Pension Schemes - Types of schemes

Pension schemes are split up by a number of aspects. The tax approval legislation (in Part IV ICTA 1988) makes the first distinction, into:

• so called 'Chapter 1' or 'Occupational Pension Schemes' (OPSs) - these include the bulk of long standing company sponsored schemes, and
• so called 'Chapter 4' or 'Personal Pension Schemes' (PPs) - which include Stakeholder Pensions.

These then break down into sub-categories, based on factors like:

• the number of members in a particular scheme,
• how contributions are limited,
• the way the funds are invested and
• when payments are made from the schemes.

The information below shows the resulting scheme types with a brief overview of each one.

'Chapter 1' - Occupational Pension Schemes

Individual Arrangements(IAs)
An IA is a scheme set up for a single named employee. The fund is always insured and is usually established by an exchange of letters between employer and employee.

Hancock Annuities
A 'Hancock Annuity' is an immediate annuity purchased for a retiring employee.

Ex-gratia
An ex-gratia benefit consists of a lump sum payment made when an employee is not already a member of an occupational or personal pension scheme in respect of the employment giving rise to the payment.

Earmarked schemes
These are a collection of IAs under a single trust. Each member's fund is held under a separate insurance policy and no other investments are allowed in the scheme.

Common Trust Funds (CTFs) including
Self Administered and Small Self Administered Schemes (SSASs)
CTFs are the most complex type of scheme commonly found, where:

• all assets are pooled in a central fund,
• benefits are paid from those central funds and
• trustees have wide powers of investment.

They come in two main categories:
Insured - where the funds are held centrally in insurance policies only, and
Self Administered - where the funds are held centrally in investments outside policies e.g. in property, shares, loans. These in turn come in two broad types:

• Small = less than 12 members
• Large = 12 or more members.

Self Managed Funds (SMFs)
SMFs are insured earmarked schemes. where the policies are unit linked to an investment fund. The investment fund is normally selected by the employer or trustees, but held in the name of the Life Office (insurance company).

Simplified Defined Contribution Schemes (SDCSs)
In an SDCS, benefits are limited by what the contributions can mature to. The contributions in turn are limited by some simple rules. On the 1st of April 2001 the Board of the Inland Revenue ceased to consider applications for approval for SDCSs, but existing approved SDCSs can continue unaffected.

Unfunded schemes
In an unfunded scheme, the employer promises to provide an employee with benefits under a scheme, but makes no advance funding in the scheme for those benefits. Benefits are then paid directly by the employer 'out of the till' when they become due.

Free Standing Additional Voluntary Contribution Schemes (FSAVCs)
FSAVCs only take contributions from employees, who can use them to buy benefits additional to those from schemes run for them by their employer.

Death in Service (DIS) Life Assurance or Group Life Schemes
These provide benefits for the dependants and family of an employee if they die in service. DIS benefits are a feature of most pension schemes but some schemes provide only this benefit without any retirement pension

Statutory Schemes
These are typically schemes established for officials, such as those in the Civil Service, NHS, Police, Teachers, Local Government etc. They are like other 'Chapter 1' schemes in many ways but many actually get their tax approval through separate legislation.

'Chapter 4' - Personal Pension Schemes

Personal Pension Schemes (PPs)
A PP is an independent pension arrangement made between an individual and a pension provider, e.g. an insurance company, bank or employer.

Stakeholder Pension Schemes (SHPs)
SHPs are a new type of PP which became available from 6 April 2001. From October 2001, most employers with 5 or more employees, and who do not already offer suitable pension arrangements, must offer access to a stakeholder pension scheme.