R04 Cheat Sheet 2025/2026 — Pensions & Retirement Planning

Free Taster · 10 Questions

Test yourself before you revise

10 exam-style R04 questions. See your score instantly, then use the cheat sheet to fill the gaps.

Question 1 of 10

LO1Political, economic & social environment — context for pensions planning5 standard Qs

Why retirement saving is harder than ever

Demographic trends

People living significantly longer — main driver of pensions challenge
Annuity rates fallen as life expectancy rises & gilt yields have dropped
Ratio of workers to retirees shrinking

Government & corporate challenges

Auto-enrolment introduced to close savings gap
Many employers closed DB schemes — too expensive
State pension age rising as longevity increases

Individual barriers

Presentism bias — rewards feel distant
Low financial literacy
Affordability pressures
Low trust in pensions industry

Auto-enrolment — exam-tested rules

Criterion	Auto-enrol (must)	Opt-in (can)
Age	22 to State Pension age	16–21 or SPA–74
Earnings trigger	At least £10,000 p.a.	At least £6,500 p.a.
Applies to	ALL employers who have a contract with a worker	—

Exam trap: No employer is exempt from auto-enrolment. There is no turnover threshold, no employee-count minimum, no 'existing pension provision' exemption.

Pension scheme types — know the difference

Defined Contribution (DC)

Contributions are fixed; benefits depend on fund performance
Types: group personal pension, stakeholder, SIPP, master trust (NEST), executive pension plan
Member bears investment risk

Defined Benefit (DB)

Benefit (pension amount) is fixed by formula; employer bears investment risk
Types: final salary, career average (CARE), cash balance
Career average = type of DB, NOT DC

CARE scheme = career average revalued earnings = a defined benefit scheme. Exam frequently tries to classify it as DC — it is not.

Employer pension contributions: (1) deductible from corporation tax, and (2) save employer NIC (15% in 2025/26) vs paying a cash bonus through PAYE.

LO2How the HMRC tax regime applies to pensions planning10 standard Qs — 2nd largest section

Key figures 2025/2026

£60,000

Annual Allowance

£10,000

Money Purchase Annual Allowance (MPAA)

£268,275

Lump Sum Allowance (LSA)

£1,073,100

Lump Sum & Death Benefit Allowance (LSDBA)

£260,000

Adjusted income taper threshold

£200,000

Threshold income (taper trigger)

£10,000

Minimum tapered AA

25%

Max PCLS (% of fund, standard)

Tax relief on contributions

Method	How it works	Who uses it	Key feature
Net pay arrangement	Contributions deducted from gross pay before PAYE calculated	Occupational pension schemes (trust-based)	Full marginal rate relief immediately. Non-taxpayers get no benefit.
Relief at source	Contributions paid net; provider claims back 20% from HMRC	Personal pensions, stakeholder, SIPPs, GPPs	Basic rate added automatically. Higher/additional rate reclaimed via self-assessment.

Trust-based = net pay. Contract-based = relief at source. Net pay and occupational pension go together. Personal pension and relief at source go together.

Pension funds pay NO income tax on investment income and NO CGT on gains — including rental income from commercial property in a SIPP.

Annual allowance (AA) — calculation & charge

Standard AA: £60,000

Total pension input (employer + employee) must not exceed £60,000. Carry forward of unused AA from past 3 years is permitted if already a scheme member.

Tapered AA

Only if both thresholds exceeded: threshold income > £200,000 AND adjusted income > £260,000
Reduction: £1 per £2 of adjusted income over £260,000
Minimum AA = £10,000

AA charge = excess × marginal rate

Basic rate taxpayer: excess × 20%
Higher rate taxpayer: excess × 40%
Additional rate taxpayer: excess × 45%
NOT a flat rate — it's income tax at marginal rate

Worked example: Higher rate taxpayer exceeds AA by £20,000. Charge = £20,000 × 40% = £8,000.

MPAA triggers

What TRIGGERS the MPAA?

Taking income from flexi-access drawdown
Taking a UFPLS
Exceeding the capped drawdown GAD limit

What does NOT trigger the MPAA?

