Retirement, Planning and Protection Easily Understood Copyright© Ruksons

Retirement, Planning
&
Protection
Easily Understood

Written by

Tomi Omidiora
BA Hons, MBA, CeMAP, CeFA

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Retirement, Planning and Protection Easily Understood Copyright© Ruksons

Published by Ruksons Ltd, UK

Retirement, Planning & Protection Easily Understood
Adetomi Omidiora

Published In Great Britain 2009

Copyright © Adetomi Omidiora 2009

The Retirement, Planning & Protection Easily Understood guide is to be used in addition to the main accredited
Textbook and will never replace the detail contained there.

It was written with an intention to support the reader’s understanding of the main aspects of the text, and will serve as
an appropriate revision guide to understanding Retirement, Planning and Protection.
A thorough analysis, the detailed document could also provide clarity and understanding to an individual who needs a
basic understanding of Retirement, Planning & Protection.

The Retirement, Planning & Protection Easily Understood Book published in August 2009 provides information for
the 2009/10 financial year. While the author has used all her efforts in preparing this book, there are no promises or
warranties in respect of the accuracy or completeness of the content of this book with updated changes from the
appropriate financial bodies.

All rights reserved. Contents and or cover may not be reproduced in whole or in part. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted in any form or by any means ---- electronic, mechanical,
including photocopying, scanning and recording worldwide, without prior permission in writing from the author and/or
publisher.

Printed in the UK.

Created and Designed By,
Ruksons Ltd.
www.ruksons.com
Edition 2.0

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Retirement, Planning and Protection Easily Understood Copyright© Ruksons

UNIT 5:
Protection
Protection 1

Reasons for Financial Protection 1

Young Single Person 1
Young couple without Children 1
Young couple with Children 1
Middle aged Couple 2
Retirement 2

When is Financial Protection Needed 2

How to help the Client understand the Needs 2

How much cover is needed 2
How much protection is needed if risk happened. 2
Current Protection 2
Churning 3
Dependant 3
State Pension 3
What happens if a Dependant Spouse Dies 3
What happens if a Parent dies 4
Lump sum Calculation 4
Points to consider 5

Sickness of a Breadwinner 5
Quantifying the need for protection in the event of sickness 5
Budgeting 6
Discussing Priorities 6
Ranking Needs 6
Reviews 7

Key Persons Policies 7

Business Protection 7
Death of a key employee 7
There are two ways to determine cover 7
Sickness of a Business Partner 8
Death of a Business partner 8

Financial Resources and Benefits Eligibility 9

Income 9
Outgoings 9
Savings 10
Attendance Allowance 10
Statutory Sick Pay 10
Incapacity Benefit (IB) 10
Employment and Support Allowance 11
Severe Disability Allowance (SDA) 11
Disability Living Allowance DLA 11
Industrial Injuries Disablement Benefit (IIDB) 12

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Carer’s Allowance 12
Support for People in Hospital or Residential Care 12
Threshold on Assets 12
Nursing Home Costs 13
Health and Social Care Act 2001 13
Statutory Maternity Pay 13
Maternity Allowance 13
Statutory Paternity Allowance (SSP) 14
Additional Paternity Leave (APL) 14
Statutory Adoption Pay 14
Child Benefit 14
Child Tax Credits 14
Working Tax Credit 14
Income Support 15
Job – Seeker’s Allowance 15
State Pension – Basic (2008/9) 15
Additional State Pension (S2P) 16
Pension Credit 2008/9 16
Guarantee Credit 16
Savings Credit 16
Support for Widows and Widowers 17
Bereavement Payment 17
Bereavement Allowance 17
Widowed Parent Allowance 17
Spouse’s Entitlement to State Pension 17
Support for Mortgage Interest 18

