocated for demonstrating the correct method of calculation. 6

7 EXAMINERS COMMENTS Candidates overall performance: This paper covered a range of topics with candidates performance still varied in relation to the pension freedoms rules surrounding death benefits and the tax treatment of pensions on withdrawal. Whilst some candidates demonstrated a good knowledge in these areas there were still a lot of candidates that do not seem to have fully grasped the changes. The paper also tested some new areas such as State Bereavement Support Payments and annuity information prompts. Question 1 This was a lifetime allowance calculation at age 75 that included a drawdown plan. It was generally well answered, with a number of candidates achieving full marks. The most common mistakes were incorrectly rounding or deducting 700,000 from the current value of the drawdown fund instead of 525,000. In addition, a number of candidates also did not gain marks by applying both rates of 25% & 55% tax to their eventual answer. Question 2 This question was about the Financial Services Compensation Scheme (FSCS). The majority of candidates performed well and achieved three marks or more out of the five available. There were a small number of candidates who performed poorly by stating that the Pension Protection Fund covers annuities or that there is a 90% cap on annuity income payments. Question 3 This was a standard factfinding question and whilst some candidates achieved full marks the majority gained around four or five out of the eight available. The common points omitted by candidates were how much of the fund remained uncrystallised or whether the provider would allow further funds to be designated. Question 4 This was a question about the statutory rates of escalation and has been tested many times, however candidates still seemed to struggle with their answers. There were some excellent answers, but a large number of candidates could not differentiate between guaranteed minimum pension (GMP) and excess benefits and therefore did not achieve full marks. 7

8 Question 5 This question was a factfinding question regarding a client making a loan using funds withdrawn from their pension using uncrystallised funds pension lump sum (UFPLS). Most candidates correctly stated the tax treatment of the withdrawal, it would be taxed on month 1 basis, it would trigger Money purchase annual allowance (MPAA) and the client would lose carry forward. The better prepared candidates also typically stated it would increase the client s estate for Inheritance Tax purposes and what other income the client would have in retirement. Question 6 This question asked candidates to state six benefits and six drawbacks of using phased flexiaccess drawdown. Most candidates stated that it would allow flexible income, the pension commencement lump sum (PCLS) would be tax free, the remaining fund could remain invested and would offer flexible death benefits. In relation to drawbacks, most candidates also stated that the client would lose guaranteed income, be subject to investment risk and the flexi-access drawdown would be more expensive. Overall it was well answered with most candidates gaining at least five or six marks out of the ten available. Question 7 This was a factors question about whether to take PCLS from a defined benefit scheme. This question was based on a specific scenario with clear client objectives. In the main this question was not well answered by candidates. A lot of answers consisted of factfinding rather than analysis and as such not many marks were achieved. In addition, candidates did not make use of the information provided in the stem which also contributed to candidates not performing well on this question. Question 8 This question asked for a definition of the safe withdrawal rate. Candidates tended to perform extremely well or not very well on this question. There were quite a few unclear and contradictory answers provided which often meant candidates did not achieve many of the six available marks. Question 9 This question was asking candidates how a deduction would be calculated in a defined benefit scheme in respect of a pension debit. The majority of candidates only stated that it would be 35% of benefits at the date of the divorce but did not state how it was revalued. 8

9 Question 10 This question was about why a spousal bypass trust might be suitable based on specific client circumstances provided. This has also been tested before, but on this occasion it was generally answered not very well by candidates. There were a few very good answers with a lot of candidates only stating it would ensure the daughter received the proceeds of the pension. Question 11 This question was about the State Bereavement Support Payment. This is a relatively new State death benefit and so it has not been tested before. Candidates did not do well on part (a) which was about the conditions that must be satisfied. They often only stated that he must have paid sufficient National Insurance contributions. Candidates performed better on part (b) which was about the amount that would be paid and the tax treatment. Question 12 This was a phased drawdown calculation. Candidates who were aware of the method to use did very well and a small number of candidates achieved full marks or only made one or two minor errors. Several candidates did not realise that the question was about phased capped drawdown and instead worked out the figures based on the UFPLS calculation. As a result of applying the incorrect methodology these candidates performed less well on this question. Question 13 This was a question on the FCA s Conduct of Business Sourcebook regarding the annuity information prompts. This is relatively new legislation and has not been tested before. Overall it was not answered well with the majority of candidates only gaining three marks out of the ten available. Question 14 This was a factors question about personal pension plan versus an ISA. It was generally well answered with the majority of candidates gaining seven marks or more out of the 12 available. Question 15 Part (a) of this question was about the transfer process for a defined benefit scheme and it was typically well answered by candidates. Part (b) tested the death benefits payable from a personal pension plan following the transfer and was also well answered. Despite a large number of candidates performing well it was still disappointing to see the minority of candidates still struggling to clearly articulate the available death benefits from a personal pension plan and the subsequent tax treatment. 9

