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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:

 

BCE Valuation
1 Drawdown pension Market value (£)
2 Scheme pension Scheme pension pa  x 20
3 Scheme pension increase above permitted maximum Additional increase x 20
4 Lifetime annuity entitlement Market value of fund used to purchase thelifetime annuity
5 Defined benefit test at age 75Member reaches age 75 with uncrystallised benefits Scheme pension entitlement x 20PlusAmount of lump sum
5A Test at 75 for drawdown pensionMember reaches age 75 having designated money purchase scheme assets for drawdown pension Current value (at 75) less value designated at outset of drawdown (Drawdown double test)
5B Test at 75 for uncrystallised money purchase funds The amount of any unused funds
6 Lump sum benefits The amount of the lump sum
7 Lump sum death benefit The amount of the lump sum death benefit
8 QROPS Transfer overseasQualifying recognised overseas pension scheme The amount of the transfer value
9 Any other Prescribed eventWhere certain payments are made to or in respect of a member that constitutes an event that is prescribed in law The amount prescribed in those regulations

 

Now…let’s use the mnemonic:

Benefit Crystallisation Events (BCE):

 

BCE Mnemonic
1 Drawdown pension  1 = I (1 looks like I; I for income)
2 Scheme pension  S = 2 (S looks like 2, for scheme)
3 Scheme pension increase above permitted maximum  3 = pee (p= permitted max)
4 Lifetime annuity entitlement  4 = A (4 looks like A, for annuity)
5 Defined benefit test at age 75Member reaches age 75 with uncrystallised benefits  5 = 75
5A Test at 75 for drawdown pensionMember reaches age 75 having designated money purchase scheme assets for drawdown pension  5 = 75
5B Test at 75 for uncrystallised money purchase funds  5 = 75
6 Lump sum benefits  Sexy 6 = pension lump sum, including TFC
7 Lump sum death benefit  7 = seven (film about 7 deaths)
8 QROPS Transfer overseasQualifying recognised overseas pension scheme  8 = sounds like Q8 = overseas
9 Any 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.

18 thoughts on “5 tips for calculating annual allowance

  1. Great article, I was thinking along these lines as well.

    One question though, is it possible to pass AF5 without having done AF1 or AF2, just AF3 and AF4?

    Would there not be quite large knowledge gaps?

    Regards

  2. Yes it is possible, if you understand the AF5 exam.

    1. Thanks John

  3. I was braced to buy into your full AF3 package (starting in Jan 17) but the changes have got me thinking. Shorter term, I want to be able to transact pension transfers (sooner rather than later actually); longer term, I want to get to Chartered but no huge rush.

    Diploma is all in place (incl R04 and R08), also PMI Auto Enrolment exam.

    Should I just crack on as planned or hold off for the new exam in July……

    It would be unfair to ask you for an answer but what factors should shape my decision making?

  4. Graham,

    If I was you – I’d maybe try the AF3 in April? It’ll be great prep for the AF7….and even when you pass the AF3 in April, I know you’ll want to have a go at the AF7?

    Buy a package that gives you access to AF3 and AF7 over 12 months?
    Who’ll be doing that come 1 December 2016?

  5. Come back and see us on 1 December for a look at the options.
    But, seriously, if the permissions is what you are after – then get started asap; don’t think sitting AF7 means you’ll pass?

    Start getting prepared asap.
    2017 = pension permissions and sooner rather than later, means giving AF3 a shot, with AF7 on the horizon ….

  6. Thanks John. Okay count me in, I shall be in touch on 1 December.

  7. As ever, John’s encouraging comments to help Graham were spot on: likewise the resulting good intent of Graham.

    Too little supply by advisers, too great a demand and good advice needed out there for DB holders means many a financial planner should up their game and cease the opportunity to help the public while the going is good.

  8. Do I have time to register and sit AF3 by the April Deadline?

    1. Very unlikely – not impossible, but a lot of work.

  9. Hi John

    I am Diploma level 4 but want to get licenced for pension transfers and to be honest understand them better too. What single exam could I take to do this through the IFS or should I take a combination or wait until 2018 exams set up?

  10. Neil, you can do this through the iFS AwPETR exam ….but, that is now closed for June – next exam is December.

    The AF7 in October (CII) is the next chance..

  11. John, I’ve just done my AF1 and AF5, hoping for positive results in June to add to my AF4 and AF6 and complete my level 6. I too am looking to get the pension transfer specialism, but have been a bit put off AF3 by its hideous c 35% pass rate over the last two years. What would you suggest for a route? I was thinking of going down the IFS road due to the part coursework assessment and lower pass mark, plus the fact that I’m a bit wary of sitting a brand new exam with no past exam guides to provide a reliable guide on content. What do you think?

    1. Hi Andrew.
      The iFS AwPETR is a great little exam. The next intake is August for the exam in December.

      The AF7 is going to be very similar to the iFS: lots of critical evaluation and critical analysis AND some good strong technical questions.
      It’s going to be a great little exam.

      The first sitting is on 10th October.

      Why don’t you do both?

  12. Truthfully, I’m not sure I want to bother sitting two exams which are effectively a duplicate of one another as there’s unlikely to be any practical benefit. Would rather just pick the best bet and get it done. Which was why I was thinking IFS as the pass mark is lower and there are (I assume) past papers to go off. Do you have any idea of the approximate pass rates for the IFS one – they don’t appear to publish them like the CII do.

    1. Indeed.
      It depends how important it is for you. I’ve seen a few people ‘double-up’ to give them a double chance.

      There are no pass rates issued by iFS, nor any past papers (apart from the odd exemplar) – and the pass mark is low to mirror a more academic marking schedule. I’d forget that: a pass is a pass.

      The absolute key thing you need to pass the iFS AwPETR exam is an ability to critically evaluate and analyse a pension transfer – across the whole syllabus…

      Good luck, Andrew.

  13. HI John

    im bit confused here. i hold a MSc in Finance. Please let me know where should i start. Do I need to complete the Diploma and Advanced Diploma both prior to the charted status?? sorry if i sound stupid..

    1. Ravin

      email me at this address and let me know how many financial services exams you have sat?
      hello@expertpensions.co.uk

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