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CII IF6 practice questions

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Question 1Life and pensions products and their features

Under UK tax rules, what is the maximum amount of pension commencement lump sum (tax-free cash) that can normally be taken from a money purchase pension at retirement?

  1. 25% of the value of the fund Correct answer.
  2. 50% of the value of the fund
  3. 33% of the value of the fund
  4. 100% of the value of the fund

Explanation

The pension commencement lump sum is normally capped at 25% of the value of the member's pension fund, with the remaining 75% used to provide income. This limit applies to money purchase arrangements and is subject to the member's available lump sum allowance.

Question 2Life and pensions products and their features

A defined benefit occupational scheme typically calculates the member's pension by reference to which of the following?

  1. The investment return achieved on the member's individual account
  2. The fund value at the date the member reaches state pension age
  3. The value of units held in the member's personal pension
  4. Accrual rate, pensionable salary and length of service Correct answer.

Explanation

Defined benefit schemes promise a pension based on a formula, commonly accrual rate multiplied by pensionable salary and years of service. Investment risk rests with the scheme sponsor rather than the member.

Question 3Life and pensions products and their features

Which type of life assurance policy combines protection with an investment element, where premiums are used partly for cover and partly to buy units?

  1. Family income benefit
  2. Whole of life without profits
  3. Unit-linked endowment Correct answer.
  4. Term assurance

Explanation

A unit-linked endowment allocates part of the premium to life cover and the remainder to units in an investment fund, so the maturity value depends on fund performance. Term assurance and family income benefit are pure protection products.

Question 4Life and pensions products and their features

In a with-profits policy, what is the purpose of a terminal bonus?

  1. To cover the cost of administering the policy in its final year
  2. To refund premiums if the policy is cancelled early
  3. To guarantee a minimum payout regardless of fund performance
  4. To distribute investment gains that have accumulated but not yet been paid as regular bonuses Correct answer.

Explanation

Terminal bonuses are added when a with-profits policy pays out and reflect gains in the fund not already distributed through regular (reversionary) bonuses. They are discretionary and can be reduced or removed by the insurer.

Question 5Life and pensions products and their features

A saver wants a life assurance product where the sum assured increases automatically to keep pace with inflation. Which feature should the adviser look for?

  1. A surrender value
  2. A guaranteed insurability option
  3. A waiver of premium benefit
  4. Indexation of the sum assured Correct answer.

Explanation

Indexation links the sum assured to an inflation measure so cover keeps pace with rising prices. Guaranteed insurability instead allows extra cover to be bought at set dates without further medical evidence.

Question 6Life and pensions products and their features

Which statement best describes the role of an annuity purchased with pension savings?

  1. It provides lump sum death benefit before age 75
  2. It transfers investment risk from the insurer to the policyholder
  3. It converts accumulated pension capital into a guaranteed income for life Correct answer.
  4. It allows the fund to remain invested and drawn down flexibly

Explanation

An annuity uses the pension fund to buy a regular income, and the insurer bears the risk of the annuitant living longer than expected. The income can be level or escalating and may include dependant benefits.

Question 7Life and pensions products and their features

A member of a workplace defined contribution scheme wants to leave the fund invested and take irregular withdrawals. Which option matches this need?

  1. A lifetime annuity
  2. Flexi-access drawdown Correct answer.
  3. A scheme pension
  4. A pension commencement lump sum only

Explanation

Flexi-access drawdown keeps the fund invested while allowing the member to take income as and when required. Each withdrawal above the tax-free cash entitlement is taxed at the member's marginal rate.

Question 8Life and pensions products and their features

Which of the following is a key characteristic of a family income benefit policy?

  1. It pays a regular income for the whole of the survivor's lifetime
  2. It pays a lump sum on the death of the life assured
  3. It pays a regular income from the date of death until the end of the policy term Correct answer.
  4. It builds a cash value that can be surrendered at any time

Explanation

Family income benefit pays an income, usually tax-free, from the date of death until the policy term ends, so the total payout depends on when death occurs. It is a pure protection product with no investment element.

Question 9Life and pensions products and their features

What is the main purpose of a waiver of premium benefit attached to a protection policy?

  1. To refund all premiums paid if no claim is made
  2. To allow the policyholder to reduce cover without penalty
  3. To keep the policy in force by meeting premiums during a period of incapacity Correct answer.
  4. To increase the sum assured if the policyholder becomes unemployed

Explanation

Waiver of premium ensures the policy continues in force by paying the premiums when the policyholder cannot work through illness or disability. It protects the cover rather than increasing or refunding benefits.