10 J05 Diploma in Financial Planning Unit J05 Pension income options October 2018 examination SPECIAL NOTICES All questions in this paper are based on English law and practice applicable in the tax year 2018/2019, unless stated otherwise in the question, and should be answered accordingly. It should be assumed that all individuals are domiciled and resident in the UK unless otherwise stated. Instructions Two hours are allowed for this paper. Do not begin writing until the invigilator instructs you to. Read the instructions on page 3 carefully before answering any questions. Provide the information requested on the answer book and form B. You are allowed to write on the inside pages of this question paper, but you must NOT write your name, candidate number, PIN or any other identification anywhere on this question paper. The answer book and this question paper must both be handed in personally by you to the invigilator before you leave the examination room. Failure to comply with this regulation will result in your paper not being marked and you may be prevented from entering this examination in the future. 10

11 Unit J05 Pension income options Instructions to candidates Read the instructions below before answering any questions Two hours are allowed for this paper which consists of 15 short answer questions and carries a total of 130 marks. You are strongly advised to attempt all questions to gain maximum possible marks. The number of marks allocated to each question part is given next to the question and you should spend your time in accordance with that allocation. Read carefully all questions and information provided before starting to answer. Your answer will be marked strictly in accordance with the question set. You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet. It is important to show all steps in a calculation, even if you have used a calculator. If you bring a calculator into the examination room, it must be a silent, battery or solar-powered, non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. Tax tables are provided at the back of this question paper. Answer each question on a new page and leave six lines blank after each question part. Subject to providing sufficient detail you are advised to be as brief and concise as possible, using note format and short sentences on separate lines wherever possible. 11

12 Attempt ALL questions Time: 2 hours To gain maximum marks for calculations you must show all your workings and express your answers to two decimal places. 1. In May 2008, Sheila s personal pension plan (PPP) was valued at 700,000. At that time, she took a pension commencement lump sum (PCLS) of 175,000. The remaining fund, currently valued at 950,000, is in a capped drawdown arrangement. Sheila is about to reach age 75. Her only other pension arrangement is an uncrystallised PPP valued at 450,000. She has not registered for any form of transitional protection. Calculate, showing all your workings, the lifetime allowance tax charge payable in respect of Sheila s pension benefits when she reaches age 75. You should assume Sheila does not crystallise any further benefits prior to age 75. (8) 2. Joan, aged 72, is in receipt of an annuity income of 10,300 per annum. She also has a self-invested personal pension (SIPP) which currently holds 130,000 in a deposit account and 75,000 in an open-ended investment company. Outline the protection available in respect of Joan s annuity and SIPP should any of the providers default. (5) 3. Navdeep, aged 61, works part-time. In 2014 he crystallised part of his personal pension plan into a capped drawdown plan. Navdeep is currently drawing 12,000 per annum to supplement his earned income. His employer is continuing to make pension contributions on his behalf. Outline the additional information you will require when advising Navdeep on whether or not he should switch his capped drawdown plan to a flexi-access drawdown plan. (8) 4. Valerie was a member of her previous employer s defined benefit pension scheme between 1985 and The scheme was contracted-out prior to April Outline the statutory minimum increases that the scheme will apply to her pension once it is in payment. (6) 12