Types of Policy 19
Factors involved in Estimates of Premium Calculations 19

Non - Profit Policies 20

With Profit Endowment 20

Bonuses can be calculated in 2 ways 20
Interest Table 20

Unit Linked Policies 21

Specialist funds may invest in 22
Pound Cost Averaging 23
Unit linked Protection Policies 24

Unitised with profit Endowment 24

FSA - Projected Benefits 24
Policy Table 25

Life Assurance Policies 26

Whole of Life Policies 26

Low cost whole of life 27
Flexible whole of life 27
Universal whole of life assurance 28
Joint life Second Death Policies 28

Term assurance (temporary insurance) 28

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Decreasing Term assurance 29

Two types of decreasing term assurance 29
Family Income Benefit (FIB) 29
Level term Assurance 30
Convertible Term Assurance 30
Personal Pension Term Assurance 30
Renewable Life Assurance 31
Renewable and Increasable term assurance 31
Convertible, Increasable and renewable term assurance policies 31

Health Insurance 31
Critical Illness Cover (CIC) 31
Premium Structure 32
Possible Uses 32
Ways to arrange cover 32
Stand alone Plan 32
Option on a Whole of life Plan 33
Group Critical Illness Cover 33
Taxation of CIC 33

Permanent Health Insurance 33

Ways to arrange Cover 34
Stand-alone Policy 34
Unit linked Basis 34
Option of Universal Whole of life plan 34
Underwriting of PHI 34
Classes of Occupation 35
Group Permanent PHI 35
Taxation of PHI 35

Accident, Sickness and Unemployment 35

Income Benefit 35
Lump sum Benefit 36
Personal Accident Insurance policies 36
Group Personal and Sickness Schemes 36
Tax Treatment of ASU 36

Mortgage payment protection insurance (MPPI) 36

Waiver of Premium 37

Private Medical Insurance (PMI) 37

Factors affecting Premium Rates 37
A Comprehensive Plan 38
Exclusions 38
General Exclusions 38
Tax Treatment of PMI 38

Hospital Cash Schemes 38

Dental Insurance 39

Long term Care (LTC) 39

Policy Types 39

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Pre funded LTC (Non- investment) 39

What can a Pre-funded Plan be arranged as? 39
Prefunded LTC (Investment) 40
Immediate needs Policy 40
Death Benefits 40
Taxation of LTC benefits 40

Other Methods for Funding LTC 41

Viatical Settlements 41
Taxation of Viatical Settlement 42

Important Dates 42

Identifying Suitable Policies to protect in Illness/Accident 42

Affordability 42

Selecting a Suitable Provider for Protection Products 43

Financial Strength 43
Costs and Charges 43
Charging and Commission Structure 43
Quality of Service 44
Investment choice and Performance 44

Background - Underwriting the Risks 44

The Life Assurance Act 1774 (Gambling Act) 44

Underwriting 45

Collective Risks 45
The three issues that are considered 45
Medical Underwriting 46
Proposal Form 46
Personal Medical Attendant Report (PMAR) 46
Medical Examiner’s Report 46
Other Information 46
Occupation and Life style 46
Financial Situation 47
Policy Debt/Lein 47
Exclusion Clauses 47
Postponement 47
Declining Proposal 48

The Contractual Process 48

Capacity to Contract 48
Reasons for breaking the Contract 48
Non-forfeiture clause 49
Endorsements 49
Insurable Interest 49
Where Insurable Interest can be demonstrated 49
Utmost good faith 50
Policy Documentation 50

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Disposal of Policy Proceeds 50

Claims 51
Death Claims 51
Sickness and Disability Claims 51

Traded Endowment Policies 52

Taxation – Traded Endowment Policies 52
Death Implications on Policy 53
Qualifying Policy 53
Life Assurance premium Relief (LAPR) 53

Taxation of non - qualifying Policy 53

Taxation of friendly society products 54
Taxation of Life cover through a pension 55

Wills 55
Rules of Intestacy 56
Intestacy - Scotland 56
Statutory Wills 56
Living Wills 57