Question 10Life and pensions products and their features

An individual takes out a personal pension and makes a contribution of £8,000 net of basic rate tax relief. What gross amount is added to the pension fund, assuming basic rate tax is 20%?

  1. £8,000
  2. £9,600
  3. £10,000 Correct answer.
  4. £12,000

Explanation

Relief at source means the provider reclaims basic rate tax on the net contribution, so £8,000 divided by 0.8 gives a gross contribution of £10,000. Higher and additional rate relief is claimed separately through self assessment.

Question 11Life and pensions products and their features

Which of the following best describes the difference between a whole of life policy and a term assurance policy?

  1. Term assurance always builds a surrender value, while whole of life never does
  2. Whole of life pays out whenever death occurs, subject to premiums being maintained, while term assurance pays only if death occurs within the term Correct answer.
  3. Whole of life pays only on death within a fixed term, while term assurance pays whenever death occurs
  4. Whole of life is always written without profits, while term assurance is always with profits

Explanation

Whole of life cover is designed to pay a benefit whenever the life assured dies, provided premiums are kept up, and is often used for inheritance tax planning. Term assurance pays only if death happens during the chosen term.

Question 12Life and pensions products and their features

A customer with a money purchase pension reaches age 55 and wishes to take a small lump sum without entering full drawdown. Which facility is designed for this purpose?

  1. Lifetime allowance charge
  2. Defined benefit transfer value
  3. Scheme pension
  4. Uncrystallised funds pension lump sum Correct answer.

Explanation

An uncrystallised funds pension lump sum allows a member to take lump sums from uncrystallised money purchase funds, with 25% normally tax-free and the balance taxed as income. It does not require the member to enter drawdown first.

Question 13Life and pensions products and their features

Which feature distinguishes a friendly society tax-exempt savings plan from a conventional unit-linked savings plan?

  1. It must be held for a set qualifying period and has a limit on the amount that can be saved each year Correct answer.
  2. It is available only to people over state pension age
  3. It guarantees a fixed rate of return regardless of investment performance
  4. It can be surrendered at any time without loss of tax relief

Explanation

Tax-exempt savings plans offered by friendly societies carry annual premium limits and a qualifying period, after which the proceeds are free of tax. They are typically invested in a with-profits or unit-linked fund.

Question 14Life and pensions products and their features

What is the principal purpose of an income protection policy?

  1. To provide a lump sum on diagnosis of a specified critical illness
  2. To build a fund for retirement through regular premiums
  3. To repay a mortgage if the borrower dies
  4. To replace part of earned income during a period of incapacity Correct answer.

Explanation

Income protection replaces a proportion of earned income when the policyholder cannot work because of illness or injury, usually after a deferred period. Payments normally continue until recovery, retirement or the end of the policy term.

Question 15Life and pensions products and their features

A policyholder holds a with-profits endowment that is due to mature. Which factor most directly determines the maturity value?

  1. The current bank base rate
  2. The number of premiums paid only
  3. The sum of regular bonuses already declared plus the terminal bonus at maturity Correct answer.
  4. The policyholder's age at the start of the policy

Explanation

The maturity value of a with-profits endowment reflects bonuses already added to the policy plus any terminal bonus declared at the payout date. Regular bonuses, once declared, are usually guaranteed.

Question 16Life and pensions products and their features

Which statement correctly describes a critical illness policy with a children's cover benefit?

  1. It replaces the child's income if the child cannot work
  2. It pays a lump sum if a covered child is diagnosed with a qualifying condition, usually subject to a percentage cap Correct answer.
  3. It converts into a whole of life policy when the child reaches 18
  4. It pays the full adult sum assured for each child claim

Explanation

Children's cover is an add-on that pays a lump sum, typically a set percentage of the adult sum assured, if a covered child suffers a qualifying condition. It does not replace income and does not convert to another policy type.

Question 17Life and pensions products and their features

Under the rules for pension death benefits for a member who dies before age 75 with uncrystallised funds, what is the usual tax position for beneficiaries?

  1. Benefits are subject to a flat 55% tax charge
  2. Benefits are subject to inheritance tax in all cases
  3. Benefits are always subject to income tax at the beneficiary's marginal rate
  4. Benefits are normally paid free of income tax, subject to lump sum and death benefit limits Correct answer.