13 5. Sanjeev, aged 59, is employed. He would like to lend his daughter 50,000 for her to use as a house deposit. Sanjeev is considering taking an uncrystallised funds pension lump sum from a personal pension plan (PPP) to make this loan. This PPP is currently valued at 80,000 and he has no other funds available to make the loan. Outline the factors that you would consider when advising Sanjeev on whether he should take this course of action. (10) 6. Jolene, aged 58, is married to Kenny aged 56. Jolene, who is in poor health with a reduced life expectancy, has decided to retire early. She has a personal pension plan valued at 375,000. Outline five benefits and five drawbacks for Jolene taking her pension income using phased flexi-access drawdown rather than by purchasing a lifetime annuity. (10) 7. June, who is single and in good health, intends to retire and take the benefits from her employer s defined benefit pension scheme when she reaches the age of 65 in November She joined the scheme in 1998 and it is her only private pension arrangement. June is entitled to an initial scheme pension of 8,500 per annum and the whole pension will increase annually in payment in line with Retail Prices Index capped at 5%. Alternatively, she can commute 2,857 of this income for a pension commencement lump sum (PCLS) of 34,285. The scheme commutation rate is 12:1. June s State Pension of 132 per week will start on 6 November Her only savings are 41,000 in a cash ISA and she has a low attitude to risk. June needs a net, inflation proofed income in retirement of at least 14,000 per annum. Explain the factors you would take into account when advising June on whether or not she should take the PCLS offered by the scheme. (10) 8. Explain what is meant by safe withdrawal rate in relation to pension drawdown. (6) 13

14 9. Frank, is due to retire and take the benefits from his employer s defined benefit pension scheme when he reaches the age of 65 in two months time. He has been divorced since As part of the divorce settlement a pension debit of 35% was applied to Frank s pension benefits and this was arranged as an internal pension share. Explain briefly how the scheme will calculate the amount that needs to be deducted from Frank s pension benefits in respect of the pension debit when he retires. No calculations are required. (5) 10. Meg and Henry have recently married. Meg has a non-dependant adult daughter from a previous relationship. On her death Meg would like to ensure that her pension fund is available to provide for Henry as he has little pension provision of his own. However, she would also like to ensure that, on Henry s death, the residual fund will pass to her daughter. Explain why nominating the death benefits to a spousal bypass trust would be suitable in these circumstances. (8) 11. Carol s husband died in September 2018 following a sudden illness. Carol, who has two dependant children, aged 10 and 12 wishes to claim the State Bereavement Support Payment. (a) Outline the conditions that must be satisfied for Carol to be eligible to receive the State Bereavement Support Payment. (4) (b) Assuming Carol is eligible, state the amounts that she will receive, including the tax treatment. (5) 12. Barry, aged 62, has a capped drawdown plan valued at 80,300. The maximum income is currently 4,187 per pension year. Barry has not taken any income from the plan in the current pension year. The contract allows additional funds to be designated to the existing plan. In addition, Barry has an uncrystallised personal pension plan (PPP) valued at 126,000. Barry s only income in the tax year 2018/2019 is a scheme pension of 18,000 gross. He would like to take an additional net payment of 24,000 from his pension funds via phased capped drawdown. In doing so he would like to crystallise as little of his PPP as possible. Calculate, showing all your workings, the amount of funds in Barry s PPP that must be crystallised to provide the net payment he requires. The GAD basis amount is 47 per 1,000. (8) 14

15 13. The Financial Conduct Authority (FCA) require firms to inform consumers wishing to purchase an annuity how much they could gain from shopping around and switching provider. Outline the information prompts contained in the FCA s Conduct of Business Sourcebook that firms must provide to consumers prior to annuity purchase. (10) 14. Mark, aged 64, who has recently retired has relevant UK earnings of 30,000 for the tax year 2018/2019. He is about to receive a small inheritance of 25,000 which he wishes to invest. He does not anticipate requiring access to this capital for at least ten years. Outline the factors Mark should consider when deciding whether to place this inheritance into a personal pension plan or an ISA. (12) 15. Arthur, aged 64, is married to Susan, aged 56. He plans to retire when he reaches age 65. Arthur is a deferred member of a defined benefit pension scheme and wishes to transfer these benefits into a personal pension plan (PPP) in order to access them flexibly. The cash equivalent transfer value of these benefits is 190,000. (a) Explain, giving your reasons, the steps that Arthur must take before the scheme will agree to transfer the funds to a PPP. (6) (b) Assuming the transfer proceeds, outline the death benefit options available to Susan from the PPP if Arthur were to die before the age of 75, including the tax treatment. (9) 15