Power of Attorney 57
Lasting Power of Attorney (LPA) 58
Two types of LPA 58

Inheritance Tax 58
Potentially Exempt Transfers 59
Chargeable Life time transfers 59
Gift with Reservation Rule 59
IHT-Equalising Estates 60
Back to Back Plans 60
IHT and Life Assurance Plans 60
Gift and Loan Trust 61
Discounted Gift Trust 61
Taxation of G&L & Discounted Loan Trust 61
Pre- Owned Assets 62
Main rules relating to pre-owned assets 62
IHT – Exemptions 62
Business Relief and Agricultural Property Relief 62
Relief for Agriculture 63
Administration of IHT 63
Payments by Instalments 63

Trustees 65
Ownership 66
Interest of Beneficiary 66
Split Benefit Trust 66

Types of Trust 67
Statutory Trusts 67
Married Women’s property Act 1882 67
Non – Statutory Trusts 67
Absolute or Bare Trusts 67

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Flexible Trust (Power of Appointment Trust) 67

Discretionary Trust 67
Accumulation and Maintenance Trust (A&M) 68
Will Trusts 68
Interest in Possession (life interest trust) 68
Mixed Trust 69
Bereaved Minors 18-25 trusts (22/3/2006) 69
The Taxation of Trusts; Income Tax, CGT and IHT 69
Income Tax 69
Trusts and Inheritance tax 70
Bankruptcy and Policies 70
Trust: new and existing policies 71
Trust and Pension contracts 71
The Trust Act 2000 71

UNIT 5 Questions 72
UNIT 5 Answers 74

UNIT 6:
Retirement & Planning
Retirement and Planning 76

Retirement 76

Occupational Pensions 77

Considering the Client’s Pension Arrangement- Categories 77

Quantifying Pension Needs 77
Next Step 77
Once again, Consider: 78

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Next step 2 78
Once again, consider 2 78
Affordability and Priorities 78
Asset Allocation 79
Asset Classes 79

Pension History 80

National Insurance 81
Basic State Pension 83
Graduated state pension 83
Additional state pension 83
State Earning Related Pension Scheme (SERPS) 83
Social Security changes: Act of 1986 enforced in 1988 84
Retirement between 1999/2000 and 2008/9 84
Retirement in 2009/10 84
Payment of Benefit 85
The State Second pension (S2P) 85
Below LET 85
Above LET 86
Other Issues – Serps and S2P 86
Survivor Benefits – From Serps to S2P 86

Pension Credit 86

Employer Contributions 89
Application of Tax Relief 89

Assessing Annual Allowance 90

Annual Allowance Charge 90
The Lifetime Allowance 90
Tax Treatment of Registered pension funds 91
Tax Treatment of Lump sum benefits from a Registered Pension Scheme 91
Recycling the PCLS 91
Tax treatment of Income from retirement 91
Tax Treatment of Annuities 91
Calculation of Life time allowance 92

Transitional Protection 92
Primary protection 92
Enhanced Protection 92

Pensions and the Employer 93

A funded scheme 93
An Unfunded Scheme 94
3 Main Funding Options 94
Investing the Contributions 94
Scheme Design 94
The Pensions Regulator 96
Accounting for Employer’s Pension Funds and Liabilities 96
Financial Reporting Standards (FRS17) 96
International Accounting Standards 96
Eligibility to Join 97
Funding and Contributions 97

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Retirement, Planning and Protection Easily Understood Copyright© Ruksons

