Benefits

Retirement benefits

The official retirement age of the scheme is known as the NRA (Normal Retirement Age), and this must be set between the ages of 60 and 75. However, benefits may be drawn earlier than the NRA, at any time between the ages of 50 and 75. See Chapter 7 for details of early retirement on ill health grounds.

Earlier ages are eligible for NRA for certain occupations, including:

• Airline pilots.
• Distant Water Trawlermen.
• Money Brokers.
• Models.
• Professional Footballers.

Maximum benefits of retirement pensions are:

• ⅔ of final remuneration, subject to the number of years’ service, and the earnings cap (currently £105,600 p.a.). However, this pension may escalate in retirement.
• Some of the pension may be commuted to a tax free lump sum of 150% of final remuneration.

Death Benefits

Occupational Schemes must provide for death benefits to dependants. Dependants can be wives, husbands or children under the age of 18, even if they are not financially dependent on the member. A dependant can also be an unmarried partner of the member, including same-sex partners.

These benefits vary according to the status of the member at the time of death:

• Active members (death in service).
• Deferred members.
• Pensioners.

Active members

The death benefit is similar to a life assurance policy. The death benefit is related to the member’s salary at the time of death. The maximum benefit allowable for the scheme to be approved by the Inland Revenue is four times the salary at the time of death. This is a tax free lump sum. The member will have had to state who they would like the death benefit paid to. However, the trustees have the final authority as to who is paid the death benefit.

For Final Salary Schemes the normal death benefit is the refund of the member’s contributions. The rules can provide for a pension to the surviving spouse of up to two thirds of the pension the member would have received at normal retirement date.

For Money Purchase Schemes the normal death benefit is a refund of the member’s accumulated fund. If the scheme is contracted-out, the rules may provide for a pension from the accumulated fund.

Deferred members

For Final Salary Schemes, the normal death benefit is the refund of the member’s contributions. If the scheme is contracted-out, the rules may provide for:

• guaranteed Minimum Pension payable to a surviving spouse, or
• up to ⅔ of the member’s preserved pension payable to the surviving spouse.

For Money Purchase Schemes, the normal death benefit is a refund of the member’s accumulated fund. If the scheme is contracted-out, the rules may provide for a pension from the accumulated fund.

Pensioners

If a pensioner dies within a guarantee period, the remaining unpaid instalments of pension for the guarantee period are paid to the beneficiary, free of tax.

For Final Salary Schemes, the rules of the scheme may allow a pension to the surviving spouse of up to two thirds of the member’s pension.

For Money Purchase Schemes, the member decides at the time of retirement what level of pension is payable to a surviving spouse, which can be up to two thirds of the member’s pension. The level of this will, of course, affect the amount of pension received by the member.

The scheme rules may provide for conditional payments to widows or widowers. These conditions could be things such as stopping or reducing the pension if the widow or widower remarries, or paying a much lower pension if the widow or widower is considerably younger than the pensioner. The widow’s or widower’s pension may be increased if there are young dependant children – up to the age of 18, or 21 if in full-time education. Even if the widow or widower dies, the pension can be continued until the children reach these ages if they are still dependant.

Other enhanced benefits

The scheme trustees may enhance the benefits due to any member in excess of their actual entitlement according to the trust document at retirement age. These enhancements are known as discretionary enhancements, and must remain within Inland Revenue maximum limits.

For example, enhanced benefits could include an escalation rate of the pension above the limited price indexation. However, it would still have to be within the 5% maximum limit imposed by the Inland Revenue.

The employer may also request the trustees to enhance a member’s benefits on early retirement, redundancy, ill health, or death in service (benefits to a surviving spouse).