Explanation

Where the member dies before 75, lump sums and income from uncrystallised funds are normally paid free of income tax, provided the available lump sum and death benefit allowance is not exceeded. Tax treatment depends on the member's age at death and the type of benefit paid.

Question 18Life and pensions products and their features

Which of the following is a feature of a stakeholder pension?

  1. It must be invested entirely in the employer's own shares
  2. Charges are capped and the minimum contribution is low, making it accessible to lower earners Correct answer.
  3. It guarantees a minimum retirement income
  4. It is available only to employees of large companies

Explanation

Stakeholder pensions were designed with a capped annual charge and low minimum contributions so that they are accessible to a wide range of savers. They must meet statutory standards on charges and terms.

Question 19Life and pensions products and their features

A customer wants protection that pays out on death but also allows the policy to be encashed for a value before death. Which product type meets both needs?

  1. Family income benefit
  2. Decreasing term assurance
  3. Level term assurance
  4. Endowment assurance Correct answer.

Explanation

Endowment assurance provides a sum assured on death and also builds a surrender value that can be encashed before maturity. Term assurance and family income benefit provide protection only and have no investment value.

Question 20Life and pensions products and their features

What is the effect of a 'paid-up' option on a whole of life policy?

  1. The policyholder stops paying premiums and the policy is cancelled with no benefit
  2. The policyholder stops paying premiums and the policy continues with a reduced sum assured Correct answer.
  3. The policyholder increases premiums to raise the sum assured
  4. The policy is converted into a term assurance policy

Explanation

Making a policy paid-up means premiums cease while cover continues at a reduced level, reflecting the premiums already paid. It avoids total loss of benefit compared with surrender.

Question 21Life and pensions products and their features

Which statement about the lifetime allowance is correct for the period before it was abolished for the 2024/25 tax year?

  1. It limited the amount of pension savings that could receive tax-relieved treatment without an additional charge Correct answer.
  2. It applied only to state pension entitlements
  3. It limited the annual amount that could be contributed to a pension
  4. It replaced the money purchase annual allowance

Explanation

The lifetime allowance capped the total value of pension benefits that could be taken without an additional tax charge, and excess benefits attracted a lifetime allowance charge. It was separate from the annual allowance, which limits yearly contributions.

Question 22Life and pensions products and their features

Which of the following best describes a self-invested personal pension (SIPP)?

  1. A savings account with no tax relief on contributions
  2. A money purchase arrangement where the member chooses from a wide range of permitted investments Correct answer.
  3. A defined benefit scheme sponsored by the employer
  4. A policy that guarantees a fixed retirement income

Explanation

A SIPP is a money purchase pension that gives the member control over investment selection within permitted categories. The fund available at retirement depends on investment performance and charges.

Question 23Life and pensions products and their features

An employer operates a group personal pension for staff. Which statement correctly describes the employer's typical role?

  1. The employer guarantees a defined benefit to each employee
  2. The employer is responsible for investment advice to each employee
  3. The employer takes ownership of all employee contributions
  4. The employer selects the provider and pays contributions, while each employee holds their own policy Correct answer.

Explanation

In a group personal pension the employer arranges the scheme and contributes, but each member has an individual contract with the provider. The employer does not guarantee benefits or provide individual advice.

Question 24Life and pensions products and their features

Which feature is characteristic of a level term assurance policy written on a joint life first death basis?

  1. It pays only when both lives assured have died
  2. It pays an income rather than a lump sum on death
  3. It pays the sum assured on the first death of either life assured and then ends Correct answer.
  4. It pays the sum assured twice, once on each death

Explanation

Joint life first death cover pays out when the first of the two lives assured dies, and the policy then terminates. It is commonly used to protect a mortgage or provide for a surviving partner.

Question 25Life and pensions products and their features

A customer is considering a personal pension and asks how charges might affect the fund. Which statement is most accurate?

  1. Charges are paid by the government through tax relief
  2. Charges have no effect because pension funds always grow
  3. Charges reduce the net return and therefore the eventual fund value available for retirement Correct answer.
  4. Charges are fixed by law at the same level for every provider

Explanation

Charges are deducted from the fund or contributions and therefore reduce the net investment return and the final fund value. The effect compounds over the term, so higher charges can materially reduce retirement outcomes.

Question 26Life and pensions products and their features

Which type of life assurance pays a benefit only if the life assured dies within a specified period, with nothing payable if death occurs after that period?