Final salary Schemes 97

Money Purchase Schemes 97

Contracting Out 97
Contracting out and NIC 98
Dates 98

Contracting Out - Defined Benefit Schemes (Final salary) 98

From 6/4/1997 99

Contracted Out Money Purchase Arrangement (COMPS) 99

Contracting Out Appropriate Pension Plan 100

Retirement Annuity Contracts (RACs) 101

Additional Voluntary Contributions 101

Free Standing Additional Voluntary Contributions FSAVC Schemes 102

Personal Pensions Plans (PPP) 102

Stakeholder Pensions (Walfare Reform and Pensions Act 1999) 103

Leaving a Pension Scheme 104

Executive Pension Plans 104

Small Administered Schemes (SSAs) 104

FURBS & EFRBS 105

Group Pension Plan 105

Personal Accounts 106

Personal Pension Fund 106

Financial Assistance Cover 106

Considering Individual Pension Arrangement 106

Investing the Contributions Money Purchase Scheme 107
Plan Charges 107
Waiver of Premium Health Insurance 107

Self Invested Personal Pension (SIPPs) 108

The Right to transfer: 108

Transfer Value 109
Transfer Values: The Options Available 109
Transfer to a New Employer’s Scheme 109
Defined Benefit Scheme 109
Money Purchase Scheme 110
Transfer to a PPP/SHP scheme 110
Transfer to a Section 32 Buy out 110

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Transfer Value Analysis: 1/1/1994 110

Crystallization 111
Commutation of Benefits 111

Death Benefits before Crystallization 112

Defined Contribution Scheme 112
Dependant’s Pension – Defined Contribution 112
Defined Benefit Scheme 113
Dependant’s Pension – Defined Benefit 113
Crystallization – Other Issues 113
Pensions – Payments/Withdrawal Methods 113

Ways in which Pension benefits can be drawn 113

Secured Pension 113
4 ways of Drawing Benefits 114
Scheme Pension 114
Life time Annuity 114
Unsecured Pensions 114
Alternatively Secured Pension 114

Life Time Annuities - Options 115

Enhanced or Impaired life annuities 115
Investment Based Annuities 115

Phased RETIREMENT 116

Investment choice – Appropriate Provider 116

The advisor will need to consider the following factors: 116

Presenting Solutions 117

Other Products that can be used as Retirement Planning 117

Equity Individual Savings Accounts and Old Personal Equity Plans. 117

Insured Investment Plans 118

Bank / Building Society 118

Direct Investment 118

Unit Trusts/OEICS 119

Property 119
Equity Release 119

Selling a Business 119

Divorce 120

UNIT 6 Questions 121

UNIT 6 Answers 123

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Retirement, Planning and Protection Easily Understood Copyright© Ruksons

Abbreviation Table:
ADL Activities for Daily Living
APL Additional Paternity Leave
APP Additional Paternity Pay
ASP Alternatively Secured Pension
ASU Accidental Sickness Unemployment
AVC Additional Voluntary Contributions
CGT Capital Gains Tax
CIC Critical Illness Cover
CITRA Convertible, Increasable, Renewable Term Assurance
COMPS Contracted Out Money Purchase Schemes
CTC Child Tax Credit
CTT Capital Transfer Tax
DLA Disability Living Allowance
DPI Disposable Income
DWP Department of Works + Pensions
EFRBS Employer Financed Retirement Benefits
EPA Enduring Power of Attorney
EPP Executive Pension Plans
FAR Free Asset Ratio
FIB Family Income Benefit
FRS17 Federal Reporting Standards
FSAVC Free Standing Additional Voluntary Constitution
FURBS Funded Unapproved Retirement Benefits
G&L Gift & Loan Trust
GMP Guaranteed Minimum Payment