Taking the PCLS alone
Receiving a DB scheme pension
Taking a trivial commutation lump sum
Receiving a small pots commutation

Death benefits — tax treatment

Scenario	Tax treatment
Member died before age 75 — lump sum to individual beneficiary	Tax-free within LSDBA
Member died age 75 or over — lump sum to individual	Taxed at recipient's marginal rate
Lump sum paid to a trust (not an individual)	Subject to 45% special lump sum charge
DB dependant's pension (any age at death)	Taxed at recipient's marginal rate as income

Age 75 is the critical dividing line. Death before 75 → lump sum within LSDBA is tax-free. Death at/after 75 → always taxed at recipient's marginal rate. The 55% charge was abolished in 2015.

Authorised payments — SIPP/SSAS

Authorised (permitted)

Commercial property (including from connected parties at market value)
Unlisted company shares
SSAS loans to sponsoring employers (max 50% of net assets)
AIM-listed stocks

Unauthorised (forbidden)

Residential property of any kind
Antiques, jewellery, fine wine, classic cars
SIPP loans to employer (allowed in SSAS only)

LO3Relevant aspects of pensions law & regulation4 standard Qs

Key regulatory bodies

Body	Role	Key power
The Pensions Regulator (TPR)	Regulates workplace pension schemes; auto-enrolment compliance	Contribution Notices, Financial Support Directives, Restoration Orders
Pension Protection Fund (PPF)	Compensates DB members when employer becomes insolvent	PPF pays 90% (deferred) or 100% (at/over NRA) of benefits
Pensions Ombudsman	Resolves complaints of maladministration of pension schemes	Legally binding decisions
FCA	Regulates pension advice, pension providers, DC scheme conduct	Rules on DB transfers (PS19/4); COBS

Earmarking vs pension sharing on divorce

Type	How it works	When income stops
Earmarking (attachment) order	Ex-spouse receives % of member's pension when member takes it	On ex-spouse's remarriage, or death of either party
Pension sharing order	Ex-spouse receives a pension credit — a share of the CETV	Does not cease on remarriage — it is the ex-spouse's own pension

State Graduated Pension CANNOT be shared under a pension sharing order. S2P can be shared. AVCs and RACs can be shared.

SIP (Statement of Investment Principles) is drawn up by the trustees — not the employer, not the fund manager.

LO4Defined Benefit (DB) schemes — structure, characteristics & application7 standard Qs — largest LO

DB scheme types

Final salary

Pension = accrual rate × years' service × final pensionable salary. Late-career salary increases are very valuable — retrospectively uplift all past service.

Career average (CARE)

Each year's benefit is based on that year's salary, revalued by CPI to retirement. More predictable cost for employer.

Cash balance

A notional 'pot' built up with guaranteed growth rate. At retirement, used to buy benefits. Risk shared between employer and member.

DB pension calculations — worked examples

Example	Calculation	Answer
1/80th scheme, 22 years, final salary £20,000	22/80 × £20,000	£5,500 p.a.
1/60th scheme, 10 years, salary £84,000	10/60 × £84,000	£14,000 p.a.
Early retirement 48 months early, 0.5%/month reduction	48 × 0.5% = 24% reduction	Pension × 0.76
Commutation: pension £5,500, PCLS £16,500, factor 15:1	£16,500 ÷ 15 = £1,100 commuted	Residual pension: £4,400 p.a.

Contingent charging (adviser only charges if transfer proceeds) was banned by the FCA from 1 October 2020.

Public sector vs private sector DB schemes

Feature	Public sector	Private sector
Funded/unfunded	Unfunded (pay-as-you-go)	Funded (assets held in trust)
Transfer club	Yes (e.g. NHS to teaching)	Less common
Indexation in payment	CPI-linked	LPI (typically)

LO5Defined Contribution (DC) scheme options4 standard + 2 multiple response Qs

DC scheme types compared

Type	Trust or contract?	Tax relief method	Key features
Group Personal Pension (GPP)	Contract-based	Relief at source	Each member has individual PP contract. Employer can contribute.
Stakeholder pension	Contract-based	Relief at source	Charges capped at 1.5% then 1%. Min contribution £20.
Trust-based occupational (master trust)	Trust-based	Net pay arrangement	NEST is a master trust. Trustees responsible for investment funds.
SIPP	Contract-based (usually)	Relief at source	Wide investment choice including commercial property. 50% borrowing limit.
SSAS	Trust-based	Net pay	Can make loans to sponsoring employer (max 50% net assets). Max ~11 members.

