CISI Mock 1 Questions v3 - Expert Pensions

CISI Pension Transfers & Planning Advice

CISI MOCK 1 QUESTIONS

Mock Exam 1

1 Version 3

Copyright © 2011 - 2018 Expert Pensions Limited, All Rights Reserved

Mock Exam 1

Pension Transfers and Planning Advice

You have 3 hours to complete this mock exam

All questions are based on English law

All questions are based on 2017-18 Tax Year

All individuals are domiciled and resident in the UK unless otherwise stated

You can refer to Tax tables as these will be provided in your exam

Remember to show all your calculations

Take your time and read the question carefully before answering

Good luck.

Mock Exam 1

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Section A Total 20 Marks

Answer all questions in this section.

For parts a) to t) inclusive, write the letter corresponding to your answer clearly in the answer book.

Question 1

a. How do state pension protected payments increase each year?

A) In line with the Triple Lock guarantee B) In line with increases in the CPI C) In line with increases in the RPI D) 2.5% fixed (1 Mark)

b. What is the minimum amount of qualifying years needed to benefit from any single tier state pension?

A) 10 B) 15 C) 30 D) 35 (1 Mark)

c. What is the level of income at which an individual’s annual allowance begins to be tapered away?

A) £110,000 threshold income B) £110,000 adjusted income C) £150,000 threshold income D) £150,000 adjusted income (1 Mark)

d. Which of these is NOT a trigger for the Money Purchase Annual Allowance?

A) Taking an UFPLS under £1,000 B) Taking a taxable payment from a flexi-access drawdown C) Taking a Pension Commencement Lump Sum (PCLS) D) Receiving a payment from a Flexible Annuity (1 Mark)

e. What will the Lifetime Allowance be in 2018-19?

A) £1m B) £1.03m C) £1.3m D) £1.025m (1 Mark)

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f. How are unfunded public sector pension schemes generally set up?

A) By an act of parliament B) By establishment of a trust deed C) By a recorded board meeting D) By an exchange of letters between the board and government (1 Mark)

g. Which one of these transitional protections protected the individual’s lifetime allowance at a fixed £1.8m?

A) Primary Protection. B) Fixed Protection 2012. C) Fixed Protection 2014 D) Enhanced Protection (1 Mark)

h. Which of the following statements is MOST accurate?

A) Both SIPPs and SSASs are regulated by the FCA B) Both SIPPs and SSASs are regulated by the Pensions Regulator C) SIPPs are regulated by the FCA and SSASs are regulated by the Pensions Regulator D) SSASs are regulated by the FCA and SIPPs are regulated by the Pensions Regulator (1 Mark)

i. When is the government deadline for setting up the second-hand annuity market originally announced in 2014?

A) April 2018 B) October 2018 C) April 2019 D) The project has been abandoned (1 Mark)

j. When calculating available lifetime allowance, what is the multiplier used for pre-commencement drawdowns?

A) 25 + PCLS B) 20 + PCLS C) 25 with no PCLS accounted for D) 20 with no PCLS accounted for (1 Mark)

k. Which of the following is NOT a recognized method of splitting a pension on divorce:

A) Offsetting B) Earmarking C) Sharing D) Exempting (1 Mark)

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l. What is the MAXIMUM level of FSCS protection available to a retail client if an annuity provider is unable to meet its liabilities?

A) 100%, no upper limit B) 90%, no upper limit C) 100% of the first £50,000, nothing thereafter D) 100% of the first £85,000, nothing thereafter (1 Mark)

m. David, 55, earns £20,000 per annum from employment. He requires a net sum of £13,000 after all taxes have been settled. What is the amount of UFPLS he’ll need to take?

A) £15,294.11 B) £16,250 C) £17,333.33 D) £17,500 (1 Mark)

n. All the following statements about the critical yield are correct, EXCEPT:

A) The critical yield does not take charges into account B) It is an annualised figure C) It is shown as a percentage D) It assumes rates of inflation and annuity rates in its calculation (1 Mark)

o. All the following are steps in the CETV calculation, EXCEPT:

A) Calculate the member’s pension at the date of leaving the scheme. B) Revalue this up to the member’s Normal Retirement Date using assumptions from the scheme actuary, usually of inflation and average earnings, depending on the scheme’s rules. C) Calculate the capitalized value using FCA-standardized annuity rates. D) Discount the capitalized value back to the present day using a reasonable assumption of investment returns (1 Mark)

p. What is the MAXIMUM age an individual can take an UFPLS?

A) 75 B) 80 C) 90 D) There is no maximum age (1 Mark)

q. Which of these statements is INCORRECT regarding the PPF compensation available for those who have not reached the scheme’s Normal Retirement Age?

A) Cash commutation is available B) Early retirement is subject to actuarial reduction C) Members receive 90% of their pension subject to 90% of an overall cap D) Spouse’s pensions are generally 66% of member’s PPF compensation (1 Mark)

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r. David is in ill-health and transfers a defined benefit scheme with no death benefits for his children over to a defined contribution scheme where his children can benefit on his death from the £500,000 transfer value. This is his only pension. How long must he live to ensure his DC pension is not subject to inheritance tax on his death?