16 NOTE ON MODEL ANSWERS The model answers given are those which would achieve maximum marks. However, there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. An oblique (/) indicates an equally acceptable alternative answer. Model answer for Question 1 Lifetime allowance utilised in 2008/ ,000 / 1,650,000 = 42.42% Benefit crystallisation event 5A at age 75 drawdown funds 950, ,000 = 425,000 Benefit crystallisation event 5B at age 75 - Uncrystallised funds + 450,000 = 875,000 Lifetime allowance remaining = 57.58% x 1,030,000 = 593,074 Subject to Lifetime allowance = 875, ,074 = 281,926 Lifetime allowance charge = 25% x 281,926 = 70, Model answer for Question 2 Protection is provided by the Financial Services Compensation Scheme (FSCS). 100% of the annuity income (at the point of insolvency); 85,000 for deposits; 50,000 for open-ended investment company (OEIC); Model answer for Question 3 Candidates would have gained full marks for any eight of the following: Age Navdeep plans to stop working. Additional income required. Maximum Government actuary department available. Value of the uncrystallised pension fund. Any need for capital lump sum. Other assets/pension funds/inheritances/plans to downsize/state pension How much employer contributing/how long will employer contribute for. How long does the fund need to provide income/state of health/longevity. Will provider allow further funds to be designated to drawdown. 16

17 Model answer for Question 4 Pre-88 guaranteed minimum pension (GMP) will not increase. Post-88 GMP will increase in line with Consumer Prices Index (CPI) capped at 3%. Pre-97 excess benefits will not increase. Remainder will increase by CPI capped at 5%. Model answer for Question 5 Candidates would have gained full marks for any ten of the following: 25% of the uncrystallised funds pension lump sum (UFPLS) is tax free/75% is taxable at Sanjeev s marginal rate. Other retirement income sources/state pension/expected inheritances. Alternative non-pension methods of raising capital (loan/equity release/daughter s assets). Employment income/tax status. Month 1 taxation. Triggers Money purchase annual allowance (MPAA)/loses carry forward. Interest rate on loan/term of loan. Daughter s affordability/ability to repay the loan/capacity for loss is low. Inheritance Tax position pension outside of estate/loan will form part of estate. Adviser fees/cost of setting up UFPLS. Current or future pension contributions. State of health/planned retirement date. Model answer for Question 6 Benefits: Income can be varied to meet requirements. Tax-free cash/pension commencement lump sum (PCLS) can be used to provide an income. No need to choose death benefit options at outset. Value of death benefits is likely to be higher/flexible death benefits. Potential for growth. Drawbacks: Candidates would have gained marks for any five of the following drawbacks: Income not secure. No large tax-free lump sum at outset. Potential to run out of money/longevity risk if lives longer than expected. Investment risk/mortality drag. Charges/cost of advice/complexity. Wouldn t benefit from likely enhanced annuity rates due to poor health. 17

18 Model answer for Question 7 Candidates would have gained full marks for any ten of the following: The commutation rate offered by the scheme is low. June would not be able to replace the lost income on the open market/pension commencement lump sum (PCLS)/ISA growth would need to be in excess of inflation. Taking the cash will reduce the amount of tax she will pay. Cash ISA can provide tax-free income/capital. She has a low attitude to risk: and a low capacity for loss; receiving higher guaranteed income is appropriate for her. She is in good health/likely to live long enough to receive greater value from the income. She can only achieve 14,000 net if she takes full income from the scheme/the commuted pension does not provide 14,000 net. The index linking offered by the scheme is (based on Retail Prices Index (RPI)). Does she have any lump sum requirements? PCLS will form part of estate for Inheritance Tax. Model answer for Question 8 Percentage of the initial investment; which can be withdrawn annually; for a given quantity of time/30 years; including adjustments for inflation; and will not lead to portfolio failure/running out of funds; where failure is defined as a 95% probability of depletion to zero. Model answer for Question 9 The amount of pension debit granted/35% of the value Cash Equivalent Transfer Value (CETV); as at the date of the pension sharing order; is revalued; in line with scheme rules; to the date the member draws their benefit/age

