Friday Five Focus on Pensions – 5 Questions in 5 Minutes – 17 Oct 2025

Friday Five Focus on Pensions – 5 Questions in 5 Minutes Every Friday

What’s this all about?

Each week, we ask questions relating to one of these topics: Investments, Taxation, Pensions, Protection, or Regulation. This week, our Friday Five is relevant to Pensions; this is useful as you prepare for the CII’s R04, AF7, or J05 exams. The challenge is for you to answer them in 5 minutes. Answers at the bottom of the page.

Questions

IMPORTANT! These questions relate to examinable tax year 2025/26, examinable by the CII until 31 August 2026.

1. Sarah is retiring after 20 years’ service in a 1/60th defined benefit pension scheme. Her final pensionable salary is £48,000. Sarah can commute part of her pension for a pension commencement lump sum (PCLS) of 3/80th of final pensionable salary for each year of service. The commutation factor is 12:1. Should Sarah take all of her PCLS entitlement, her reduced pension will be
   1. £12,000 p.a.
   2. £13,000 p.a.
   3. £15,000 p.a.
   4. £16,000 p.a.

2. As a new member of a private sector defined benefit scheme, the accrual of Mary’s pension commencement lump sum (PCLS) at retirement will be
   1. determined by the scheme rules.
   2. 3/80 x salary x years of service.
   3. 3/80 x fund x years of service.
   4. 25% x fund value.

3. Joyce is a member of an occupational pension scheme, which is receiving employer national insurance savings. This is an indication that
   1. her scheme is a defined benefit one.
   2. it contains an element of guaranteed minimum pension (GMP).
   3. she is making her contributions via the net pay method.
   4. she is using a salary sacrifice arrangement.

4. Why might an employee view a contract-based pension scheme as a less valuable benefit than a trust-based pension scheme?
   1. Basic rate tax relief on contributions is not obtained immediately but instead via self-assessment.
   2. Early leavers lose employer contributions in the event of transfer within 2 years.
   3. Because the scheme has been outsourced to a third party and does not provide members with the protection of trustees.
   4. Because the scheme is unlikely to offer drawdown options at retirement.

5. Craig is a UK ex-pat resident in Portugal. He had no lifetime allowance protection. During the 2025/26 tax year, he transfers his UK pension scheme valued at £1,000,000 to a Lisbon based scheme which meets the definition of a QROPS. This would mean that he would be subject to
   1. no tax charge.
   2. a 25% tax charge.
   3. a 40% unauthorised payment charge.
   4. UK income tax at his marginal rate.

Answers

1. B; See R04 Study Text, Chp 5; Rationale: Sarah’s entitlements are as follows: Maximum pension entitlement = 20 x 1/60 x £48,000 = £16,000 or Maximum PCLS entitlement = 20 x 3/80 x £48,000 = £36,000 (plus a reduced pension). As the commutation factor is 12:1, the maximum pension is reduced by £1 for each £12 of PCLS taken. So, if Sarah takes the maximum PCLS, her pension is reduced by (£36,000/12 =£3,000). Therefore, her reduced pension is £16,000 – £3,000 = £13,000.
2. A; See R04 Study Text, Chp 1; Rationale: The accrual of Mary’s PCLS under her private sector defined benefit scheme will depend on the scheme rules.
3. D; See R04 Study Text, Chp 2; Rationale: Employer national insurance contributions can be rebated into a pension where a salary sacrifice arrangement is being used. The type of scheme being used is irrelevant, though the rebate would only be of benefit to defined contribution members with a pension pot. Guaranteed minimum pension is not relevant and relief-at-source contributions do not attract employer national insurance rebates.
4. C; See R04 Study Text, Chp 6; Rationale: A contract-based scheme is outsourced to a third party, whilst a trust-based scheme has the protection of the trustees. Basic rate tax relief at source, the option to use pension drawdown and transfer values including employer contributions for any length of service are all benefits of a contract-based scheme.
5. A; See R04 Study Text, Chp 3; Rationale: As the scheme is a QROPS, the payment is an authorised one. Craig is resident in Portugal, and the receiving scheme is based in the same country. The amount is also within his overseas transfer allowance. Therefore, no overseas transfer charge applies. The payment would not be an unauthorised one, and income tax does not apply on a transfer of benefits.

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