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   Relevant benefits    Restricted activities rules    Retirement age
   Relevant earnings    Retail price index    Revaluation
   Retirement benefits    Retirement annuity policies    RPI escalation

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Relevant benefits
As specified in section 612 of the Income and Corporation Taxes Act 1988 (ICTA 88) and practice notes (IR12 (1997)) relevant benefits are used to describe the benefits derived from and subject to taxation governing an occupational pension scheme. Relevant benefits will be any financial gain to the scheme member that is related to retirement benefits, or the ending of the period of employment.

This employment could include continuous service whereby the member has worked for a number of connected employers pension scheme. Death in service benefit is also a relevant benefit although excluded is accidental death or disability during employment.


Relevant earnings
As defined in the Income and Corporation Taxes Act 1988 (ICTA 88) relevant earnings include any income that is chargeable to UK tax as:

Schedule E earnings including benefits in kind;
Income from a property related to the taxable emoluments of employment;
Income chargeable to income tax under schedule D after deducting business expenses arising from a trade, profession or vocation as an individual or partnership;
Income from patent rights and treated as earned income;
Income from certain commercial lettings of holiday accommodation assessed for tax after 1995/96 under schedule A.


Restricted activity rules
The Financial Services and Markets Act 2000 (FSMA) requires a designated professional body to make rules, which have to be approved by the Financial Services Authority (FSA). An exempt professional firm must carry on, and hold itself out as carrying on, only regulated activities allowed by these rules.


Retail price index
A cost of living index has been published since July 1914 and the retail price index (RPI) was first introduced in 1947. The RPI is expressed as a percentage of price levels at a given time relative to a previous date, called the reference date. This date has changed five times since 1947 and the base point of 100 is currently January 1987.

The Office for National Statistics (ONS) compiles the RPI, which is the main domestic measure of inflation in the United Kingdom and measures the average change each month in the prices of goods and services purchased by most households in the UK. Although the RPI covers the whole of the UK, expenditure of certain higher income households and pensioners that are mainly dependent on the state basic pension are excluded.

To compile the RPI the prices of over 600 separate goods and services are regularly measured in 146 locations throughout the United Kingdom. In total some 20,000 outlets are selected producing 130,000 separate price quotations that are combined to produce individual indices for each year. These item indices are combined as a Laspeyres price index to create the UK retail price index.

The Laspeyres price index is weighted using items from the family expenditure survey and are updated each year. The basket of goods and services are also revised each year and the list of outlets and locations are revised and rotated every five years.


RPI escalation
For an individual that retires and wants a guaranteed income for the rest of their life from a pension annuity (compulsory purchase annuity) connected with a pension fund or a purchased life annuity, RPI escalation can be added to maintain its value in the future, it needs to rise with inflation.

This means that the annuity must be indexed-linked to the Retail Price Index (RPI). Alternatively, the pension annuity could also be escalated by limited price indexation (LPI) which is inflation rises limited to a maximum of 5% growth and this basis is used for any portion of the pension fund containing protected rights benefits.

It is also possible to have fixed rate annuity rather than RPI escalation. The cost of RPI escalation depends on inflation and therefore could be cheaper or more expensive than a fixed rate escalation, but certainly more expensive than a level annuity.

At retirement the individual can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.

Where the annuitant wants the high income of level annuities but growth in the income, a with profits annuity could be an option. By selecting an Anticipated Bonus Rate (ABR) of between 1.0% and 3.0% the annuitant will receive more income than escalating rates and the potential for income growth when declared bonuses are greater than the ABR.


Retirement age
In an occupational pension scheme such as a final salary pension, a member must retire and take the retirement benefits at the retirement age selected by the scheme trustees. There will be the possibility for early retirement but the member will pay a penalty for doing so, usually expressed as a percentage reduction of benefits for each year of early retirement. Reductions in the pension income would apply which reflect the greater period of time the income would be in payment.

Retirement before the age of 50 is only possible if an individual has a special occupation as agreed by the Inland Revenue, such as a professional sportsman or if the member is part of the Armed Forces Pension Scheme or because of incapacity.

A member of a personal pension or stakeholder pension will be able to select their retirement age, which must be between 50 and 75 and at retirement age the individual can use the pension fund to buy an annuity where the annuitant has the option to use an open market option to search for the highest pension annuities. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates. At the age of 75 the scheme member must purchase a pension annuity (also called a compulsory purchase annuity).


Retirement annuity policies
Personal pensions were introduced from 1 July 1988 but prior to this date an individual could make contributions to retirement annuity policies (RAPs). The RAPs are approved under Chapter III of Part XIV of the Income Corporation Taxes Act 1988. Being very similar to personal pensions, RAPs contributions qualify for full tax relief and the pension fund will grow free of tax on investment income and capital gains tax. There is also the possibility for commutation to a tax free lump sum at retirement age.

However, retirement age is restricted to between 60 and 75. Both carry back relief and carry forward relief is available and retirement annuity policies are unaffected by the restrictions imposed on personal pensions from 6 April 2001. Any existing RAPs member can continue to make contributions towards them until their actual retirement age.


Retirement benefits
The scheme member may have a number of retirement benefits at retirement age depending on whether it is a defined benefits scheme, defined contribution scheme, public service scheme or private sector scheme. In general a pension income could be provided by a compulsory purchase annuity, a pension drawdown or guaranteed by statute if a public service scheme.

Final salary pensions usually provide spouses and dependents pension automatically in the retirement benefits. In addition for a defined benefits scheme the pension income may include the benefit of escalation to protect against inflation such as limited price indexation (LPI).

The member of a defined contribution scheme such as a stakeholder pension or SIPP could include spouses pension rights or a pension income for other dependents such as children, provided on the death of the member. A spouse's benefit would be a proportion, typically either 50% or 100% of the annuity income. For a pension annuity the income may include the benefit of escalation to protect against inflation such as the retail price index (RPI) or a fixed escalation of 3% or 5%.

At retirement the individual can use the pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity, adding all the features necessary such as spouse's income, escalation and frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.


Revaluation
Applying specifically to an occupational pension scheme, revaluation refers to indexing benefits relating to early leavers. This means a scheme member will have their preserved benefits revalued in line with the retail price index (RPI) with a maximum of 5.0% per annum to protect against inflation.

Since the Pension Schemes Act 1993 (PSA 93) the guaranteed minimum pension (GMP) part of a contracted out schemes preserved benefits, has been subject to a minimum level of revaluation that applies to both private sector employers and public services schemes. GMP accrued from 6 April 1993 up to 5 April 1997 of preserved benefits must have a revaluation equal to the average earnings index (AEI) of 7.0% and from 6 April 1997 this is reduced to the RPI or a maximum of 5.0% a year.
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Annuity Rates
Single
  55 £4,217  
  60 £4,691  
  65 £5,394  
  70 £6,194  
Joint
  55 £4,299  
  60 £4,745  
  65 £5,258  
  70 £5,973  
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