19 Model answer for Question 10 Prevents Henry accessing the full fund. Henry can receive income/loans. Loans are repayable on death. Loans will reduce Henry s estate/maximises estate for Meg. Her daughter can be a trustee; which provides her with control/ensures that Meg s wishes are fulfilled. Any new spouse or children for Henry will not be able to benefit from the trust fund/ensures her daughter is likely to receive the residual funds. Outside estates for bankruptcy/divorce/remarriage. Model answer for Question 11 (a) Candidates would have gained full marks for any four of the following: Deceased spouse must have paid Class 1 or Class 2 National Insurance contributions; for at least 25 weeks in any one tax year prior to their death. Carol must be under State Pension age. Carol must have been living in the UK when her husband died/uk relevant individual. Carol must apply within 3 months of death to receive full benefits; and no later than 21 months. (b) 3,500 lump sum; as she has (dependent) children. Plus 350 per month; for up to 18 months. Tax-free lump sum and monthly payments. Model answer for Question 12 80,300 x x 150% x 0.8 = 4, ,000-4, = 19, provides 25 tax free; Plus 75 x x 150% x 0.8 = , / = 66, needs to be crystallised. 19

20 Model answer for Question 13 Candidates would have gained full marks for any ten of the following: The amount used to purchase the annuity/fund value. Whether the annuity is single or joint life. Whether payment is in advance or in arrears of the start date. Whether the income paid by the annuity is guaranteed for any period. Whether the income will increase/escalate. The provider s own quote/key features illustration/annuity rate. How to shop around/open market option/sign-posting/pensionwise. The difference between the ceding scheme and best open market option rate. The availability of enhanced annuities/does client have medical conditions. Whether policy has a guaranteed annuity rate/safeguarded benefits. Whether policy has enhanced PCLS. Model answer for Question 14 Candidates would have gained full marks for any twelve of the following: Pension contributions receive tax relief/isa savings do not receive tax relief. ISA fund is payable completely tax-free. 25% will be payable tax-free/75% taxed as pension income. Has MPAA been previously triggered? Proximity to lifetime allowance. Pension funds are outside of estate/isa funds are within estate. Max gross tax relievable contribution is 30,000; but 25,000 net is 31,250 gross/gross contribution exceeds Mark s relevant UK earnings. Has Mark made any other contributions to a pension in 2018/2019. Mark could pay the balance (of 5,000) into an ISA next tax year/can make 1,250 pension contribution next year and get tax relief as it is less than 3,600. Maximum ISA contribution is 20,000; less any contributions made. Expected retirement income/other accessible funds/tax status on retirement. 20

21 Model answer for Question 15 (a) Candidates would have gained full marks for any six of the following: As Arthur has safeguarded benefits and; is planning to access his pension benefits flexibly and; the transfer value is more than 30,000. he must obtain (independent) advice; from an appropriately qualified adviser/firm; and provide evidence to the ceding scheme confirming this. Complete transfer paperwork/confirm he wishes to transfer. (b) Lump sum. Dependant s. Flexi-access drawdown. Lifetime annuity. Paid tax free; if paid/designated within two years of date of death. Taxable as (earned income) if paid outside of two years. Uncrystallised funds subject to a check against Arthur s lifetime allowance. Not subject to Inheritance Tax. 21