  1. Term assurance Correct answer.
  2. Whole of life assurance
  3. Deferred annuity
  4. Endowment assurance

Explanation

Term assurance provides cover for a fixed period and pays out only on death within that term, so no benefit is payable if the life assured survives to the end. Whole of life and endowment contracts both contain a guaranteed payout event regardless of survival to a set date.

Question 27Life and pensions products and their features

A policyholder wants protection where the sum assured reduces broadly in line with a repayment mortgage balance. Which contract is designed for this purpose?

  1. Level term assurance
  2. Convertible term assurance
  3. Family income benefit
  4. Decreasing term assurance Correct answer.

Explanation

Decreasing term assurance has a sum assured that falls over the term, typically in line with the outstanding capital on a repayment mortgage, while the premium stays level. Level term and family income benefit keep a constant benefit basis and do not track a reducing loan.

Question 28Life and pensions products and their features

Which statement describes the benefit payable under a family income benefit policy on the death of the life assured?

  1. A regular income is paid for the remaining balance of the policy term Correct answer.
  2. An income is paid for the whole of the survivor's lifetime
  3. A single lump sum equal to the original sum assured is paid
  4. The premiums paid are returned with interest

Explanation

Family income benefit pays an income from the date of claim until the end of the original policy term, so the total payout depends on how early the claim occurs. It does not pay a lump sum, and payments cease when the term expires rather than continuing for life.

Question 29Life and pensions products and their features

An individual aged 40 is diagnosed with a specified critical illness covered by a standalone policy. What is the usual consequence under the contract?

  1. The sum assured is paid only on subsequent death
  2. The policy pays a fixed weekly income until recovery
  3. The sum assured is paid and the policy normally ends Correct answer.
  4. Premiums are waived but no capital sum is paid

Explanation

A standalone critical illness policy pays the lump sum on first diagnosis of a covered condition and the cover then terminates. Waiver of premium and income-based benefits are separate features, and accelerated arrangements reduce a death benefit rather than being standalone.

Question 30Life and pensions products and their features

Which feature allows an income protection claimant to receive a benefit while working in a reduced capacity and having earnings topped up?

  1. A proportionate or rehabilitation benefit Correct answer.
  2. An increasing claim option
  3. A waiver of premium clause
  4. A deferred period

Explanation

Some income protection contracts include a proportionate benefit that pays part of the claim where the claimant returns to work at reduced earnings, supporting rehabilitation. A deferred period merely delays the start of any claim, and waiver of premium relates to premiums rather than earnings.

Question 31Life and pensions products and their features

What is the principal effect of selecting a longer deferred period on an income protection policy?

  1. The premium is lower because claims start later Correct answer.
  2. The policy becomes guaranteed renewable
  3. The policy pays a higher weekly benefit
  4. The maximum benefit period is extended

Explanation

The deferred period is the waiting time before benefit becomes payable, so a longer wait reduces the insurer's exposure and lowers the premium. It does not change the amount of benefit or the length of the benefit period.

Question 32Life and pensions products and their features

Which statement describes the operation of a unit-linked whole of life policy?

  1. Bonuses are declared annually and become guaranteed once added
  2. The sum assured is guaranteed and never affected by investment performance
  3. The policy has no surrender value at any time
  4. Premiums buy units whose value may fall as well as rise, and charges are deducted from the fund Correct answer.

Explanation

In a unit-linked contract the premium buys units in underlying funds, so the policy value depends on investment performance and is not guaranteed. Charges are typically taken by cancelling units, which reduces the fund.

Question 33Life and pensions products and their features

How does a with-profits policyholder's terminal bonus usually operate at maturity?

  1. It replaces all regular bonuses already added
  2. It is a discretionary addition reflecting final investment returns and is not guaranteed in advance Correct answer.
  3. It is guaranteed at outset and cannot be reduced
  4. It is paid only if the policyholder dies during the term

Explanation

Terminal bonus is declared at the point of claim or maturity and reflects the fund's investment experience over the policy's life; it is discretionary and can be zero. Regular bonuses already added are generally retained, not replaced.

Question 34Life and pensions products and their features

A with-profits endowment is surrendered early and a market value reduction is applied. What is the purpose of this adjustment?

  1. To recover commission paid to the adviser at outset
  2. To protect remaining policyholders from the cost of early encashment during poor investment conditions Correct answer.
  3. To apply an early surrender penalty required by the regulator
  4. To convert the policy into a paid-up contract

Explanation

A market value reduction adjusts the surrender value so that those leaving early do not receive more than the fund can fairly support, protecting continuing policyholders. It is not a commission clawback or a regulatory penalty.

