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Understanding annuities and scheme pensions

Up to 30 CPD minutes

Introduction
Pension freedoms have introduced lots of flexibility for clients in how they draw their pensions, but many will still need/prefer the security of a regular income provided by either a lifetime annuity or scheme pension. So it’s important for advisers to be able to determine when a secure income is likely to be most suitable and to be aware of the possible options when setting up this type of pension income.

This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
  • Explain the advantages of providing income via annuities or scheme pensions.
  • Describe the options available when setting up an annuity.
  • Explain the taxation of lifetime annuities and scheme pensions.

Learning material

This module explains the nature, options and taxation of lifetime annuities and scheme pensions.

Please read the learning material before attempting the self-assessment questions.

CPD minutes: up to 30
Technical guide: Secure Income - annuities and scheme pensionsOpens in new window

Post learning assessment

Question 1
Which of the following statements about secure pensions are FALSE?

a. Pensions from defined benefit schemes are always in the form of a scheme pension
b. The ‘open market option’ allows individuals to choose a lifetime annuity from any annuity provider
c. Only defined benefit schemes can provide income in the form of a scheme pension
d. Lifetime annuities can only be bought using uncrystallised funds
Question 2
One of the following is NOT an option when setting up a lifetime annuity - which is it?

a. Pension increases
b. Survivor’s pension
c. Income flexibility
d. Value protection
Question 3

Which of the following statements is TRUE about lifetime annuities?

a. Survivors’ pensions can only be paid to dependants and the maximum pension guarantee is 10 years
b. Survivors’ pensions can be paid to anyone and the maximum pension guarantee is 10 years
c. Survivors’ pensions can only be paid to dependants and there’s no maximum pension guarantee period
d. Survivors’ pensions can be paid to anyone and there’s no maximum pension guarantee period

Question 4
Which of the following statements is TRUE about scheme pensions?

a. Survivors’ pensions can only be paid to dependants and the maximum pension guarantee is 10 years
b. Survivors’ pensions can be paid to anyone and the maximum pension guarantee is 10 years
c. Survivors’ pensions can only be paid to dependants and there’s no maximum pension guarantee period
d. Survivors’ pensions can be paid to anyone and there’s no maximum pension guarantee period
Question 5
Which statement on the taxation of scheme pensions and/or annuities is FALSE?

a. A scheme pension or lifetime annuity established for the original scheme member will be subject to income tax under PAYE
b. Dependants’ scheme pensions are paid tax free on death before age 75
c. The market value of any payments to a beneficiary under a guarantee period on a lifetime annuity is potentially subject to IHT, unless paid to the deceased’s spouse or civil partner
d. A lifetime annuity which is being paid to a beneficiary will be subject to income tax where the original member died under age 75 but before 2 December 2014

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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.