Overview
This will be the only option – without transferring - for members of their employer’s Defined Benefit (also known as Final Salary) Pension Scheme. Those with other types of pension arrangement can also choose this option if they do not wish to purchase a Lifetime Annuity. These pensions are paid either directly from the original pension scheme or on its behalf by an insurance company.
Payment of scheme pensions from Defined Benefit schemes are guaranteed for life.
Tax Free Cash
The scheme pension would allow the option of taking a tax-free cash lump sum at outset. Once income has started, there is no further entitlement to tax-free cash and moving out of the plan cannot be undertaken.
Income
Pension payments are taxed as earned income under the PAYE system as described under ‘Lifetime Annuity’.
Death Benefits
The death benefits are typically a spouse’s or dependant’s pension payable for life at a set percentage of the original scheme member’s pension e.g. 50% or 66%. There is also usually an option for the full level of pension to continue to be paid if death occurs within a specified ‘guaranteed period’ e.g. on death within the first 5 years commonly.
Advantages
- You will receive an income for life and you can elect for your spouse/partner to receive an income (subject to income tax) upon your death.
- Money purchase plan scheme pensions are regularly reviewed therefore income could be altered according to changes in health / fund performance.
- Tax-free cash is available at outset.
- The contract is simple to understand and there is minimal paperwork needed to start the payment of benefits.
Disadvantages
- For money purchase schemes, the benefits paid on death could be reduced if investment performance has been poor.
- Any options (if offered by the scheme) to provide benefits on death must be selected at outset and will result in a lower initial pension payment. These selected benefits cannot usually be altered in the future.
Suitability
Final Salary scheme pensions are likely to suit individuals who want a guarantee on their pension payments. They therefore suit individuals with low attitudes to risk and a requirement for security. Money purchase scheme pensions can vary and are likely to suit someone who is prepared to accept these income fluctuations. This would therefore suit individuals who have a balanced attitude to risk.
