Sexy 6 is Tax free cash; a BCE mnemonic for your CII AF3 exam

red-rounded-square-with-number-6-hiThis is week 5 of our CII AF3 study plan; pension income options – which is all about BCEs (benefit crystallisation events) and their valuation. This is an essential subject for the CII AF3 exam, if you want to pass.

The J05 pension income option is a great exam to do alongside the AF3 exam, because the J05 exam is what we are learning this week! And the J05 exam is all about BCE’s – understanding that they are and when they occur and how you value each one; it’s a key part of the CII AF3 exam. The exam will ask you a question about pension income options, in the April 2013 CII AF3 exam [click here] it was phased retirement and was worth a HUGE 20 marks. That is a BIG part of your plan to pass this exam.

If you can’t list them straight of the top of your head 1-to-9 and value them, I’ve a little mnemonic for you to learn and you’ll never forget them again! I promise.

But first let’s clarify what each BCE is and what the valuation is:

 

BCEValuation
1Drawdown pensionMarket value (£)
2Scheme pensionScheme pension pa  x 20
3Scheme pension increase above permitted maximumAdditional increase x 20
4Lifetime annuity entitlementMarket value of fund used to purchase thelifetime annuity
5Defined benefit test at age 75Member reaches age 75 with uncrystallised benefitsScheme pension entitlement x 20PlusAmount of lump sum
5ATest at 75 for drawdown pensionMember reaches age 75 having designated money purchase scheme assets for drawdown pensionCurrent value (at 75) less value designated at outset of drawdown (Drawdown double test)
5BTest at 75 for uncrystallised money purchase fundsThe amount of any unused funds
6Lump sum benefitsThe amount of the lump sum
7Lump sum death benefitThe amount of the lump sum death benefit
8QROPS Transfer overseasQualifying recognised overseas pension schemeThe amount of the transfer value
9Any other Prescribed eventWhere certain payments are made to or in respect of a member that constitutes an event that is prescribed in lawThe amount prescribed in those regulations

 

Now…let’s use the mnemonic:

Benefit Crystallisation Events (BCE):

 

BCEMnemonic
1Drawdown pension 1 = I (1 looks like I; I for income)
2Scheme pension S = 2 (S looks like 2, for scheme)
3Scheme pension increase above permitted maximum 3 = pee (p= permitted max)
4Lifetime annuity entitlement 4 = A (4 looks like A, for annuity)
5Defined benefit test at age 75Member reaches age 75 with uncrystallised benefits 5 = 75
5ATest at 75 for drawdown pensionMember reaches age 75 having designated money purchase scheme assets for drawdown pension 5 = 75
5BTest at 75 for uncrystallised money purchase funds 5 = 75
6Lump sum benefits Sexy 6 = pension lump sum, including TFC
7Lump sum death benefit 7 = seven (film about 7 deaths)
8QROPS Transfer overseasQualifying recognised overseas pension scheme 8 = sounds like Q8 = overseas
9Any other Prescribed eventWhere certain payments are made to or in respect of a member that constitutes an event that is prescribed in law 9 lives….anything else!

 

  • The designation of assets from a money purchase arrangement to provide payment of a drawdown pension (‘1’ looks like an ‘I’ for income)
  • The member has an entitlement to a scheme pension  (‘2’ looks like an ‘S’ for scheme pension)
  • There is an increase in entitlement to the scheme pension beyond the permitted margin (‘3’ is pee….permitted max)
  • The member becomes entitled to a lifetime annuity purchased under a money purchase arrangement (‘4’ looks like ‘A’ for annuity)
  • The member reaches age 75 with uncrystallised scheme pension and/or lump sum benefits from a defined benefit scheme (‘5’ reminds you of ’75’)
  • The member reaches age 75 having previously designated money purchase scheme funds as available for the payment of a drawdown pension (‘5’ reminds you of ’75’)
  • The member reaching age 75 when there is a money purchase arrangement relating to the individual under any of the relevant pension schemes.
  • The member become entitled to a relevant lump sum (six is like sex… Sexy is good… Lump sum is good)
  • A relevant lump sum being paid in respect of the members death either from a defined benefit scheme or from the uncrystallised funds of a money purchase arrangement (7 is a film involving lots of death [7 deaths to be precise] = BCE 7)
  • A transfer to a QROPS (8 sounds like Kuwait, which is overseas)
  • An event prescribed in the relevant legislation (any event described – 9 lives)

 

I hope you find that helpful to remember – once you can write them down and understand them you can then start working out where the valuations fit in – EVERY single question you get on pension income options will involve a BCE explanation or calculation; and with all due respect, if you are serious about your AF3 exam study – learn it. And build your J05 learning around it.

It’s been 5 weeks since we launched our study plans and the response has been fantastic. It’s been a busy year for us all at expertpensions and the response to our weekly study questions and answers and workshops has been nothing short of amazing:

‘’The material is first class and am really enjoying the study. Coupled with the Q&As and video support, it’s a brilliant combination that suits my style of learning. Pics and colour pens are very effective as I can recall diagrams readily rather than the full monty explanation. “Don’t make me laugh, give me a graph” works well.’’

Mick Murphy certainly likes the video format and we’ve included a full question and answer video for you to have a look at this week – to help you understand how the video support works on our weekly study plan. Mick is following the weekly study plan and joining us on the workshop – if you want to do the same, we’ve only got 4 places left having already fully-booked one course [click here for more information]

Here is our question and answer video tutorial for this week: pension income options

And finally for this week, a couple of months back I was asked to write an article on the important drawdown changes that came into effect earlier this year – another key part of this week’s study. If you’d like a copy of that article – please just download your copy with your email address. You might even find it useful in your day job, if you get involved in drawdown regularly.

[sdfile url=”http://pxlbx.it/12D42Tr”]

There are 10 weeks until the exam and you still have time to start, but whatever you do – just do it. Just get the books and your pen and start doing some watching or some reading – whether you are on a beach this week or in your office; making a start is sometimes the hardest thing to do…

Good luck and see you next week, when we’ll be showing you the TVAS triangle and starting our discussions on CETVs.

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Comments

  1. Tony says

    Hi John

    Your videos/articles are great. You must put in lots of hard work.

    At 18:20 for the video above, it talks about BCE 5A (test at 75 for previously designated DD funds not been secured by annuity or scheme pension). I’m not 100% sure, but I think the tax charge is 25% not 55% because no lump sum is physically paid out, can you clarify? Thanks,

    Tony

  2. says

    Tony,

    yes – more to do with the words used than the principle; there is a 55% tax charge on LTA excess, but where it is taken as income it is 25% (55% x 100 = 45; 25% x 100 = 25 and then 40% x 75 = 45) – works out same in either case.