Pensions
Core concepts
Pension questions test the accumulation vs. decumulation distinction. In accumulation, contributions build a fund with tax relief (subject to limits and annual/lifetime allowances); in decumulation, the fund is converted to income via annuity, income drawdown, or lump sum options.
Know the main scheme types: defined benefit (final salary/career average) - employer bears investment risk and promises a formula-based pension; defined contribution/money purchase - member bears investment risk and the fund buys benefits. Also understand state pension basics (qualifying years, deferral), auto-enrolment (eligible jobholders, minimum contribution split between employer and employee), transfers (including safeguards against scams), and death benefits (lump sum vs. dependant's pension).
Traps in questions
- Confusing tax relief on contributions with tax on withdrawals - relief is on the way in, tax often on the way out.
- Assuming DB and DC risks sit with the same party: in DB the employer/scheme bears investment and longevity risk; in DC the member does.
- Mixing annuity (guaranteed income, often irreversible) with drawdown (flexible, invested, can run out).
- Ignoring annual allowance and lifetime allowance caps when computing relief.
- Forgetting that deferring the state pension usually increases the eventual weekly amount.
Worked example / rule of thumb
Rule of thumb: DB pension ≈ accrual rate × years of service × reference salary. Example: 1/60th accrual, 30 years, final salary 60,000 → 30 × (1/60) × 60,000 = 30,000 a year. For DC, the fund is whatever contributions plus growth produce - never promise a formula payout.
When a question describes a guaranteed formula based on salary and service, it is DB; when it describes a pot that depends on investment performance, it is DC.