22 October 2018 Examination - J05 Pension income options Syllabus learning outcomes being examined Understand the HMRC rules that apply when pension benefits are crystallised Understand the regulatory requirements and legal framework designed to protect clients who are drawing pension benefits. Understand the features, tax treatment and risks of flexible benefit options. Understand the HMRC rules that apply when pension benefits are crystallised. Understand the features, tax treatment and risks of phasing retirement benefits. Understand in detail the features, tax treatment and risks of lifetime annuities and scheme pensions. Understand the HMRC rules that apply when pension benefits are crystallised. Understand the features, tax treatment and risks of phasing retirement benefits. Understand the features, tax treatment and risks of flexible benefit options. Understand the features, tax treatment and risks of phasing retirement benefits. Understand in detail the features, tax treatment and risks of lifetime annuities and scheme pensions. Understand the features, tax treatment and risks of flexible benefit options. Understand the issues in giving initial and ongoing advice on taking pension benefits to clients Understand the HMRC rules that apply when pension benefits are crystallised Understand the issues in giving initial and ongoing advice on taking pension benefits to clients Understand the State retirement benefits available Understand the features, tax treatment and risks of phasing retirement benefits Understand the regulatory requirements and legal framework designed to protect clients who are drawing pension benefits. Understand the features, tax treatment and risks of flexible benefit options. Understand the features, tax treatment and risks of phasing retirement benefits. Understand the issues in giving initial and ongoing advice on taking pension benefits to clients. Understand in detail the features, tax treatment and risks of lifetime annuities and scheme pensions. Understand the features, tax treatment and risks of flexible benefit options. Understand the issues in giving initial and ongoing advice on taking pension benefits to clients. 22

23 All questions in the April 2019 paper will be based on English law and practice applicable in the tax year 2018/2019, unless stated otherwise and should be answered accordingly. The Tax Tables which follow are applicable to the October 2018 and April 2019 examinations. 23

24 24 INCOME TAX RATES OF TAX 2017/ /2019 Starting rate for savings* 0% 0% Basic rate 20% 20% Higher rate 40% 40% Additional rate 45% 45% Starting-rate limit 5,000* 5,000* Threshold of taxable income above which higher rate applies 33,500 34,500 Threshold of taxable income above which additional rate applies 150, ,000 Child benefit charge: 1% of benefit for every 100 of income over 50,000 50,000 *not applicable if taxable non-savings income exceeds the starting rate band. Dividend Allowance 2,000 Dividend tax rates Basic rate 7.5% Higher rate 32.5% Additional rate 38.1% Trusts Standard rate band 1,000 Rate applicable to trusts - dividends 38.1% - other income 45% MAIN PERSONAL ALLOWANCES AND RELIEFS Income limit for Personal Allowance 100, ,000 Personal Allowance (basic) 11,500 11,850 Married/civil partners (minimum) at 10% 3,260 3,360 Married/civil partners at 10% 8,445 8,695 Transferable tax allowance for married couples/civil partners 1,150 1,190 Income limit for Married couple s allowance 28,000 28,900 Rent a Room relief 7,500 7,500 Blind Person s Allowance 2,320 2,390 Enterprise Investment Scheme relief limit on 1,000,000 max** 30% 30% Seed Enterprise Investment relief limit on 100,000 max 50% 50% Venture Capital Trust relief limit on 200,000 max 30% 30% the Personal Allowance reduces by 1 for every 2 of income above the income limit irrespective of age (under the income threshold). where at least one spouse/civil partner was born before 6 April ** maximum for standard investment but for knowledge intensive investment, the limit is 2,000,000. Child Tax Credit (CTC) - Child element per child (maximum) 2,780 2,780 - family element Threshold for tapered withdrawal of CTC 16,105 16,105

25 Class 1 Employee NATIONAL INSURANCE CONTRIBUTIONS Weekly Lower Earnings Limit (LEL) 116 Primary threshold 162 Upper Earnings Limit (UEL) 892 Total earnings per week CLASS 1 EMPLOYEE CONTRIBUTIONS Up to * Nil % Above % *This is the primary threshold below which no NI contributions are payable. However, the lower earnings limit is 116 per week. This 116 to 162 band is a zero-rate band introduced in order to protect lower earners rights to contributory State benefits e.g. the new State Pension. Total earnings per week CLASS 1 EMPLOYER CONTRIBUTIONS Below ** Nil % Excess over % ** Secondary earnings threshold. Class 2 (self-employed) Flat rate per week 2.95 where profits exceed 6,205 per annum. Class 3 (voluntary) Flat rate per week Class 4 (self-employed) 9% on profits between 8,424-46,350. 2% on profits above 46,