Question 35Life and pensions products and their features

Which statement describes the tax treatment of premiums on a qualifying life assurance policy taken out by an individual?

  1. Premiums are deductible against earnings and the lump sum is taxed at 40%
  2. Premiums are paid from taxed income and the proceeds are generally free of income tax and capital gains tax for the individual Correct answer.
  3. Premiums are paid gross and the proceeds are subject to capital gains tax
  4. Premiums attract basic rate tax relief and the proceeds are taxable as income

Explanation

Qualifying life policies are not given upfront tax relief on premiums, but the lump sum or regular benefits are generally free of income tax and capital gains tax for the policyholder. This differs from pensions, where contributions attract relief but benefits are taxed.

Question 36Life and pensions products and their features

Why might a whole of life policy be written in trust?

  1. To guarantee a higher sum assured
  2. To obtain income tax relief on the premiums
  3. To keep the proceeds outside the estate and speed payment to beneficiaries Correct answer.
  4. To avoid the need for medical underwriting

Explanation

Writing a policy in trust removes the proceeds from the deceased's estate for inheritance tax purposes and allows the trustees to pay beneficiaries without waiting for probate. Trusts do not affect underwriting or premium relief.

Question 37Life and pensions products and their features

Which statement correctly describes a joint life second death policy?

  1. It pays only if both die simultaneously
  2. It pays a reduced sum on each death
  3. It pays on the death of the second of the two lives assured Correct answer.
  4. It pays on the first death and then ceases

Explanation

A joint life second death contract pays a single sum on the death of the survivor, which suits inheritance tax planning for couples. A first death basis pays earlier and the policy then ends.

Question 38Life and pensions products and their features

What is the effect of an 'accidental death benefit' rider on a term assurance policy?

  1. It pays the sum assured if death occurs from any cause at any age
  2. It pays an additional sum if death results from an accident within defined terms Correct answer.
  3. It converts the policy to whole of life cover
  4. It waives premiums after any illness

Explanation

An accidental death rider adds an extra payment where death is caused by accident, subject to the definition and any limits in the contract. The base sum assured remains payable under the main terms.

Question 39Life and pensions products and their features

An individual wants a retirement product that guarantees a minimum income for life regardless of how long they live. Which contract meets this need?

  1. A lifetime annuity Correct answer.
  2. A with-profits bond
  3. A unit trust
  4. A term deposit account

Explanation

A lifetime annuity converts capital into a guaranteed income payable for the annuitant's lifetime, so longevity risk transfers to the insurer. Investments such as unit trusts and bonds do not guarantee lifetime income.

Question 40Life and pensions products and their features

Which option increases the income payable from a lifetime annuity at outset?

  1. Choosing an escalating income
  2. Adding a spouse's pension
  3. Adding a guarantee period
  4. Selecting a level income with no escalation Correct answer.

Explanation

A level annuity with no escalation pays a higher starting income because the insurer does not fund future increases. Guarantee periods and dependant's benefits add cost and reduce the initial income.

Question 41Life and pensions products and their features

Which statement describes an impaired life annuity?

  1. It is only available to those already receiving long-term care
  2. It pays income only after the annuitant reaches state pension age
  3. It offers an enhanced income where the annuitant's health or lifestyle is expected to shorten life expectancy Correct answer.
  4. It guarantees the full purchase price back to the estate

Explanation

An impaired life or enhanced annuity takes account of medical conditions or lifestyle factors that reduce life expectancy, allowing a higher income for the same purchase price. It is not restricted to care recipients and does not guarantee return of capital.

Question 42Life and pensions products and their features

A saver wants a pension wrapper that allows them to choose and manage individual shares and funds themselves, with wide investment choice. Which arrangement fits?

  1. A self-invested personal pension Correct answer.
  2. A stakeholder pension
  3. A retirement annuity contract
  4. A group personal pension

Explanation

A self-invested personal pension gives the member control over the investments held within the wrapper, subject to HMRC rules on permitted investments. Stakeholder and group personal pensions offer a limited range of funds chosen by the provider.

Question 43Life and pensions products and their features

A member of a defined benefit occupational scheme is considering transferring to a defined contribution arrangement. Which statement is most accurate?