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GWR Gift With Reservation

HMRC Her Majesty Revenue + Customs
IB Incapacity Benefit
IHT Inheritance Tax
IIDB Industrial Injuries Disablement benefit
ISA Individual Savings Accounts
ISMI Income Support Mortgage Interest
LAPR Life Assurance Premium Relief
LEL Lower Earnings Limit
LPA Lasting Power of Attorney
LPI Limited Price Indexation
LTC Long Term Care
MFR Minimum Funding Requirement
MIG Minimum Income Guarantee
MPPI Mortgage Payment Protection Insurance
NAE National Average Earnings
NIC National Insurance Contribution
NRD Normal Retirement Date
OEIC Open Ended Investment Company
PCLS Pension Commencement Lump Sum
PEP Personal Equity Plans
PETS Potentially Exempt Transfers
PHI Permanent Health Insurance
PMAR Personal Medical Attendance Report
PMI Permanent Medical Insurance
PPF Personal Pension Fund
PPP Personal Pension plan
RACS Retirement Annuity Contracts
REITS Real Estate Investment Trusts
RPI Retail Price Index
S&P Standard & Poor
SDA Severe Disability Allowance
SERPS State Earnings Related Pensions
SHEP Second Hand Endowment Policy
SHP Stakeholder Pension Plan
SIPPS Self Invested Personal Pension
SMP Statutory Maternity Pay
SPP Statutory Paternity Pay
SSAS Small Self Administered Schemes
SSP Statutory Sick Pay
TEP Traded Endowment Policy
TPR The Pensions Regulator
UEL Upper Earnings Limit
USL Upper Savings Limit

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PLEASE NOTE: THIS IS A SAMPLE FROM THE ORIGINAL

COPY. PAGES WILL BE MISSING

Unit 5

Protection
Reasons for Financial Protection
• The reason that most people consider protection in the first instance is
usually for mortgage purposes.
• Statistics reveal that it is easier to make people understand the
consequences of dying and leaving a debt e.g the mortgage than the
consequences of illness on the household------ This presents a greater
need.
• Most people are uninterested in providing for an untimely death because
they feel it wouldn’t happen them.
• In the UK the probability of dying is about 1 in 8 males (over 65) and 1 in
12 females.
• Where people take out protection policies it is usually for peace of mind,
control and value for money.

Young Single Person

• Life Assurance is usually not a priority.

• It is more vital for young persons to have protection cover such as illness
or accident cover to ensure living standards can be maintained if such an
event were to occur.
• Consider critical illness cover, unemployment cover is also important.

Young couple without Children

• Extent of financial loss is a guide to provision.

• Income protection is important to maintain living standards for the
additional cost that may occur if a partner is unable to work.
• It is possible for private medical insurance (PMI) to be a consideration but
long term care (LTC) may be psychologically out of reach.
• Inheritance tax for future legacy may also need planning.

Young Couple with children

• Protection in the event of death or illness is top priority, as there is usually

absolute reliance on both incomes.
• Where the spouse is non –working, provision is also important, because if
she were to take ill someone else may have to be hired to care for the
children.

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Non-forfeiture clause

• Where a policy can acquire a surrender value, the clause allows the policy
to remain in force for up to one year, without premiums being paid.
• At any time during the policy period, paying premiums can reinstate policy.
• Where sum assured becomes payable unpaid premiums plus interest is
deducted. If no claim has arisen at maturity of policy, then funds are paid
less deductions, or the policy is paid up as discussed above.

Endorsements

• The process of making alterations on a policy is called endorsement.

• Changes may include premium frequencies or amount, sum assured
changes, addition or substitution of life assured, mode of payment etc.

Insurable Interest

• Insurable interest must be demonstrated to exist before an insurance

policy can be taken out. This must be stated on the proposal form.
• Basically, you cannot take out a life policy on someone else’s life except it
is proven that measurable loss will be suffered financially if the person
were to die.
• In the case of a husband and wife or civil partnership, it is quite easy to
prove and immeasurable financial loss is said to exist.
• An individual also has unlimited insurable interest in his own life.
• Sum assured must be in line with insurable interest (or less), and policy
must state on whose behalf it has been effected.
• Insurable interest only needs to exist on the day the contract is made; it
does not need to continue for the duration of the policy.
• Insurable interest must be “quantifiable financial interest” that has arisen
because of a “legal relationship”.
Where Insurable Interest can be demonstrated.
1) Joint Borrowers – Mortgages, may be half the loan.
2) Employer/Employee
3) Lender / Borrower – Loan and interest.
4) Divorcees – Financial Settlement (maintenance)
5) Partners – Not usually required as partners take out policies on their own
lives, written in trust for other partners
6) Parents / Children – Funeral expenses. IHT payment is not considered
automatically as insurable interest existing, even though firms take a more
relaxed view. This is because IHT is not considered as financial loss but as
a reduction in inheritance.
Utmost good faith
• Most contracts are based on “caveat emptor” let the buyer beware.
However with life assurance contracts all material facts must be revealed

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whether or not the firm asks for them.

