RPSM11104260 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Scheme pension - BCE 2: Scheme pension from a money purchase arrangement
Provision of a scheme pension under a money purchase arrangement
|[s216(1), BCE 2 and 4][s165(1), pension rules 4 and 6][Para 2, Sch 28]|
Unless a money purchase scheme offers its members the option of taking a scheme pension, such schemes will always value any arising entitlement to a pension benefit through BCE 1 (provision of a drawdown pension, before 6 April 2011 an unsecured pension) or BCE 4 (purchase of a lifetime annuity contract).
Where a money purchase scheme does offer the scheme pension option there will be a clear choice for the member (as required by pension rules 4 and 6 - see RPSM09101420); either accept the scheme pension quote, or use the funds held in the particular arrangement(s) to
- purchase a lifetime annuity contract through the open market option, or
- where permitted by the scheme, provide a drawdown pension, before 6 April 2011 an unsecured pension (or until 5 April 2011 alternatively secured pension, if age 75 or over).
If the member accepts the scheme pension offer they lose the right to the funds held in the arrangement, and in return are given a certain scheme pension entitlement under the scheme (or with an insurance company through a contract).
The resulting scheme pension benefit will be caught for lifetime allowance purposes through BCE 2, with the amount crystallising being calculated by the relevant valuation factor multiplied by scheme pension formula. This applies even if the liability for that scheme pension is secured through an annuity type contract with an insurance company.
If the member declines the scheme pension promise and decides to use the funds accumulated to purchase a lifetime annuity contract on the open market the purchase of that annuity will be caught by BCE 4. The amount crystallising here will simply be the purchase price of the annuity contract. The resulting pension provided by the lifetime annuity contract will be set by market forces, i.e. what the insurance company is prepared to pay the member.
As the member gets the choice it will be clear which BCE the scheme administrator is dealing with based on what the member chooses to do.
RPSM09101400 onwards explains the differences between the provision of a scheme pension and the purchase of a lifetime annuity in a money purchase arrangement.