R04 Annuities and scheme pensions: free practice questions

1. Question 1 of 5

   What is an advantage to a scheme of paying a scheme pension directly from its assets?

   Option A: It guarantees the scheme's long-term funding positionOption B: It transfers the longevity risk to an insurerOption C: It keeps the capital invested and retains any mortality gainOption D: It removes the need for administration

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   The answer is C: It keeps the capital invested and retains any mortality gain

   Paying directly avoids an immediate capital outflow, keeps funds invested and keeps any gain if pensioners die early, but the scheme keeps longevity and investment risk.

   Why the other options are wrong

   A

   It doesn't guarantee funding.

   B

   Longevity risk stays with the scheme.

   D

   It adds administration.

2. Question 2 of 5

   How does the maximum guarantee period differ between a scheme pension and a lifetime annuity bought now?

   Option A: Ten years for bothOption B: Five years for a scheme pension, ten for an annuityOption C: Ten years for a scheme pension; no HMRC limit for an annuityOption D: No limit for either

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   The answer is C: Ten years for a scheme pension; no HMRC limit for an annuity

   Scheme pension guarantees are capped at ten years. For lifetime annuities from 6 April 2015 HMRC sets no limit, though insurers impose their own.

   Why the other options are wrong

   A

   The annuity limit was removed from April 2015.

   B

   Scheme pensions allow up to ten years.

   D

   Scheme pensions are limited to ten years.

3. Question 3 of 5

   If demand for gilts rises, what typically happens to annuity rates?

   Option A: They stay the sameOption B: They fall, as gilt prices rise and yields fallOption C: They rise for older buyers onlyOption D: They rise, as higher prices give more income

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   The answer is B: They fall, as gilt prices rise and yields fall

   Higher demand pushes gilt prices up and yields down, so insurers can offer less income.

   Why the other options are wrong

   A

   Rates respond to yields.

   C

   The effect isn't limited by age.

   D

   Higher prices mean lower yields and lower rates.

4. Question 4 of 5

   Which lifetime annuity triggers the MPAA?

   Option A: One with a level incomeOption B: One linked to RPIOption C: One with a ten-year guarantee and protectionOption D: One whose income can fall by any method in the contract

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   The answer is D: One whose income can fall by any method in the contract

   A flexible lifetime annuity, whose income can decrease beyond the prescribed methods, triggers the MPAA. Conventional annuities don't.

   Why the other options are wrong

   A

   Level income annuities are conventional.

   B

   RPI-linked annuities are conventional.

   C

   A guarantee doesn't make it flexible.

5. Question 5 of 5

   Why is a unit-linked annuity seen as riskier than a with-profits annuity?

   Option A: It has no guarantee periodOption B: It can't be bought after 75Option C: Its income isn't smoothedOption D: It can only be single life

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   The answer is C: Its income isn't smoothed

   With-profits bonuses are smoothed by the actuary; unit-linked income follows unit values directly.

   Why the other options are wrong

   A

   Guarantees may be available.

   B

   Age 75 isn't a bar.

   D

   Joint life may be possible.

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