In May 2006 Brian chooses to draw benefits under his money purchase arrangement. He has £100,000 in the arrangement at that time. The scheme gives Brian the option of taking a scheme pension. When the scheme makes the scheme pension offer they tell Brian his other options. Brian can choose to
Brian sees an independent financial advisor and considers what
types of annuity are available in the market, and the sort of rates
he can obtain, given his circumstances and the funds available.
The best lifetime annuity quote Brian can obtain is a level
annuity of around £8,000 per annum. Brian is interested in
purchasing an investment linked annuity (linked to the Stock
Market). This is an annuity where the income goes up and down
depending on the performance of the FTSE 100 share index. Brian can
have a pension starting at around £8,000 per annum with such
an annuity, but future levels may vary (depending on the movement
in the FTSE 100 index).
If Brian chooses the scheme pension he becomes entitled to a
pension of £8,000 per annum, increasing by RPI each year, and
loses the right to the £100,000 funds held in the arrangement.
The liability here is then with the scheme.
The scheme may, or may not, choose to secure their liability
for the pension by purchasing an annuity contract with an insurance
company. If they do, the contract will only provide the same income
as the scheme pension (£8,000 per annum, increasing by RPI).
Brian will not be involved in choosing which insurance company the
contract is purchased from.
The amount of Brian’s
lifetime allowance used up will be calculated by
reference to the level of scheme pension payable, not the level of
funds given up to secure the entitlement (so it falls within
benefit crystallisation event (BCE) 2). The
crystallised value of that pension is £160,000 (20 X
£8,000) not £100,000. This applies whether or not the
scheme liability is secured with an insurance company.
If Brian declines the scheme pension offer and goes down the
lifetime annuity route he must tell the
scheme administrator what he wants to do, the type
of contract he wants and which insurance company he wants them to
purchase the annuity with. The scheme administrator then buys that
contract from the relevant insurance company.
If he chooses the index-linked lifetime annuity discussed
above, his income will start at £8,000 per annum. But the
income in subsequent years will vary depending on the performance
of the underlying funds. The amount of Brian’s lifetime
allowance used up will be calculated by reference to the purchase
price of the annuity (as there is no scheme pension entitlement).
So it will fall within BCE 4, with the crystallised value being
£100,000.
| Glossary ( RPSM20000000) |