  1. The transfer must be completed within seven days of the request
  2. The member automatically loses all accrued service rights with no advice needed
  3. Transfer is prohibited in all circumstances
  4. A transfer value above the statutory threshold requires the member to take regulated advice before proceeding Correct answer.

Explanation

Where the cash equivalent transfer value exceeds the statutory threshold, the member must obtain appropriate independent advice before the transfer can proceed. Transfers are permitted in many circumstances but are not automatic or time-limited in the way described.

Question 44Life and pensions products and their features

What is the main purpose of auto-enrolment into a workplace pension?

  1. To give employers full control over employees' investment choices
  2. To compel employees to remain in the scheme for life
  3. To replace the state pension entirely
  4. To require eligible jobholders to be enrolled into a qualifying scheme with minimum contributions unless they opt out Correct answer.

Explanation

Auto-enrolment places a duty on employers to enrol eligible jobholders into a qualifying pension scheme with at least minimum contributions, while the employee retains the right to opt out. It supplements rather than replaces state provision.

Question 45Life and pensions products and their features

Which statement correctly describes the tax position of employer contributions to a registered pension scheme?

  1. They are subject to national insurance as earnings
  2. They are normally deductible for the employer and not treated as taxable income of the employee Correct answer.
  3. They are taxed as benefits in kind on the employee
  4. They attract no relief for the employer

Explanation

Employer pension contributions are generally allowable as a business expense for the employer and are not taxed as the employee's income when paid into a registered scheme. This is a key reason salary sacrifice and employer contributions are tax-efficient.

Question 46Life and pensions products and their features

An individual makes a personal pension contribution and receives basic rate tax relief at source. How is higher rate relief typically obtained by a higher rate taxpayer?

  1. By reducing the gross contribution reported to HMRC
  2. Automatically added to the pension fund by the provider
  3. By claiming a refund from the pension provider
  4. Through the self-assessment return or by adjusting their tax code Correct answer.

Explanation

The provider claims basic rate relief at source and adds it to the fund, while additional relief for higher and additional rate taxpayers is normally claimed through self-assessment or a tax code adjustment. The provider does not pay higher rate relief into the fund.

Question 47Life and pensions products and their features

Which statement describes the annual allowance for pension contributions?

  1. It applies only to employer contributions
  2. It caps the fund value at retirement
  3. It limits the total tax-relieved contributions across all registered schemes in a tax year, with carry forward of unused amounts available Correct answer.
  4. It is a lifetime limit replacing the lifetime allowance

Explanation

The annual allowance restricts the amount of tax-relieved pension saving in a tax year across all arrangements, and unused allowance from up to three previous years may be carried forward. It is not a cap on fund value and applies to both individual and employer contributions.

Question 48Life and pensions products and their features

A customer holds a with-profits endowment and asks what happens if they stop paying premiums but keep the policy in force. Which outcome is most likely?

  1. The policy becomes paid-up with a reduced sum assured and continues to share in bonuses Correct answer.
  2. The policy continues with the original sum assured and no further premiums
  3. The policy converts to a term assurance with the same sum assured
  4. The policy is cancelled and all premiums are refunded

Explanation

Making a policy paid-up stops premiums while keeping the contract in force at a reduced sum assured, and the policy may continue to receive bonuses on that reduced amount. Premiums are not refunded and the original sum assured is not maintained.

Question 49Life and pensions products and their features

Which statement best explains the concept of insurable interest for a life assurance policy?

  1. The life assured must be in good health at the time of application
  2. The policy must be written in trust
  3. The sum assured must not exceed the proposer's annual income
  4. The proposer must stand to suffer financial loss if the life assured dies Correct answer.

Explanation

Insurable interest requires the person taking out the policy to have a financial interest in the life assured continuing to live, such as a spouse, business partner or debtor. Health status and trust arrangements are separate matters, and there is no income-based cap of that kind.

Question 50Life and pensions products and their features

An individual with a money purchase pension wants to take 25% of the fund as a tax-free lump sum at retirement while leaving the remainder invested. What is the usual tax treatment of the remaining fund?

  1. Withdrawals are taxed at a flat 20%
  2. Withdrawals are entirely tax-free
  3. Withdrawals are subject to capital gains tax
  4. Withdrawals are taxed as income at the member's marginal rate Correct answer.

Explanation

Pension commencement lump sums are normally tax-free up to the permitted limit, while subsequent withdrawals from the remaining crystallised fund are taxed as income at the member's marginal rate. Capital gains tax and a flat rate do not apply to these payments.