Scheme Pension
Overview
This will be the only option for Individuals who have
pension benefits in 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.
Tax Free Cash
The scheme pension would allow the option of taking a
tax-free cash lump sum before commencement of the regular
pension income. Once income has started, there is no further
entitlement to tax-free cash, therefore the decision of
whether to access the cash or not needs to be made at
outset.
Income
Pension payments are taxed as earned income under the PAYE
system as described under ‘Lifetime Annuity’.
Death Benefits
The death benefits are the same as described under Lifetime
Annuity however, the payment of death benefits from a
Defined Benefits (or Final Salary) Scheme are classed as a
benefit crystallisation event. Essentially, this means that
the maximum that can be paid out is the individuals
remaining Lifetime Allowance (a Standard Lifetime Allowance
figure is declared by the government each year) with any
remaining fund in excess of this allowance being subject to
a 55% tax charge
Advantages
● You will receive an income for
life, and you can elect for your spouse/partner to receive
an income or lump sum (which could be subject to tax) upon
your death.
● 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
● The selected income level is
guaranteed and is not subject to future investment returns.
● Any options to provide
benefits on death must be selected at outset and will result
in a lower initial pension payment. These selected benefits
cannot be altered in the future.
Suitability
These annuities are most likely to suit individuals who want
absolute guarantee on their pension payments. They therefore
suit individuals with low attitudes to risk and a
requirement for security.