26 PENSIONS TAX YEAR LIFETIME ALLOWANCE 2006/2007 1,500, /2008 1,600, /2009 1,650, /2010 1,750, /2011 1,800, /2012 1,800, /2013 1,500, /2014 1,500, /2015 1,250, /2016 1,250, /2017 1,000, /2018 1,000, /2019 1,030,000 LIFETIME ALLOWANCE CHARGE 55% of excess over lifetime allowance if taken as a lump sum. 25% of excess over lifetime allowance if taken in the form of income, which is subsequently taxed under PAYE. ANNUAL ALLOWANCE TAX YEAR ANNUAL ALLOWANCE 2011/ , / , / , / , / ,000~ 2016/ ,000* 2017/ ,000* 2018/ ,000* ~ increased to 80,000 for pension input between April - 8 July If not used, can be carried forward to pension input period of 9 July April 2016, subject to a maximum of 40,000. *tapered at a rate of 1 for every 2 of adjusted income in excess of 150,000 where threshold income exceeds 110,000. MONEY PURCHASE ANNUAL ALLOWANCE 2017/ /2019 4,000 4,000 ANNUAL ALLOWANCE CHARGE 20% - 45% determined by the member s taxable income and the amount of total pension input in excess of the annual allowance or money purchase annual allowance. 26

27 CAPITAL GAINS TAX EXEMPTIONS 2017/ /2019 Individuals, estates etc 11,300 11,700 Trusts generally 5,650 5,850 Chattels proceeds (restricted to five thirds of proceeds exceeding limit) 6,000 6,000 TAX RATES Individuals: Up to basic rate limit 10% 10% Above basic rate limit 20% 20% Surcharge for residential property and carried interest 8% 8% Trustees and Personal Representatives 20% 20% Entrepreneurs Relief* Gains taxed at: 10% 10% Lifetime limit 10,000,000 10,000,000 *For trading businesses and companies (minimum 5% employee or director shareholding) held for at least one year. 27

28 INHERITANCE TAX RATES OF TAX ON TRANSFERS 2017/ /2019 Transfers made on death after 5 April Up to 325,000 Nil Nil - Excess over 325,000 40% 40% Transfers made after 5 April Lifetime transfers to and from certain trusts 20% 20% A lower rate of 36% applies where at least 10% of deceased s net estate is left to a registered charity. MAIN EXEMPTIONS Transfers to - UK-domiciled spouse/civil partner No limit No limit - non-uk-domiciled spouse/civil partner (from UK-domiciled spouse) 325, ,000 - main residence nil rate band* 100, ,000 - UK-registered charities No limit No limit *Available for estates up to 2,000,000 and then tapered at the rate of 1 for every 2 in excess until fully extinguished Lifetime transfers - Annual exemption per donor 3,000 3,000 - Small gifts exemption Wedding/civil partnership gifts by - parent 5,000 5,000 - grandparent/bride and/or groom 2,500 2,500 - other person 1,000 1, % relief: businesses, unlisted/aim companies, certain farmland/building 50% relief: certain other business assets Reduced tax charge on gifts within 7 years of death: - Years before death Inheritance Tax payable 100% 80% 60% 40% 20% Quick succession relief: - Years since IHT paid Inheritance Tax relief 100% 80% 60% 40% 20% 28