Trust-based = net pay. Contract-based = relief at source. Under net pay, non-taxpayers get no benefit. Under relief at source, the provider adds 20% even for non-taxpayers.

SIPP — permitted and prohibited investments

✓ Permitted in SIPP

Commercial property (inc. from connected party)
Quoted and unquoted shares
Gilts, bonds, unit trusts, OEICs
Borrowing up to 50% of net assets

✗ NOT permitted in SIPP

Residential property (any kind)
Tangible moveable property (antiques, art, wine)
SIPP cannot lend to sponsoring employer

SIPP borrowing calculation

Max total borrowing = 50% of net scheme assets.

Example: assets £450,000, existing borrowing £50,000. Net assets = £400,000. Max total = £200,000. Further available = £150,000.

QROPS — overseas transfer

Overseas Transfer Charge (OTC) = 25% of the transfer value. OTC applies if member is NOT resident in the same country as the QROPS. If member moves to country where QROPS is based = no charge.

LO6Analysing options for drawing pension benefits5 standard + 4 multiple response Qs — largest LO

UFPLS tax treatment

UFPLS: 25% is tax-free, 75% is taxable as pension income at marginal rate. Triggers the MPAA.

Drawdown options

Type	Income limit	MPAA triggered?
Flexi-access drawdown (FAD)	None — can draw any amount (including nil)	Yes (when any income drawn)
Capped drawdown	Max = 150% of GAD rate; min = 0%	Only if cap exceeded

Capped drawdown GAD calculation: Fund £50,000, GAD rate £58 per £1,000, age 67. Max income = (50 × £58 × 1.5) = £4,350 per annum.

Small pots & trivial commutation

Rule	Small pots	Trivial commutation
Maximum value	£10,000 per pot	Total pensions ≤ £30,000
Time window	None specified	Must complete within 12 months of first commutation
RBCE?	No	No
Tax treatment	25% tax-free, 75% taxable as income	25% tax-free, 75% taxable as income

Annuity rules

Lifetime annuity — key rules

Does NOT need to increase in payment
Maximum guaranteed period: 10 years
Can be assigned only under a pension sharing order
All new annuities use unisex rates (since December 2012)

Short-term annuity

Maximum term: 5 years
Must cease before age 75
Started at age 63 → maximum age it can run = 68

Mortality drag

Mortality drag is the increasing cost of remaining in drawdown rather than annuitising. This drag increases significantly around age 70+, making annuitisation progressively more attractive on actuarial grounds.

LO7State Schemes — structure, relevance & application4 standard Qs

State Pension history & structure

Scheme	Earned when?	Survivor benefits?	Key facts
State Graduated Pension	1961–1975	None	Cannot be contracted out of; no survivor pension on death
SERPS	1978–2002	Up to 50% may be inherited	Contracted-out = GMP provided by employer scheme instead
S2P	2002–2016	Some inheritance	Replaced SERPS; closed to contracting-out in 2012
New Single-Tier State Pension	From April 2016	Limited	35 qualifying years for full pension; 10 for any. Full rate: £230.25/wk

Ann's husband has Graduated Pension and dies → Ann receives NOTHING. Graduated Pension has absolutely no survivor benefits.

Triple lock & frozen pensions

Triple lock: State Pension increases annually by the highest of earnings growth, CPI inflation, or 2.5%.

Frozen pension: State Pension is NOT uprated for recipients living in countries without a UK social security reciprocal agreement (e.g. Australia, Canada, Thailand).

State Pension deferral

Old rules (reached SPA before 6 April 2016)	New rules (SPA on/after 6 April 2016)
Deferral increases pension by 10.4% per year. Option to take deferred lump sum.	Deferral increases pension by approx 5.8% per year. No lump sum option.

