R04 Main pension scheme types: free practice questions

1. Question 1 of 5

   Which three factors determine the pension from a defined benefit scheme?

   Option A: The member's NIC record, earnings and State Pension ageOption B: Contributions paid, investment growth and the member's ageOption C: Fund value, annuity rates and the charges taken by the providerOption D: Pensionable service, pensionable remuneration and accrual rate

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   The answer is D: Pensionable service, pensionable remuneration and accrual rate

   A DB pension is service multiplied by the accrual rate multiplied by pensionable remuneration, for example 1/60th of salary for each year.

   Why the other options are wrong

   A

   These factors relate to the State Pension.

   B

   Contributions and growth determine a DC fund.

   C

   Fund value and annuity rates drive DC outcomes, not DB.

2. Question 2 of 5

   A scheme accrues 1/60th of final pensionable salary for each year of service. Lisa retires after 24 years with final pensionable salary of £45,000. What is her pension?

   Option A: £27,000 a yearOption B: £22,500 a yearOption C: £18,000 a yearOption D: £11,250 a year

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   The answer is C: £18,000 a year

   24/60 x £45,000 = £18,000 a year.

   Why the other options are wrong

   A

   £27,000 would need 36 years at 1/60th.

   B

   £22,500 would need 30 years at 1/60th.

   D

   £11,250 uses 1/96th or 15 years.

3. Question 3 of 5

   What is a targeted money purchase scheme?

   Option A: A DB scheme guaranteeing a minimum fund at retirementOption B: A scheme that pays a cash sum on death only, with no pensionOption C: A State scheme designed to top up the pensions of low earners in workOption D: A DC scheme funded to target a set benefit, such as part of final salary

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   The answer is D: A DC scheme funded to target a set benefit, such as part of final salary

   It's a hybrid: contributions are set to target a level of benefit, often a fraction of final salary, but the outcome isn't guaranteed.

   Why the other options are wrong

   A

   The benefit is targeted, not guaranteed, so it isn't DB.

   B

   It's a retirement scheme, not a death-only arrangement.

   C

   It's an occupational arrangement, not a State scheme.

4. Question 4 of 5

   How is an uncrystallised funds pension lump sum (UFPLS) taxed?

   Option A: All of it is paid tax-free as a cash lump sum to the memberOption B: It is treated as a capital gain and is subject to CGT insteadOption C: All of it is taxed at a flat rate of 45% at source by the schemeOption D: Up to 25% is tax-free; the rest is taxed as income via PAYE

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   The answer is D: Up to 25% is tax-free; the rest is taxed as income via PAYE

   A UFPLS comes from uncrystallised funds. Generally a quarter is tax-free and the balance is taxed as pension income through PAYE.

   Why the other options are wrong

   A

   Only part, usually up to 25%, is tax-free.

   B

   Pension lump sums are subject to income tax, not CGT.

   C

   The taxable part is taxed at the member's marginal rate, not a flat 45%.

5. Question 5 of 5

   What is a successor in relation to flexi-access drawdown?

   Option A: The member's spouse, who takes over the member's drawdown automaticallyOption B: Someone nominated by a dependant or nominee to carry on their drawdownOption C: The next scheme administrator after a scheme mergerOption D: Anyone named on the member's own expression of wish form

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   The answer is B: Someone nominated by a dependant or nominee to carry on their drawdown

   A successor is nominated by a dependant, nominee or previous successor to carry on their flexi-access drawdown, which becomes successor's drawdown.

   Why the other options are wrong

   A

   A spouse is usually a dependant, not a successor.

   C

   A successor is an individual beneficiary, not an administrator.

   D

   People nominated by the member are nominees.

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