29 CAR BENEFIT FOR EMPLOYEES The charge for company car benefits is based on the carbon dioxide (CO2) emissions. There is no reduction for high business mileage users. For 2018/2019: The percentage charge is 13% of the car s list price for CO2 emissions of 50g/km or less. For cars with CO2 emissions of 51g/km to 75g/km the percentage is 16%. For cars with CO2 emissions of 76g/km to 94g/km the percentage is 19%. Cars with CO2 emissions of 95g/km have a percentage charge of 20% and thereafter the charge increases by 1% for every complete 5g/km to a maximum of 37% (emissions of 190g/km and above). There is an additional 4% supplement for diesel cars not meeting Euro IV emission standards. However, the maximum charge remains 37% of the car s list price. Car fuel The benefit is calculated as the CO2 emissions % relevant to the car and that % applied to a set figure ( 23,400 for 2018/2019) e.g. car emission 90g/km = 19% on car benefit scale. 19% of 23,400 = 4, Accessories are, in most cases, included in the list price on which the benefit is calculated. 2. List price is reduced for capital contributions made by the employee up to 5, Car benefit is reduced by the amount of employee s contributions towards running costs. 4. Fuel scale is reduced only if the employee makes good all the fuel used for private journeys. 5. All car and fuel benefits are subject to employers National Insurance contribution s (Class 1A) of 13.8%. PRIVATE VEHICLES USED FOR WORK 2017/2018 Rates 2018/2019 Rates Cars On the first 10,000 business miles in tax year 45p per mile 45p per mile Each business mile above 10,000 business miles 25p per mile 25p per mile Motor Cycles 24p per mile 24p per mile Bicycles 20p per mile 20p per mile 29

30 MAIN CAPITAL AND OTHER ALLOWANCES 2017/ /2019 Plant & machinery (excluding cars) 100% annual investment allowance (first year) 200, ,000 Plant & machinery (reducing balance) per annum 18% 18% Patent rights & know-how (reducing balance) per annum 25% 25% Certain long-life assets, integral features of buildings (reducing balance) per annum 8% 8% Energy & water-efficient equipment 100% 100% Zero emission goods vehicles (new) 100% 100% Qualifying flat conversions, business premises & renovations 100% 100% Motor cars: Expenditure on or after 01 April 2016 (Corporation Tax) or 06 April 2016 (Income Tax) CO2 emissions of g/km: 50 or less* or more Capital allowance: 100% 18% 8% first year reducing balance reducing balance *If new 30

31 MAIN SOCIAL SECURITY BENEFITS 2017/ /2019 Child Benefit First child Subsequent children Guardian s allowance Employment and Support Allowance Assessment Phase Age Up to Up to Aged 25 or over Up to Up to Main Phase Work Related Activity Group Up to Up to Support Group Up to Up to Attendance Allowance Lower rate Higher rate basic State Pension Single Married new State Pension Single Pension Credit Single person standard minimum guarantee Married couple standard minimum guarantee Maximum savings ignored in calculating income 10, , Bereavement Payment* 2, , Bereavement Support Higher rate - First payment 3, , Payment** Higher rate - monthly payment Lower rate First payment 2, , Lower rate monthly payment Jobseekers Allowance Age Age 25 or over Statutory Maternity, Paternity and Adoption Pay *Only applicable where spouse or civil partner died before 6 April ** Only applicable where spouse or civil partner died on or after 6 April

32 CORPORATION TAX 2017/ /2019 Standard rate 19% 19% VALUE ADDED TAX 2017/ /2019 Standard rate 20% 20% Annual registration threshold 85,000 85,000 Deregistration threshold 83,000 83,000 STAMP DUTY LAND TAX Residential Value up to 125,000 0% 125, ,000 2% 250,001 and 925,000 5% 925,001 and 1,500,000 10% 1,500,001 and over 12% Stamp Duty Land Tax (SDLT) is payable in England and Northern Ireland only. Land Transaction Tax (LTT) is payable in Wales and Land and Buildings Transaction Tax (LBTT) is payable in Scotland. The rates for LTT and LBTT are different to the rates shown above. Additional SDLT of 3% may apply to the purchase of additional residential properties purchased for 40,000 or greater. SDLT is charged at 15% on interests in residential dwellings costing more than 500,000 purchased by certain corporate bodies or non-natural persons. First-time buyers benefit from SDLT relief on purchases up to 500,000 when purchasing their main residence. On purchases up to 300,000, no SDLT is payable. On purchases between 300,000 and 500,000, a flat rate of 5% is charged on the balance above 300,