|[s165, ‘Pension rules 4 and 6’][Para 2(2)(a), Sch 28][s161(3) and (4)]|
scheme pension is provided under a
money purchase arrangement through a policy with
insurance company it will usually be purchased in
the name of the member, establishing a contract between the
insurance company and the member. In such a case the insurance
company becomes liable to maintain the required pension payments
directly to the member. Nevertheless, such payments are still
treated as if they were made by the purchasing
registered pension scheme for the purposes of the
authorised payment rules. So the contract would need to reflect the
scheme pension requirements (as detailed under the scheme rules).
Any other payment made by the insurance company will be an
unauthorised payment, and taxed as such.
The pension provided by the insurance company is still valued for lifetime allowance purposes as a scheme pension, not a lifetime annuity (so is caught through BCE 2, not BCE 4).
This may potentially cause some confusion, as under a money purchase arrangement the member also has the option to decline the scheme pension offer and use the funds in that arrangement to purchase a lifetime annuity on the open-market (see RPSM09101420). So it needs to be made clear to members what type of pension they have selected.
Where a scheme providing benefits through money purchase arrangements offers a member the scheme pension option there will be a clear choice for the member – either accept the scheme pension offer given by the scheme (or insurance company), or decline and take the open market lifetime annuity route. As the member is given a choice, it should be clear from outset what form of pension benefit they are dealing with, as each option could crystallise a different amount for lifetime allowance purposes.
If the member takes a scheme pension offer made by a scheme
(rather than an insurance company) their entitlement is set under
the scheme rules, and the liability rests with the scheme. The
member becomes entitled to a given scheme pension level, payable
for life, with a prescribed level of pension increases year-on-year
(if any). In return the member loses the right to the relevant
funds held in their arrangement(s).
Once the member has chosen the scheme pension option the scheme may subsequently choose to secure their liability for that pension with an insurance company. The choice of insurance company here is down to the scheme administrator; however the administrator cannot formalise this until the member has made their choice to have a scheme pension in the first place.
The annuity contract will mirror the liability of the scheme (which the scheme is effectively insuring against, by paying the insurance company to take the risk on). It cannot be any form of ‘lifetime annuity’, and the member is unlikely to be given any influence over which insurance company the annuity contract is purchased from. The annuity will normally pay out to the trustees who in turn will make the scheme pension payments to the member. Alternatively the trustees might delegate the pension payment function to the insurer as the trustees' paying agent.
If the scheme pension entitlement is provided at outset directly
from an insurance company (based on that insurance company’s
quote) using a policy in the name of the member, then the process
involved is essentially the same as where a lifetime annuity is
purchased, although what is secured cannot be any form of
‘lifetime annuity’. The insurance company offers to pay
the member a certain level of pension in return for a certain level
of consideration from the scheme. If the transaction goes ahead the
funds held in the arrangement are paid over to the insurance
company in return for that lifelong income stream (as detailed in
The differences between the rules that apply to scheme pensions and lifetime annuities taken from a money purchase scheme include:
|Glossary ( RPSM20000000)|