PSI25.2.3 - Flexibility in Pension Provision – Annuity Deferral/Income Drawdown – Surplus Check

(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)

When employer funded benefits in pension or annuity form are due to come into payment, the trustees/Life Office must carry out a surplus check on the fund underlying the member's / survivor's benefits. For the purposes of this check, the member's / survivor's fund does not include any money that has already been used to pay a lump sum or to purchase an immediate annuity.

In order to identify any surplus, a maximum benefit check must be carried out. For this purpose, the member or survivor must select a nominal form of benefits i.e. level or escalating pension, and in the case of the member, with or without guarantee. Then, the trustees or Life Office apply to the member's or survivor's fund a current market annuity rate appropriate to the form of benefits selected by the member/survivor. This rate must be either determined by the scheme actuary or be one which is currently offered either by the Life Office which underwrites the scheme (or with whom the contract is secured) or from any other Life Office selected for illustrative purposes by the scheme trustees or member/survivor. The method must be set out in the scheme's trust deed or rules.

When calculating maximum benefits, any allocation in accordance with PSI12.1.2 should not take place until annuity purchase

The nominal pension payable as a result of this calculation must for limits purposes be aggregated with total pension benefits (including pension equivalent of lump sum) payable under other schemes of the employer - see PSI6.1.3.

Any identified surplus should be dealt with immediately as a surplus arising on the member's retirement. If the scheme is constituted as a common trust fund the surplus should be retained within the scheme as part of the common fund. If the scheme is funded by individually earmarked policies the surplus should be eliminated by:

a) augmenting benefits within approvable limits, and/or
b) setting it off against the employer's existing liability to pay further contributions to the scheme, and/or
c) payment to the employer.

PSI13.4.11 sets out the procedure to be followed for surpluses under buy-out contracts. Surplus AVC funds (including FSAVCs) should be dealt with under the regulations described at PSI25.3.10.