Individual and state pension provision, retirement products and decumulation
This domain covers the state pension, private provision and decumulation. The exam tests the new State Pension rules, auto-enrolment, and the tax and product rules for taking benefits.
State and individual provision
- New State Pension: 35 qualifying years for the full rate; at least 10 to receive anything; pro-rated between. Full rate £221.20 a week (2024/25). State Pension age is 66, rising to 67 and 68.
- Contracting out ended in 2016; the old state scheme rules still affect some transitional calculations.
- Auto-enrolment: eligible jobholders contribute at least 8% of qualifying earnings between £6,240 and £50,270, with at least 3% from the employer.
Decumulation
- Pension commencement lump sum: normally 25% of fund, capped by the lump sum allowance (£268,275 in 2024/25).
- Annuities convert capital into guaranteed income; drawdown keeps the fund invested; UFPLS takes 25% tax-free and the rest taxed as income.
- Taking income can trigger the money purchase annual allowance (£10,000), reducing future tax-relieved contributions.
Worked example
A member has 28 qualifying years and reaches State Pension age. Full rate is £221.20. Pension = 28/35 × 221.20 = £176.96 a week. With a £400,000 DC fund, 25% is £100,000, below the £268,275 allowance, so the full £100,000 is tax-free; the remaining £300,000 stays in drawdown.
Traps
Assuming 35 years is always enough; confusing the lump sum allowance with the annual allowance; ignoring the MPAA; treating drawdown as risk-free; forgetting that annuities can be impaired-life enhanced.