(This archived guidance relates to HMRC discretionary
practice before the 6th April 2006. For current guidance on
Registered Pension Schemes see the Registered Pension Schemes
Manual)
[PN13.9]
Most individual arrangements and discretionary earmarked
schemes provide benefits on a money purchase basis (see
PSI20.1.13). The member receives
whatever benefits can be provided from the “proceeds of
policy or policies” subject to Revenue limits (proceeds of
policy schemes are a type of money purchase arrangement). These
types of scheme/arrangement can give rise to problems with the
level of benefits payable to early leavers (see
PSI13.3.9-12 and
PSI20.1.16). Traditionally these
schemes/arrangements have been funded on a level annual
contributions basis (see
PSI20.1.43) which can lead to
overfunding early on in the life of the scheme/arrangement. This
was one of the prime reasons why a new funding basis for these
schemes/arrangements was introduced with effect from 1 September
1994. As explained in
PSI20.1.43, under this new basis which
has been agreed between the Inland Revenue and the Association of
British Insurers (ABI), maximum joint contributions (by both
employer and employee) must be calculated as an annual percentage
of salary (subject to the earnings cap (see
PSI6.4.8) where appropriate),
rather than on the level annual concept. However, schemes and
arrangements are permitted to continue funding by level annual
contributions provided they do not produce funding levels above
those acceptable under the new basis.