Pension Credit 2025/2026

Element	2025/26 rate
Guarantee Credit — single	£227.10/wk
Guarantee Credit — couple	£346.60/wk

PIP (Personal Independence Payment) is FULLY DISREGARDED when calculating income for Pension Credit purposes.

LO8Aims and objectives of retirement planning — investment issues5 multiple response Qs

Key retirement planning risks

Sequencing risk

Poor returns in the early years of withdrawal permanently reduce the capital base. Cannot be recovered simply by later good returns.

Longevity risk

Living longer than planned. Cash flow modelling should be based on above-average life expectancy. Annuities transfer this risk to the insurer.

Inflation risk

Erodes the real value of fixed income. Stress testing should include higher-than-expected inflation scenarios.

Pension vs ISA vs VCT vs Investment bond — tax comparison

Wrapper	Tax relief on entry?	Growth?	Income on exit
Pension	Yes	Tax-free within fund	Taxed at marginal rate (except PCLS)
Stocks & shares ISA	No relief	Tax-free	Tax-free
VCT	30% income tax relief (≥5 years)	Dividends tax-free	Dividends tax-free
Investment bond	No relief	Deferred	IT at marginal rate; top-slicing available

SSAS — specific rules

SSAS loans to employer

Maximum = 50% of net scheme assets
Must be at commercial interest rate
Must be secured on first charge
Maximum term: 5 years

SSAS investment in employer shares

Maximum = 5% of scheme assets per sponsoring employer
Residential property still cannot be held

FIGURESKey figures & tax tables 2025/2026Provided in exam

Pensions — core allowances

£60,000

Annual Allowance

£10,000

MPAA

£268,275

Lump Sum Allowance (LSA)

£1,073,100

LSDBA

£260,000

Adjusted income taper threshold

£200,000

Threshold income (taper trigger)

£10,000

Minimum tapered AA

£3,600

Max pension contribution without UK earnings

Income tax 2025/2026

£12,570

Personal Allowance

20%

Basic rate (£0–£37,700)

40%

Higher rate (£37,701–£125,140)

45%

Additional rate (£125,141+)

State benefits (per week) 2025/2026

Benefit	Rate
New State Pension (full rate)	£230.25
Basic State Pension Category A (full rate)	£176.45
Pension Credit — Guarantee Credit single	£227.10
Pension Credit — Guarantee Credit couple	£346.60
BSP — higher rate lump sum / monthly	£3,500 / £350 for up to 18 months
BSP — standard rate lump sum / monthly	£2,500 / £100 for up to 18 months

Common R04 exam traps — quick reference

Common exam trap	Correct answer
CARE scheme — DB or DC?	DB — always.
Does taking the PCLS trigger the MPAA?	No — only drawing income from FAD or taking UFPLS triggers it.
Death before 75 — lump sum to individual taxable?	No — tax-free within LSDBA.
Death after 75 — rate on lump sum to individual?	Beneficiary's marginal rate (not 45%, not 55%).
Death benefit paid to a TRUST — rate?	45% special lump sum charge.
State Graduated Pension on death — does spouse inherit?	No — zero survivor benefits.
AA charge rate for a higher rate taxpayer?	40% of the excess.
Can a SIPP hold residential buy-to-let?	No — prohibited.
New State Pension deferral — lump sum option?	No lump sum — only higher weekly pension.
De-registration charge?	40% of total scheme assets.

Free R04 Cheat Sheet

R04 Cheat Sheet

Pensions & Retirement Planning — All 8 Learning Outcomes

Test yourself before you revise

Demographic trends

Government & corporate challenges

Individual barriers

Defined Contribution (DC)

Defined Benefit (DB)

Standard AA: £60,000

Tapered AA

AA charge = excess × marginal rate

What TRIGGERS the MPAA?

What does NOT trigger the MPAA?

Authorised (permitted)

Unauthorised (forbidden)

Final salary

Career average (CARE)

Cash balance

✓ Permitted in SIPP

✗ NOT permitted in SIPP

SIPP borrowing calculation

Lifetime annuity — key rules

Short-term annuity

Sequencing risk

Longevity risk

Inflation risk

SSAS loans to employer

SSAS investment in employer shares

Ready to practise exam-style questions?