Pensions and Retirement Planning
Core concepts
Retirement planning involves building a fund during working life and converting it into income later. Candidates must understand the main pension types: state pension (based on qualifying years of contributions/credits), occupational schemes - defined benefit (DB) (promised income based on salary and service) and defined contribution (DC) (fund value depends on contributions and investment returns) - and personal pensions, including self-invested personal pensions (SIPPs) and stakeholder pensions.
Learn tax relief on contributions (often at the marginal rate, subject to annual and lifetime allowances), employer contributions, and the annual allowance including tapering for high earners. Understand the money purchase annual allowance once benefits are flexibly accessed. Know the options at retirement: annuity purchase, flexi-access drawdown, uncrystallised funds pension lump sum (UFPLS), and the tax-free lump sum (commonly 25% of the fund, subject to the lump sum allowance).
Traps
A frequent trap is confusing DB (investment and longevity risk borne by the scheme/employer) with DC (risk borne by the member). Watch for questions about the normal minimum pension age (currently 55, rising to 57 in 2028), and about the tax treatment of withdrawals - only the tax-free portion escapes income tax. Another trap is assuming the state pension is means-tested; it is contribution-based.
Worked rule of thumb
For a DC pot of £200,000, a 25% tax-free lump sum is £50,000, leaving £150,000 to provide income. At a 4% withdrawal rate that is roughly £6,000 a year before charges - a useful sanity check against annuity quotes.