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G60
Pensions
The qualification of the advanced financial planning certificate
(AFPC) for G60 Pensions demonstrates a pensions consultant
has a comprehensive knowledge of pension issues. It will also
classify an intermediary such as an independent financial
adviser (IFA)
as a pension
transfer specialist.
This relates to transfer advice for deferred benefits from
a defined benefits occupational
pension scheme, such as final salary pension, to another
pension arrangement. Pension transfer advice is recognised
by the Financial Services Authority (FSA),
formally the Personal Investment Authority (PIA), under permitted
activity 13 of the Financial Services Authority Handbook of
Rules and Guidance.
General
prohibition
The prohibition that is contained in Section 19 of the Financial
Services and Markets Act 2000 (FSMA),
states that no person may carry on a regulated activity in
the United Kingdom, or purport to do so, unless he is an exempt
person or an authorised
person.
Government
Actuary's Department
In 1919 the Treasury created the Government Actuary's Department
(GAD) to satisfy the demand from government departments for
actuarial advice on financial matters. The importance of GAD
increased significantly after World War II with the states
expansion of its role in pensions, social security and healthcare.
Today GAD remains a government department but also functions
as an actuarial consulting firm operating on commercial lines,
generating fee income for services to the public and private
sectors and almost covering all of its costs. The Government
Actuary's Department has a number of core activities involving
official population projection for the United Kingdom, employers
pension scheme surveys and statistics on life expectancy.
A large part of GAD is concerned with pensions and includes
advice given to the Treasury, Inland Revenue and the Occupational
Pensions Regulatory Authority (OPRA).
Also, GAD advises on private
pensions and regulation in the UK related to technical,
strategic and policy issues.
Gross
and net contributions
The contributions of a scheme member to approved pensions
will benefit from tax rebates resulting in a distinction between
the gross contribution and the net contribution. For a private
pension scheme such as a personal
pension or stakeholder
pensions, the net contributions paid by the member will
be increased by the pension provider to gross contributions
invested with a tax rebate at the basic rate of tax, currently
22.0%.
Although this satisfies the basic rate taxpayer, the higher
rate taxpayer, currently 40.0%, will receive the 18.0% difference
between basic and higher rate tax at the end of the tax year
through their self assessment. This will then effectively
reduce their original net contributions made for that tax
year. For an employers pension scheme such as a final salary
pension or money
purchase scheme, an individual will have the gross contribution
deducted from their gross relevant
earnings and this in turn will reduce the tax on the earnings
remaining that will be equal to any tax relief on pension
contributions made.
Therefore both basic and higher rate taxpayers will benefit
from tax relief at their highest marginal rate as the contributions
are made, with no need for any adjustment to tax through self
assessment at the end of the tax year.
Group
personal pension
Unlike an occupational pension scheme such as a final salary
pension or small self administered scheme (SSAS),
a group personal pension (GPP) is effectively a series of
individual personal pensions provided by a single life insurance
company. A GPP will cost a scheme member more to operate than
a final salary
pension and this cost will be met out of the contributions
made.
However, under the Pensions
Act 1995 the regulation requirements of the employer by
operating a GPP are much less onerous and with lower administration
costs than a final salary pension scheme. Both the employer
and the employee can contribute to a group personal pension
and these contributions will be limited to the Inland Revenue
maxima based on the members age. The employee will pay the
contributions net of basic rate tax, after pay
as you earn (PAYE) tax has been deducted. Any employer
contribution will be made gross to the members personal pension.
The employee will decide on contracting out of the state earnings
related pension scheme (SERPS)
but if they do, the national insurance (NI) contributions
will be the same as the contracted in rates. Unlike a final
salary pension a GPP is a defined
contribution scheme with no maximum on the retirement
benefits, paid as a pension income and/or partial commutation
to a tax
free lump sum, provided at retirement age. However, the
members contributions will be limited by the earnings cap.
Guaranteed
minimum pension
Where a final salary pension
scheme has contracted out of the state scheme the guaranteed
minimum pension (GMP) relates to the earnings component of
the state
basic pension that the member would have earned while
in the employer's scheme, had the member not contracted-out.
GMPs ceased to accrue after 5 April 1997.
Guaranteed
period
At retirement an individual with a pension fund or a lump
sum can buy either a pension
annuity or purchase
life annuity. The annuitant can decide that the annuity
income is to be paid for a guaranteed period of time from
the start, typically for 5 or 10 years and this applies to
a With
Profits annuity as well. This means that if the annuitant
dies shortly after taking the annuity, the income must continue
be paid for the time of the guaranteed period remaining.
The annuity can be paid as an income, usually to the estate,
or the insurance company may be willing to capitalise the
amount of the annuity remaining and pay this as a lump sum.
This lump sum is typically less than the value that would
have been paid as an income to reflect the investment loss
to the insurance company of paying the money sooner.
Alternatives to a guaranteed period for a pension annuity
would be a survivors
pension that would be payable for the whole of the spouse's
life, or for a purchase life annuity a dependents benefit.
The purchase life annuity could use capital
protection instead where the remaining value between the
purchase price and payments made would be paid to the estate
on the death of the annuitant.
Headroom
check
A scheme member of a free standing additional contribution
(FSAVC)
with contributions of more than £2,400 gross per annum
will require a headroom check. A headroom check performed
by the FSAVC scheme administrator will ensure the members
contributions are not exceeding Inland Revenue maximums set
at 15.0% of pensionable
earnings for an occupational pension scheme.
Under the Occupational Pension Schemes (Disclosure of Information)
Regulations 1996 as amended by section 1 1997 number 786,
a scheme member is entitled to obtain details of the main
scheme benefits. Where the earnings
cap is applied to the main scheme benefits, it will also
apply to the FSAVC headroom check calculations.
H
v H (1993)
The couple married in 1978 and divorced in 1990. At the time
of the divorce
they had three children. The husband was a doctor and the
wife was a teacher and nurse. The couple had joint matrimonial
assets of £158,000, the wife had further assets
of £162,000 and the husband had further assets of £242,000.
The District Judge ordered that the husband pay maintenance
to the children of £2,280 each per annum and maintenance
to the wife of £5,700 per annum as well as capital of
£180,000.
In this case the District Judge took into account the husband's
future family inheritance and the NHS pension rights. The
husband appealed and this was allowed. On appeal the Judge
said that it was wrong to consider the inheritance and NHS
pension rights and should only consider the duration of the
marriage,
not the pensions
post-divorce value of retirement benefits.
Hybrid
scheme
An employers pension scheme that combines both a final salary
and occupational
money purchase scheme is called a hybrid scheme. A hybrid
scheme will provide a mix of benefits and evaluates the members
pension fund on both a money purchase and final salary pension
basis.
At retirement
age or on leaving
service early, the member will receive a fund or income
from whichever provides the greater value. This offers the
security of a link to earnings closer to or at retirement
and the member is less likely to lose benefits if leaving
the scheme early.
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