RPSM03109040 - Technical Pages: Protecting pension rights from tax charges: Death benefits: Arrangement types
Types of arrangement providing death benefits
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All types of arrangement (
defined benefits,
cash balance, other money purchase and hybrid) can
be used to provide death benefits. Any
arrangement type can provide death benefits in
either lump sum or pension form (or a combination of both).
Pension arrangements can use insurance policies (term
life/life cover policies) to fund the promised death benefits.
However it is the form of the death benefits promised to the member
under the terms of the pension arrangement that sets the type of
arrangement. The arrangement type depends on the pension promise
for members, not the wording of the policy that is used as the
mechanism to deliver the promise.
Other money purchase arrangements
The amount of benefits provided is wholly dependent on the
amount of payments made to the arrangement by or on behalf of the
member. An example of benefits provided from an
other money purchase arrangement is a return of
the member’s fund. Another example would be an arrangement
that promised to pay the member the proceeds of an insurance
policy.
Arrangements under former
personal pension schemes, most
retirement annuity contracts (see
RPSM03101091) and most small self
administered pension schemes will fall into the other money
purchase arrangement category.
Cash balance arrangements
The amount of benefits provided is dependent on the amount that
has been promised will be made available to provide those benefits.
The amount available to provide benefits is not dependent on the
payments that have been made by or in respect of the member of the
arrangement.
For example a member is promised that £3 million worth
of death benefits will be provided. Benefits worth £3 million
will be provided regardless of the money that is in the arrangement
at any point in time. If there is more than £3 million in the
member’s arrangement only £3 million can be provided.
Similarly if there is less than £3 million in the arrangement,
benefits worth £3 million must still paid. Further funds will
need to be put into the arrangement by, for example, the employer
so that the promised benefits can be paid.
Defined benefits arrangements
The amount of benefits provided is not dependent on the amount that will be made available to provide benefits. Examples of benefits from such an arrangement are
- a lump sum death benefit of 4 x salary, and
- a dependant’s pension of a fixed amount, e.g. £50,000 pa or 2/3rds of the member’s pension.
Hybrid arrangements
An arrangement may for instance promise pension benefits on an other money purchase basis if the member survives until retirement age, or a defined benefits lump sum death benefit if they do not. As the benefit to be paid is not known at the outset and only one type of benefit will be paid such an arrangement will be a hybrid arrangement.
| Glossary ( RPSM20000000) |