A) 1 year B) 2 years C) 5 years D) 7 years (1 Mark)

s. Which of these are included in TPR’s 10 steps that a scheme member can take to protect their pension?

A) Be wary of cold calls and unsolicited texts or e-mails B) Check the FCA’s list of known scams C) Steer clear of overseas investment deals D) Talk to Pension Wise about transferring safeguarded benefits (1 Mark)

t. Which of these insurance policies could best be used to replicate DC pension death benefits for a spouse?

A) Whole of life B) Decreasing Term C) Level Term D) Increasing Term (1 Mark)

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THIS PAGE IS DELIBERATELY BLANK.

PLEASE MOVE ON TO SECTION B OVERLEAF.

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Section B Total 40 Marks

Answer all questions in this section.

2. Describe two features of Fixed Protection 2016. (2 Marks) 3. Describe HMRC’s definition of “dependent” for the purposes of receiving a dependent’s scheme pension. (3 Marks) 4. Why is income generally lower from an index-linked annuity compared to a level annuity? (2 Marks) 5. Explain briefly what is meant by “Mortality Drag”. (2 Marks) 6. Martin has used up his full Lifetime Allowance buying an annuity with his main DC pension pot two years ago. He has a second smaller pot worth £200,000. He wants to transfer the pot out to a Spanish QROPS. What, if any, will the lifetime allowance tax charge be? (2 Marks) 7. Explain what might happen to CETVs in general – and why – if inflation was to continue to increase. (2 marks) 8. Give two benefits of a scheme pension member in ill-health taking up a pension increase exchange. (2 marks) 9. What gross amount of fund would need to be crystallised by a 40% taxpayer as an UFPLS to produce a net payment of £15,000? Show all workings. (4 marks) 10. Explain 5 reasons why a Scheme Pension might be reduced. (5 marks) 11. With regards to the Single Tier State Pension, what is the Foundation Amount and how is it calculated? (4 marks)

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12. a) List four potential risks of flexi-access drawdown (4 marks) b) Briefly explain reverse pound cost averaging and why it’s particularly pertinent for drawdown clients. (3 marks) 13. In the context of TVAS, accurately define the term “critical yield”. (5 marks)

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THIS PAGE IS DELIBERATELY BLANK.

PLEASE MOVE ON TO SECTION C OVERLEAF.

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Section C Total 40 Marks

Answer both questions in this section. Question 14 Fiona had been in her company’s defined benefit occupational pension scheme for 5 years and 0 months when the scheme closed to further accrual. The accrual rate is 60ths and her final pensionable salary used to calculate her benefits is £48,000. NRA is 60 which is exactly 10 years away. The pension revalues in line with inflation, which your firm assumes is going to be at an annualized rate of 2.5% between now and Fiona’s NRA. The commutation factor is 15. Fiona already has large amounts of capital in the bank and has little need for additional capital, but wants to explore investing her lump sum for income to top-up her scheme pension. Fiona has a Cautious attitude to risk and will be a non-taxpayer in retirement. a) Calculate Fiona’s pension at the date of leaving the scheme. Show all workings. (2 marks) b) Calculate Fiona’s pension at her normal retirement age. Show all workings. (3 marks) c) Calculate Fiona’s maximum available lump sum at NRA and reduced pension assuming she were to take it. (5 marks) d) Explain to Fiona whether or not the commutation factor offers value for money, and why this is the case. (4 marks) e) List SIX drawbacks of Fiona taking the lump sum and investing it for income. (6 marks) (Total 20 marks)

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Question 15 St John, 60, wants to retire following a recent heart attack at work which was nearly fatal. He has a paid-up occupational DC scheme with scheme-specific protected tax-free cash and a GAR at 6%. It does NOT offer any kind of flexibility, and both the SSTFC and GAR would be lost on transfer. This is his only pension. At A-Day, his fund was valued at £100,000 and he had a tax-free cash entitlement at the time of £45,000. His fund is currently valued at £250,000. His married partner, David, has scheme pension income of over £50,000 per annum which covers all their bills and provides 100% spouse’s pension. As such, St John has an “easy come, easy go” attitude to his own pension pot, a 100% capacity for loss, and an adventurous attitude to risk. He wants to explore the option of transferring out to a drawdown, and understand some of the pros and cons. a) Calculate St John’s current protected tax-free cash entitlement. Show all workings. (5 marks) b) Give 5 advantages of St John transferring his pension into a drawdown contract. (5 marks) c) Give two benefits and two drawbacks of St John investing his pension in a portfolio of equity ETFs. (4 marks) d) List 6 considerations not detailed in the case study you’d take into account when selecting investment funds for John’s pension. (6 marks) (Total 20 marks)

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CISI Mock 1 Questions v3 - Expert Pensions