Legal, regulatory and tax frameworks for life and pensions business
Domain 2 - Legal, regulatory and tax frameworks. The exam tests how FSMA, FCA rules and tax statutes shape what can be sold, how it is disclosed and how benefits are taxed.
Regulation and conduct
Life and pensions business is dual-regulated: the PRA for prudential matters, the FCA for conduct. Key sources are FSMA 2000, the FCA Handbook (COBS for investments and pensions, ICOBS for insurance) and the Consumer Duty (four outcomes: products and services, price and value, consumer understanding, consumer support; in force for open products from 31 July 2023 and closed products from 31 July 2024). Firms must treat customers fairly, assess vulnerability (FG21/1) and handle complaints within eight weeks; the Financial Ombudsman Service can award up to £430,000 and the client has six months from the final response to refer. The FSCS covers long-term insurance benefits in full and investment claims up to £85,000.
Pension taxation
Pensions use EET: contributions get relief, funds grow tax-free, benefits are taxed. Relief is given at source (provider adds 20%, higher-rate relief claimed via self-assessment) or under net pay. The annual allowance is £60,000, tapered down to £10,000 for adjusted income above £260,000; unused allowance carries forward three years. The money purchase annual allowance is £10,000 once flexible benefits are accessed. The lifetime allowance was abolished from 6 April 2024 and replaced by the lump sum allowance (£268,275) and lump sum and death benefit allowance (£1,073,100). Death benefits are generally outside the estate, but unused pension funds are scheduled to fall within the estate for IHT from 6 April 2027 - check the current rules.
Life policies and trusts
Qualifying policies are tax-efficient for regular savers; gains on non-qualifying policies and investment bonds are chargeable event gains taxed at marginal rates with top-slicing relief. The 5% allowance permits withdrawals of 5% of premium each year, cumulative. Offshore bonds roll up gross but gains are still taxable on a chargeable event. Trusts (absolute, discretionary, spousal bypass) affect control, IHT and probate.
Worked example
A 40% taxpayer pays £8,000 into a relief-at-source personal pension. The provider adds £2,000, giving £10,000 gross. Higher-rate relief is 40% × £10,000 = £4,000; £2,000 has already been given, so £2,000 is claimed through self-assessment.
Traps
The lifetime allowance is abolished - do not apply 55%/25% charges; do not mix up the LSA and LSDBA; do not confuse relief at source with net pay; offshore bonds are not tax-free on encashment.