| [s152] |
How a
registered pension scheme can provide an
authorised benefit to its members depends on whether the scheme
provides benefits on a
money purchase basis or on a
defined benefits basis
The various pension rules and the lump sum rule apply
differently depending on whether benefits are being provided on a
money purchase or on a defined benefits basis.
Where the level of benefits provided to a member under a scheme is calculated by reference to a capital amount of money that is made available to provide benefits to or in respect of the member at the point of entitlement then these are money purchase benefits. (This capital amount may be more colloquially referred to as the individual’s ‘pot’.) The precise amount of benefits the member receives will not be known in advance; it will depend on what the capital amount of money can provide at the time, which may depend on factors such as prevailing annuity rates. The term money purchase benefits includes cash balance benefits.
Where the level of benefits provided to a member is calculated in any way other than by reference to a capital amount of money that is made available to provide benefits to or in respect of the member then these are defined benefits. This includes benefits calculated and paid by reference to the earnings and/or service with an employer (or any other similar factor). So the member may have a promise of a certain level of benefit based on what their salary/service etc. is at a given point, irrespective of the funds (if any) built up by that time from contributions made by and on behalf of the member. The member knows in advance what their entitlement will be (if not the exact level of benefits). Benefits paid under final salary or career average schemes are examples of defined benefits.
| Glossary ( RPSM20000000) |
