Scheme Pension

A defined benefit scheme has to provide a Scheme Pension whereas other types of pension arrangement are not compelled to do so. This has led to a number of providers deciding to offer this option alongside others such as Drawdown Pension.

With regard to defined contribution schemes, a Scheme Pension can only be taken after the offer and refusal of an annuity, at any time, after age 55. It is an alternative way to take an income but is based on your individual circumstances. There are regular reviews and these again are based on your circumstances prevailing at the time of the actuarial review.

It is also possible to provide a dependant’s Scheme Pension.

Advantages

  • A Scheme Pension is determined by an actuary with the maximum income based on your age, state of health, mortality, any escalation or guaranteed period and fund value. In many situations this will potentially allow a larger income to be taken.
  • There are regular reviews and these again are based on your circumstances prevailing at the time of the actuarial review. This can be particularly useful where your state of health has worsened and the actuary is able to reset the income at a level whereby the reduced longevity can be reflected by an increase in the amount of Scheme Pension payable.
  • A scheme pension cannot normally be reduced.
  • Pension protection may be included on death (on death a lump sum is paid which is equal to 20 times your starting scheme pension less the gross pension payments you had received up to the date of death less 55% tax – the 55% tax charge is being reviewed by the Government and may reduce from April 2015, although this has not yet been confirmed). Subject to the scheme rules, it may be possible for a defined benefit (final salary) scheme to treat the lump sum as a defined benefit scheme lump sum which would be tax free (providing the lump sum falls within your unused Lifetime Allowance).
  • It is possible to provide a dependant’s Scheme Pension although it cannot be higher than the Scheme Pension the deceased received.
  • A scheme pension can be guaranteed for up to 10 years.

Disadvantages

  • There are rules set by HMRC with regards to increasing and decreasing the amount of Scheme Pension you can take and if these are breached, substantial tax charges may apply to your fund.
  • The payment of a scheme pension depends on the financial health of the paying pension scheme, unless the financial liability has been passed to an insurance company. With regard to a defined benefit (final salary) scheme, scheme pensions may be protected by the Pension Protection Fund in the event of the pension scheme winding up. The level of protection varies depending whether you retired before or on/after the scheme’s normal pension age which may mean your scheme pension is not fully protected.