Non –disclosure is a serious thing and means that the contract may be null
and void.

Policy Documentation

• Personalised Key facts Illustration (PKFI) – States the key features of the
plan e.g premiums payable, charges, commission, personal data of clients.
• Key Features Guide (KFG) – Sets out generic features of the plan, how it
works what it protects against and what happens when premiums cease.
PKFI and KFG are issued to clients to help them to decide if plan is right.
• Acceptance Letter – Once the plan is underwritten, the insurer issues an
acceptance letter to confirm the terms and conditions. Terms may differ
from those specified on the PKFI e.g where a health issue has been
uncovered by underwriting.
• Cancellation Notice – Sent out at around the same time as the acceptance
letter.
• Policy Document (certificate of insurance) – Lists the details of the plan,
cover provided and terms under which the cover is provided.

Joint life first death

• Policy that pays out on death of the first party.
Joint life second death
• Policy that pays out upon death of second party.

Disposal of Policy Proceeds

The policy proceeds are usually payable to the policyholder except:
1) Policy holder is life assured upon death then it is payable to his estate.
2) Where life assured is not policyholder, and policyholder has died before
life assured and premiums are still paid after his death.
3) Where the policy has been assigned. This indicates that ownership has
been transferred to another person through a deed of assignment. The new
owner is called the assignee.
• The Policies of Assurance Act 1867 state that a notice of assignment must
be sent to the life assurance company who then registers this notice in the
records. All life policies are required to show the address of the company’s
Principal Office to which notices of assignment must be sent. Where a
claim is made the assignee gets the fund e.g policy given to trustees to
hold for the benefit of the beneficiaries of a trust.
4) Policies written in trust. The funds are paid to the trustees who deal with
the proceeds in accordance with the deed. The advantage is that the
beneficiaries do not have to wait for the grant of probate and no IHT is
charged on the funds as they are ring fenced outside the deceased’s
estate.

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Unit 6

Pensions and the Employer

• Until 1987, it was possible for employers to make membership of

occupational pension schemes a pre requisite for employment. This can
no longer be a requirement for employment.
• Occupational schemes must be established as Irrevocable Trusts to be
granted full registration at the HMRC so as to be entitled for tax benefits.
• The trust status indicates that the assets of the employers are separated
from pension scheme assets, which indicates some safety.
• The scheme’s members must nominate one third of the scheme’s trustees.
The Government is proposing an increase to 50% in the future.
• Where an occupational pension scheme is set up as a irrevocable trust a
trustee can be appointed from:
1) The employer – as a sole trustee
2) Individuals selected by the employer
3) Professional trustee corporation
4) Subsidiary company – Set up by employer to act solely
as trustee.

• The Pensions Act 1995 required member nominated trustee appointment

procedures (except for some schemes, statutory) by April 1997.
• Where an employer proposes a different trustee structure other to that
which is statutory, there is a right to opt out but members must be
consulted and must agree with trustee’s chosen structure in the future.
• An occupational scheme could be funded or unfunded.
• Pension earnings may differ from actual remuneration as it usually based
on basic salary.

A funded scheme
• Funded schemes rely on investment of contributions for future benefits.
The schemes will apply for registration for tax purposes.
• The schemes are usually contributory where employers and employees
make contributions, or non-contributory where only employers make
contributions.

