It can be paid from the scheme assets or from an insurance company selected by the scheme administrator. The member can asked for the phased scheme pension. A PCLS can also be paid to the member if they ask.

Benefits for the scheme:

• There is no immediate outflow of capital from the scheme (i.e. pay out the monthly income rather than the cost of buying the income via an insurance company).
• The funds within the scheme remain invested and so benefit from any out- performance of these assets.
• The scheme has the option to secure the income at a later date if desired and may benefit from an increase in annuity rates or the worsening of the member’s health
• If the member and/or their dependants die sooner than expected, the scheme retains the ‘unused’ funds for the benefit of all members, whereas if they secured the income with an insurance company, the insurance company would benefit from these funds.

Downsides for the scheme:

• The payments must be made whatever the funding position of the scheme.
• The member and/or their dependants may live longer than expected and the scheme bears the cost of these ‘extra’ payments.
• The scheme retains both the longevity and investment risk, whereas these are transferred to the insurance company where the scheme is bought from an insurance company.
• It entails additional administration for the scheme.

If the policy is in the name of the member the payments would be paid directly to the member from the insurance company, but if it is in the name of the trustees they would get the payment first.

To qualify as a scheme pension HMRC requires that the pension must:

• be paid for the life of the member;
• be paid at least annually;
• be incapable of being reduced year on year except in limited circumstances; and
• be paid by the scheme administrator or by an insurance company chosen by the scheme administrator.
• In addition, HMRC allows a scheme pension to offer the options of:
• a guarantee period; and
• a capital protection lump sum

Usually a scheme pension cannot be reduced or stopped unless the HMRC approved circumstances occur:

• it is being paid on the grounds of ill-health and stops or reduces;
• the reduction in the rate payable is being applied to all scheme pensions paid under the scheme
• it is a bridging pension that is being reduced or stopped at SPA by an amount that does not exceed the State retirement pension entitlement arising at that time;
• it is being reduced while the scheme is being wound-up because there are insufficient sums and assets in the pension scheme to continue to pay the pension at the existing rate;
• the rate is being reduced in consequence of a pension sharing order;
• the rate is being reduced due to forfeiture of entitlement permitted by regulations
• the rate is being reduced in consequence of a court order;
• a scheme pension from a public service pension scheme is reduced due to abatement (e.g. where a member is re-employed within the same part of the public sector as that for which the scheme pension is being paid)
• the rate is being reduced due to the scheme administrator paying an annual allowance charge in relation to the member.

Death benefits

A scheme pension can offer the following benefits:

• Dependent’s scheme pension –
  • same income as before the member’s death, but the scheme does not have to pay the income for the life of the dependent, pay it annually or the income can be reduced within the rules of the annuity or scheme
  • a DC pension scheme may allow a dependent to move into flexi access drawdown
  • It will not include a guarantee period or pension protection
  • It cannot be commuted expect for the grounds of triviality
• Guarantee period
  • It can be guaranteed for up to 10 years
  • HMRC have no restrictions on who can get the payments in respect to a guarantee
  • The rules do allow the payment to cease if the recipient gets married, reaches age 18 or ceases full time education
  • It cannot be commuted expect for the grounds of triviality
• Lump sum death benefit
  • DB lump sum death benefits –
    • From a DB pot only where a member dies while in employment,
    • Can be paid from crystalised or uncrystalised funds
    • There are no HMRC rules as to who can get it,
    • Scheme rules may be more restrictive.
    • Pre 75 death causes BCE 7 with any excess taxed at 55%
  • Pension protection lump sums –
    • If the member dies before the guaranteed amount of pension is paid, the rest can be paid as a lump sum
    • Can be paid from crystalised funds only
    • No BCE event
    • There are no HMRC rules as to who can get it,
    • Scheme rules may be more restrictive.
    • The max amount paid is the crystalised amount for LTA purposes minus the gross amount already paid out.
  • Annuity protection lump sum
    • From a DC pension only
    • There are no HMRC rules as to who can get it,
    • Scheme rules may be more restrictive. 
  • • The max amount paid is the crystalised amount for LTA purposes minus the gross amount already paid out.