PTM061100 - Member benefits: essential principles: pensions
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives.
If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary PTM000001
The commencement of benefits
Types of authorised pension benefits payable to a member
What pension benefits may be provided to a member by a money purchase arrangement, by a collective money purchase arrangement and by a defined benefits arrangement
Member’s choice of benefits
Taking a pension in stages
The commencement of benefits
Registered pension schemes and the contributions paid to them are granted tax reliefs in order to encourage people to save for benefits for later life.
The normal minimum pension age is currently 55, however this will increase to age 57 from 6 April 2028. If a member takes benefits before then, those benefits will be treated as an unauthorised payment unless the member satisfies the ill-health condition or where they have a protected pension age. For more information on when a protected pension age will allow pension benefits to be paid before normal minimum pension age and be treated as authorised payments, see PTM062200.
Pension benefits that crystallise on or after normal minimum pension age (or any earlier age resulting from ill-health or a protected pension age) may be paid as a secured pension - that is, a lifetime annuity or a scheme pension - or (if a money purchase arrangement) as a drawdown pension or an uncrystallised funds pension lump sum. Pension benefits do not have to be taken before age 75.
Types of authorised pension benefits payable to a member
Section 165 and schedule 28 Finance Act 2004
The legislation authorises a registered pension scheme to provide pension benefits to its members only if those benefits comply with the pension rules. If a pension benefit does not comply with these rules any payment made is an unauthorised member payment and is taxed accordingly - see PTM130000.
The pension rules set out the various ways in which a pension benefit may be paid during the lifetime of a scheme member.
The pension rules differentiate between registered pension schemes on the basis of whether they provide benefits on a money purchase, a collective money purchase or a defined benefits basis. So, some of the rules apply only to money purchase arrangements, some rules may apply only to collective money purchase arrangements and some only to defined benefits arrangements (see section below What pension benefits may be provided to a member by a money purchase arrangement, by a collective money purchase arrangement and by a defined benefits arrangement. PTM062300 onwards explains what form of pension benefits may be provided to the member from each type of arrangement.
Provision of a secured pension
A pension paid direct from the scheme as a scheme pension or through the purchase of a lifetime annuity is collectively referred to in this manual as a secured pension. Each of the 2 forms of secured pension is bound by a different set of rules. Guidance on scheme pensions is at PTM062300 onwards and guidance on lifetime annuities is at PTM062400.
What pension benefits may be provided to a member by a money purchase arrangement, by a collective money purchase arrangement and by a defined benefits arrangement
Money purchase arrangements
Section 165(1) pension rules 4 to 7 Finance Act 2004
A money purchase arrangement may provide the member with a pension income in the following ways:
- through the purchase of a lifetime annuity contract from an insurance company (see PTM062400)
- as a scheme pension (see PTM062300)
- through the provision of a drawdown pension (see PTM062700)
- as an uncrystallised funds pension lump sum (see PTM063300).
The precise options available to a member depend on the scheme rules.
A cash balance arrangement is a type of money purchase arrangement.
Defined benefits arrangements and collective money purchase arrangements
Section 165(1) pension rule 3 Finance Act 2004
A defined benefits arrangement and a collective money purchase arrangement may only provide the member with pension income as a scheme pension (PTM062300).
Member’s choice of benefits
Section 165 and paragraphs 8 and 10 schedule 28 Finance Act 2004
The legislation allows a registered pension scheme to give its members certain choices over when and in what manner they draw benefits. The precise options open to a member as to how and when they take their benefits will depend on the type of scheme (money purchase, defined benefits or collective money purchase) and the degree of flexibility the scheme is prepared to offer its members, and will be specified in the scheme rules.
Where benefits are held in a money purchase arrangement, the scheme may allow the member to draw income as a drawdown pension either direct from the scheme through income withdrawal or through the purchase of a short-term annuity contract with an insurance company. When choosing either type of drawdown pension, the member ‘designates’ the amount of funds they want to be used as their ‘drawdown fund’.
Alternative methods of providing pension under money purchase arrangements are as uncrystallised funds pension lump sums or by purchasing a lifetime annuity.
A member of an occupational pension scheme that provides defined benefits or collective money purchase benefits is likely to have a more limited choice over when they can draw their benefits and no option over the format, as under a defined benefits arrangement or a collective money purchase arrangement, the pension can only be paid in one way, as a scheme pension.
The member may also be allowed to take their pension entitlement held under an arrangement in stages over a period of time.
Taking a pension in stages
A registered pension scheme may allow a member to draw only part of their benefit entitlement held in an arrangement, or to take benefits from only some of the funds held in that arrangement. This gives the member flexibility over how they provide for themselves later in life and for any dependants, nominees or successors on death.
An individual may draw benefits from part of a money purchase arrangement either as an uncrystallised funds pension lump sum (PTM063300), by designating only part of their funds for drawdown pension or by using only part of their funds to purchase a lifetime annuity.
PTM062310 gives more information on drawing benefits from part of a defined benefits arrangement.
Payment of a pension commencement lump sum
Paragraph 1 schedule 29 Finance Act 2004
To be treated for tax purposes as a pension commencement lump sum the individual’s entitlement to the payment must be linked to an arising entitlement to some form of pension benefit. The maximum amount of lump sum that can be paid is linked to the value of that arising pension entitlement. If an individual’s benefits are taken in stages, over a period of time, each time a ‘slice’ of pension benefits is crystallised, the scheme may pay a lump sum related to it. If the lump sum satisfies the conditions necessary to qualify as a pension commencement lump sum, it can be paid free of Income Tax.
Where the member receives a lump sum in anticipation of becoming entitled to the relevant pension, but then dies before that entitlement arises, the legislation deems the member to have become entitled to the lump sum immediately before death. This means that the lump sum payment becomes an authorised payment, providing it did not exceed the member’s available lump sum allowance immediately before the member died, and providing the other conditions for a pension commencement lump sum are satisfied.
Payment of an uncrystallised funds pension lump sum
A member may take their money purchase pension in stages if they wish, through a series of uncrystallised funds pension lump sums. Each time such a lump sum is paid, 25% of it is paid free of Income Tax, with the remaining 75% taxed as pension income. See PTM063300.
Pension paid out as a one-off lump sum
Paragraph 4(1), 5(1)(d) and 7(1)(d) schedule 29 Finance Act 2004
There are certain circumstances where a member’s benefits cannot be taken from an arrangement in stages. This is where pension benefits are being wholly commuted to a lump sum on grounds of serious ill-health, winding-up or triviality and where the lump sum is a refund of the member’s contributions under an occupational pension scheme because the member has completed less than 2 years' pensionable service. Taking such lump sums in stages is not possible because it is a requirement for any of these types of lump sum that its payment must extinguish all that member’s entitlement either under the registered pension scheme concerned, or under the specific arrangement, as appropriate for each type of lump sum. For more details on: