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Tactical manoeuvres

The Chartered Insurance Institute and LJ Financial
Planning director Paul Heath reveal exam tactics
and making specific preparations. This month, the
focus is on J05, the diploma on pension income options

Passing the pension income options unit of the CII’s diploma in financial planning – known as J05 – demonstrates to clients that you understand these important areas:

  • The process of decumulating pension funds and the main issues for clients and advisers
  • The main choices facing members of pension schemes during decumulation
  • The features, risks and tax treatment of secured and unsecured pension options and phased retirement Among those elements that candidates have to grapple with to achieve the necessary pass mark, there are exam tactics and specific preparation that can serve them well. Here, we will tackle the areas of the current syllabus that tend to present the most frequent problems.

2.2, 2.6, 3.3 & 4.4: Death benefits
Benefits payable on death after crystallisation are a core area of this subject and tested in some way in many sittings of the paper. A good level of detail is required for these answers, including the form of the death benefits, for example, lump sum or income, who would receive
it and the tax treatment.

1.2 & 1.6: lifetime and annual allowances, including transitional reliefs and valuation factors & lifetime allowance charge
Most papers contain a calculation relating to the lifetime allowance and the lifetime allowance charge. Good marks can be obtained through calculation questions and you can prepare fully using examples within study material and past exam guides. Show clearly all workings and steps in calculations to maximise your opportunity to gain marks.

1.7: trivial commutation
Questions relating to this feature regularly, relating to individuals, dependants and scheme wind-ups. Each has its own criteria so be sure of the differences.

2.5: required features of a scheme pension, including escalation for defined-benefit schemes
This area of the syllabus includes the rules around statutory minimum escalation for scheme pensions – an important, high-mark area requiring
detailed answers. Escalation is regularly confused with indexation which relates to deferred benefits pre-crystallisation. Statutory escalation
relates to post-crystallisation pension benefits, with different elements having different minimum requirements, not to be confused with schemespecific requirements which may be more generous.

2.7: impact of longevity, economic and other factors on annuity rates
To obtain marks when asked how something is affected, for example, annuity rates, answers should specify how it changes, for example,
increases or decreases rather than just saying that it “changes”.

3.3 & 4.4: the benefits payable on death, including the inheritance tax position
This requires a knowledge of HMRC rules surrounding when inheritance tax is payable and how it is calculated. Although a complex area, only
a basic knowledge is needed to gain good marks. Candidates can confuse the answers for how it is calculated and why it may be payable, so read the question carefully.

3.4: use of income withdrawal as a tax planning tool
An outline knowledge of the application and mechanics of a spousal bypass trust for inheritance tax planning and the use of flexible income for income tax planning is generally sufficient.

Be aware what information is carried forward to the new income-drawdown provider from the existing plan and what is not when a plan is to be switched to another provider

3.9: drawdown to drawdown transfers
Candidates should be aware what information is carried forward to the new incomedrawdown provider from the existing plan and what is not when a plan is to be switched to another provider

4.1: main structure and features of phased retirement – lump-sum and income payments, the calculation of total income
Typically, questions require calculating the minimum fund or number of segments needed to provide a specified income level. Candidates should convert all income figures to either gross or net before attempting the calculation and show all steps to gain good marks

5.0: understanding in detail the features, risks and tax treatment of the alternatively secured pension at age 75
In view of the proposed changes, it is unlikely that questions will be asked regarding alternatively secured pension in any papers in the foreseeable future.

6.0: understand the use of the critical yield in advising on withdrawal and its implications for investment
Candidates must understand the difference between critical yields A & B, how they are calculated, the different methods of structuring income withdrawal and the appropriate investment strategies linked to them. Knowledge of the four main asset classes and why they would be used within withdrawal strategies and an understanding of mortality drag and mortality gain is essential.

7.0: understand the benefits available when an investor is in ill health
Although a small area of the syllabus, it is tested in some form on every paper, requiring knowledge of the rules and requirements for ill-health
retirement and serious illhealth retirement and how the lifetime allowance is applied.

8.0: understand the state retirement benefits available
As this exam subject is based on retirement income, candidates should generally concentrate their studies around state benefits which may be provided after retirement.

9.1: the choice between the different methods of taking pension income
Candidates should understand the benefits and drawbacks of secured pensions, unsecured pensions and phased retirement.

9.5: the importance of reviews for clients using unsecured pension
You need to understand why a review may take place and what information would be required for the review.

An essential area of preparation is the use of past exam guides and it is vital to read the questions carefully and understand what is being asked before attempting a question.


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