An Unfunded Scheme
• A minority of schemes are not funded, with benefits paid on a pay as you
go basis. This indicates that present benefits are paid out of present
contributions with little or no investment of those contributions.
• Some schemes are just a promise by an employer to pay some form of
pension or lump sum at a pre-agreed date

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• Public sector (Government) schemes make no contributions; the amount

required is taken out of the public purse, although the employee may be
asked to make a small contribution.
• Future arrangements may affect profitability.

3 Main Funding Options

1) Insurance Company Funds – They are usually for small to medium
sized schemes. The small defined contribution and executive schemes
will choose this option. They could be arranged on a with profits basis,
unit linked basis or deposit administration. The funds are normally
placed in the equity/gilt market.
Deposit Administration invests in a variable guaranteed interest bearing
account, with interest being credited for premiums paid. This may have
a minimum interest rate bonus paid after charges subject to
fluctuations.
2) Managed Funds – Small schemes. A portfolio of investments that are
chosen to meet a specific scheme’s requirements. Merchant banks,
stock brokers etc, offer this kind of service.
They will usually invest in the equity/gilt market. Larger funds will invest
in property.
3) Self – Administered Funds – Larger defined benefit schemes consisting
of in house pension teams and external actuaries.

Investing the Contributions

• Investor contributions are invested in a range of funds to suit the needs of

its members.
• The funds will be invested for income and growth
• Contributions could be invested in with profits, managed, unit linked funds
or direct investment management.
• The investment vehicles used will involve a mixture of cash/ deposit, fixed
interest securities, UK and international equities, overseas bonds and
property.

Scheme Design
Benefit Base – Method used to calculate retirement benefits that scheme will
pay its members.
Final Salary Scheme
• Depends on the average of a person’s last 3 consecutive years of work
ending in the last ten years before retirement. They use the 60ths and
80ths method.
• Bonuses and commissions must be averaged over a 3year period.
• The benefits will depend on
1) Length of Service
2) The accrual rate – 60s and 80s
3) Employees salary

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• An employee with 40 years of service in a 60s scheme; will retire on 40/60,

which is 2/3rds of his final salary.
• Spouse is included so that a percentage of pension (66%) can continue to
be paid on death of scheme member.
• Poorer than expected returns may lead employer to contribute additional
funds to compensate.
• Where over funding occurs a contribution holiday might be necessary or
the surplus is used to increase benefits.
• If the employer takes a refund of the surplus it is subject to tax at 35%.
• Actuaries maintain the balance between over funding and under
investment and produce an overall cost for the scheme. They consider
age, sex distribution of scheme, future wage inflation, investment returns,
retirement etc.
• Overall costs are subject to review on a 3 yearly basis.
Earmarking – Funds are not allocated to individual persons within the scheme
until a benefit falls due

Illustration: Public sector civil service

Public sector /civil service 80 accrual rate 3/80 for tax free lump sum.
Individual 30 years of service, retirement £40,000
A pension of £15,000 P.A (30/80 x £40,000)
Plus
Tax- free cash of £45,000 (30x 3/80 x £40,000)
Note – Both must be taken, person cannot for go tax- free cash to increase pension.

• Pension moves in line with RPI and if the individual transfers to another
civil service, he is given full credit for the existing years (under transfer
club).
Defined Contribution (Money Purchase Scheme)
• More straightforward arrangement, all of a member’s contributions can be
separately identified.
• The employer knows how much the pension scheme will cost and the
employer does not bear the risk.
• Company may reduce or vary contributions.
• For a money purchase scheme to retain approved status, the employer is
required to put in contributions of a minimum of 10% (full exempt status,
can be granted a holiday).
• Good arrangement, all the benefits and contributions are easily
understood, the employer is able to estimate costs is a good arrangement
for short service members (before retirement).
• Kindly note that money purchase schemes are not close- ended
commitments. The outcome of the arrangement will depend on the
performance of the underlying investments.

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