Pension Income & Drawdown

• Topic 01

  Pension Income & Drawdown

  27 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What are the main options for converting a DC pension pot into retirement income?

   • A
     Annuity, flexi-access drawdown, Uncrystallised Funds Pension Lump Sum (UFPLS), or a combination of these
     Correct answer
   • B
     Only an annuity — DC pensions must be converted to guaranteed income at retirement
   • C
     Transfer to a DB scheme, annuity, or leave the fund invested until age 75
   • D
     Annuity, ISA transfer, or leave the fund with the employer
   Explanation

   Since the Pension Freedoms introduced by the Taxation of Pensions Act 2014 (effective April 2015), DC pension holders have multiple options at retirement: (1) purchase an annuity to convert the pot to guaranteed income; (2) move into flexi-access drawdown, retaining investment exposure and drawing income flexibly; (3) take Uncrystallised Funds Pension Lump Sums (UFPLS) directly from the uncrystallised pot; or (4) use a combination of these approaches.

2. What is an annuity and how does it differ from flexi-access drawdown?

   • A
     An annuity is a temporary arrangement that pays income for 5 years; drawdown pays income for life
   • B
     An annuity and drawdown are identical products — both offer flexible income with a guaranteed minimum
   • C
     Drawdown requires the fund to be fully spent within 10 years; an annuity has no such time limit
   • D
     An annuity converts a pension pot into a guaranteed income for life by paying an insurer; flexi-access drawdown keeps the fund invested and allows flexible income withdrawals
     Correct answer
   Explanation

   An annuity is an irrevocable exchange: the pension pot is given to an insurance company in return for guaranteed income for life (or a fixed term). The insurer bears longevity and investment risk. In flexi-access drawdown, the fund remains invested under the individual's ownership and control; any level of income can be drawn at any time, but investment and longevity risk remain with the individual.

3. A client designates £200,000 to flexi-access drawdown and takes only the 25% PCLS without drawing any income. Has the MPAA been triggered?

   • A
     Yes — designating funds to flexi-access drawdown automatically triggers the MPAA at the point of designation
   • B
     No — the MPAA is triggered only when the first flexi-access drawdown income payment is taken; taking only the PCLS at designation does not trigger it
     Correct answer
   • C
     No — but the MPAA will be triggered automatically 12 months after designation even if no income has been drawn
   • D
     Yes — the MPAA is triggered when £50,000 (25% of £200,000) is received as a lump sum because this exceeds the £10,000 threshold
   Explanation

   The MPAA trigger is specifically the first income withdrawal from the flexi-access drawdown fund. Designating the fund to drawdown and taking the PCLS (Pension Commencement Lump Sum — the tax-free cash) does not trigger the MPAA. In this case, the client has crystallised £200,000, taken £50,000 as tax-free cash, and left £150,000 in the drawdown fund uninvested for income. No income has been drawn, so the MPAA has not been triggered and the client can still contribute up to the full Annual Allowance.