| [s165, Pension rules 3, 4 and 6][Para 2(2)(a), Sch 28] |
The only authorised member pension that can be provided under a defined benefits arrangement is a scheme pension. But it is also possible for such a pension to be provided under a money purchase arrangement.
Some schemes providing benefits through
money purchase arrangements give their members the
option of exchanging the funds built up in their arrangement on
their behalf for a promise to pay a certain pension for life direct
from the scheme. This can be done either when they choose to draw
benefits, or within a certain timescale specified by the scheme.
There is no
defined benefits promise while the member is
accruing benefits, but at the time they choose to take benefits the
scheme is, for example, prepared to grant them a guaranteed pension
entitlement under the scheme, depending on the fund size (and their
circumstances such as age, sex or life expectancy). Thus they are
prepared to give a guarantee, but only at that late stage, and only
in relation to the fund that has accrued at that point. As such the
risk the scheme is taking on in these circumstances is less than
with a defined benefits promise under a defined benefits
arrangement. The scheme may decide to carry that risk itself or may
arrange an annuity with an insurance company, purchased in the name
of the scheme trustees, as a way of securing their liability to
maintain pension payments to the member. In such a situation the
insurance policy is simply an internal funding device for the
scheme.
Alternatively, a scheme with money purchase arrangements may
simply offer its members the option of securing a scheme pension
direct with an
insurance company when they draw benefits. The
scheme itself is not at risk, and is simply saying that when a
pension is being drawn, the member may use those funds to either
secure a
lifetime annuity or have the scheme purchase a
scheme pension (policy) in the member’s own name with an
insurance company at that time. The rate of annuity/scheme pension
will then be based on the level of benefit the insurance company is
prepared to offer.
If a member with a money purchase arrangement decides that
they want to take a scheme pension option offered by the scheme by
means of an insurance company then, unlike with the purchase of a
lifetime annuity, the member does not have the right to choose the
insurance company that will be used. This applies whichever way the
annuity is purchased, whether in the name of the member or the
trustees. In both cases the right here is with the
scheme administrator – see
RPSM09101420.
RPSM09101460 gives an example.
RPSM09101440 gives more information
on using an annuity contract to provide a scheme pension from a
money purchase arrangement.
| Glossary ( RPSM20000000) |
