RPSM09100230 - Technical Pages: Member benefits: Overview: Types of arrangement

Types of arrangement

The rules governing the payment of benefits under a registered pension scheme vary depending on whether the scheme provides benefits on a money purchase or a definedbenefits basis.

The legislation therefore categorises arrangements on the basis of how benefits will be provided under that arrangement when the member draws benefits.

The legislation actually defines four types of arrangements – these are

• a money purchase arrangement (i.e. an arrangement that provides money purchase benefits),
• a cash balance arrangement (which is a type of money purchase arrangement),
• a defined benefits arrangement (i.e. an arrangement that provides defined benefits), and
• a hybrid arrangement.

A money purchase arrangement that is not a cash balance arrangement may be referred to as an ‘other money purchase arrangement’.

Further information on other money purchase, cash balance and hybrid arrangements can be found at RPSM09100250 to RPSM09100260.

Classifying an arrangement

An arrangement cannot be more than one type of arrangement apart from a cash balance arrangement, which is a type of money purchase arrangement. If the way benefits are provided under a scheme in respect of a member varies in any way these differing entitlements are, for the purposes of the tax legislation, treated as held in separate arrangements.

For example, a member of a scheme that provides defined benefits , but which also allows the member to contract-out through the scheme on a money purchase basis, will have (at least) two arrangements under the scheme. (One or more defined benefits arrangements will hold the main scheme benefit, and one or more money purchase arrangements will hold the contracted-out benefits). The same would apply to a scheme that provided money purchase benefits to its members, but also provided a lump sum on their death based on a multiple of their final salary (defined benefits).

The position is different where only one type of benefit will ultimately be provided to a member under the scheme, but which type that will be will depend on the circumstances at some future point in time. This is a hybrid arrangement – see RPSM09100260.

When considering other issues (such as the annual allowance, lifetime allowance etc.) the four different forms of arrangements are often each subject to separate rules and restrictions.