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CII AF3 Exam Paper October 2014

CII AF3 Exam Paper October 2014

In this article, we take a detailed look at how you’d go about solving the first question of the recent CII AF3 Exam – useful information for CII AF3, J05 and R04 candidates.

Calendar Pages - Waiting for CII AF3 Results in DecemberThe October exams are over and now there’s just the painful wait until December to find out the results.  In the meantime, we’ve been putting our feelers out to find out what we can about the questions asked.

Question 1

It seems Question 1 went something like this:

Tim with no dependents had pension funds at 5 April 2006 of £1,950,000, 25% of which were in respect of tax-free cash (£487,500).

In May 2008 he crystallised a personal pension valued at £170,000. This was a BCE in 2008/9. He took the maximum permitted PCLS (25% x total value of BCE); the balance of the fund is in capped drawdown.

The uncrystallised funds (dated October 2014), held in SIPP, are valued at £2,350,000. Tim is planning to leave his entire estate to charity when he dies.

From what we’ve been told, here are the questions:

  1. Calculate, Tim’s maximum TFC (about 6 marks)
  2. Calculate, the amount Tim will have available to invest into drawdown after the TFC and LTA tax charge have been deducted. (about 10 marks)

Answer

Part a) of the question:

Protected TFC is £487,500
Max TFC today is £1.8/£1.5 x £487,500 = £585,000

Previous value of BCE (nos6 TFC):
LTA in 2008/9 = £1.65
TFC is always revalued up: £1.8/£1.65 x £170,000 x 25% (proportion of max TFC available, based on assumption in question) = 1.0909 x £170,000 x 25% = £46,363.64

Therefore, max TFC available is £585,000 – £46,363.64 = £538,636.36

Part b) of the question:

Calculate, the amount Tim will have available to invest in drawdown after the TFC and LTA tax charge have been deducted.

Primary protection factor: £1.95m/£1.5m = 1.3 or 1.95-1.5/1.5 = 0.3

Protected fund value October 2014 – £1.8m x 1.3 = £2.34m OR 1.95 x 1.2 = 2.34

Current fund value: £2.35m

Value of previous BCE – in today’s money:

The amount of lifetime allowance used up by Tim’s previous BCE is calculated by multiplying the amount of benefits crystallised (£170k) by £1.5m and then dividing by the SLA at the time of the previous BCE (1.65) – NB – Previous BCE’S in primary are revalued down.

£170k x 1.5/1.65 = £154,545.46

Therefore: £2.35m fund today PLUS £154,545.46 (he had used previously) = total value of benefits tested = £2,504,545.46

Current max protected = £2.34m

£2,340,000 (protected amount) less £2,504,545.46 (total value of funds now and previous BCE’s) = £164,545.46 excess over protected LTA

Taking whole amount as pension (capped drawdown) = 25% tax charge = £164,545.46 x 25% = £41,136.37 tax charge

Total SIPP fund today less LTA tax charge less TFC = amount going into capped drawdown = £2.35m less £41,136.37 tax charge Less max TFC available today which is = £538,636.36 (answer to q1(a)) = £1,770,227.27

The amount Tim will have available to invest into a drawdown pension = £1,770,227.27

AF3 is clearly a tough exam, and the two-part question we’ve looked at was a challenging start for anyone.  We hope you tackled it carefully and methodically, and in doing so, picked up most of the marks on offer.

For more help with your Pensions exams go to:

http://brandft.co.uk/drfp/r04.asp – for R04
http://brandft.co.uk/df/j05.asp – for J05
http://brandft.co.uk/advdf/af3.asp – for AF3

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