Provide a pension for your scheme member
Find out how to provide the minimum level of pension that must be paid, depending on benefits a member has accrued and according to anti-franking legislation.
Providing a pension
Occupational pension schemes, insurance companies or friendly societies (where an annuity has been purchased) must use a member’s scheme benefits, including any Guaranteed Minimum Pension (GMP) and or post 1997 Contracted-out Salary Related (COSR) rights to provide:
- a pension from the scheme
- for the payment of a lump sum or both in certain circumstances
These options can be taken by the:
- member
- member’s widow, widower or surviving same sex spouse (providing certain conditions are met)
A pension can be payable by an occupational pension scheme to the:
- member at any time subject to scheme rules
- widow, widower or surviving same sex spouse on the death of the member
However, the scheme must make the GMP available to its members at age:
- 60 for a woman
- 65 for a man
Although the State Pension Age (SPA) for men and women is rising from age 65 to 68 over a phased period, the date you must make the GMP available remains at age 65 for men and age 60 for women.
Payment of the GMP is deferred
Payment of a scheme pension (including the GMP element) may be deferred after pensionable age if the member continues in employment. However, the member must consent to deferment if the:
- GMP relates to a different employment to that in which they are currently employed
- deferment includes a period which is 5 years after they reached age 60 for women and 65 for men
If the deferment is for 7 weeks or more, the scheme must increase the GMP by one seventh of a per cent for each complete week in the period of deferment. The increment calculation is based on the pension value at the end of the period of deferment which will include any inflation proofing.
If a member dies while deferring their pension, any increments due should be calculated up to the date of death. The member’s spouse will then be entitled to half the increments earned on the GMP built up from:
- 6 April 1978 in the case of a qualifying widow
- 6 April 1988 in the case of a qualifying widower, surviving civil partner or surviving same sex spouse
Lump sum payments
In certain circumstances GMP and post 1997 COSR rights can be paid as a:
- trivial commutation lump sum payment
- serious ill-health lump sum payment
- winding-up lump sum payment
Additionally, post 1997 COSR rights can be paid as a pension commencement lump sum payment.
For full details of the conditions for payment of these lump sums are contained in regulations 18 and 25 of The Occupational Pension Schemes (Schemes that were Contracted-out) (No 2) Regulations 2015 (2015/1677) and the Member benefits: lump sums contents of the Pensions Tax Manual.
Inflation-proofing the pension
There is no requirement for pension schemes to inflation-proof any GMP accrued between 6 April 1978 and 5 April 1988, however any GMP accrued between 6 April 1988 and 5 April 1997 must be inflation-proofed by the scheme by the lower of:
- the increase in Consumer Price Index (CPI) over a 12-month period
- 3%
The first increase will be due on 6 April following the date on which the GMP becomes payable, with subsequent increases being made on 6 April. Any other increases a scheme makes during a year may be taken into account against the inflation proofing required at the beginning of the new tax year. Schemes are not permitted to pay such increases out of other benefits in the scheme which are in excess of the GMP.
Pension rights that accrue from 6 April 1997 onwards must be inflation-proofed by the scheme by the lower of:
- the increase in CPI over a 12-month period
- 5% (for accruals from 6 April 2005 schemes may choose to reduce this cap to 2.5%)
Widows’, widowers’ and surviving same sex spouse benefits are protected in the same way.
GMP inheritance provisions
Widow’s GMP
If a married man dies with an entitlement to a GMP, his widow is entitled to half the GMP accrued by, or in payment to him, at the date of his death providing she qualifies for one of the following state benefits:
- Bereavement Allowance
- Widowed Parent’s Allowance
- Retirement Pension, based on her late husband’s National Insurance contributions (NICs)
- Retirement Pension, based on her own NICs but with underlying title to a Retirement Pension based on her late husband’s NICs
- Bereavement Support Payment
Widower’s, surviving civil partner’s or surviving same sex spouse’s GMP
If a married woman, civil partner or same sex spouse dies with an entitlement to a GMP, the widower, surviving civil partner or surviving same sex spouse is entitled to half of the GMP built up from 6 April 1988, if they qualify for one of the following state benefits:
- Bereavement Allowance
- Widowed Parent’s Allowance
- State Retirement Pension, based on late wife’s, civil partner’s or same sex spouse’s NICs
- State Retirement Pension (based on own NICs but with underlying title to a Retirement Pension on his late wife’s, civil partner’s or same sex spouse’s NICs)
- Bereavement Support Payment
When entitlement to Widowed Parent’s Allowance, Bereavement Support Payment or Bereavement Allowance ends, if the widow, widower, surviving civil partner or surviving same sex spouse has reached age 45, the widows, widowers, surviving civil partner or surviving same sex spouse’s pension continues to be payable for life.
The scheme can stop payment if the widow, widower, surviving civil partner or surviving same sex spouse subsequently remarries, forms a civil partnership or lives together with another person as if they were married.
The provision to stop payment does not apply where the member was entitled to a Retirement Pension based on their late spouse’s or civil partner’s NICs (category B Pension) or the circumstances in section 17(4A)(aa) of the Pension Schemes Act 1993 apply. And also where the survivor and the deceased were both over pensionable age when the deceased died.
Post 1997 COSR rights for widows, widowers, surviving civil partners and same sex spouses
For the widow, widower or surviving civil partner to inherit survivor’s benefits provided under the scheme rules, they must:
- be married or have been in a civil partnership with the deceased member before the pension commenced payment
- not be living with another person as if they were married at the time of the spouse’s death
The scheme can withdraw payment of the pension if they subsequently:
- remarry
- form a civil partnership
- live together with another person as if they were married
If a widow, widower, surviving civil partner or surviving same sex spouse does not satisfy the qualifying conditions, then it will depend on the scheme rules whether they will be entitled to a pension.
GMP anti-franking requirements
The anti-franking rules prevent the off-set of GMP revaluation against benefits in excess of the GMP or against required revaluation increases in those benefits in certain circumstances.
Individuals protected by legislation
Members, and their widows or certain widowers and surviving civil partners are protected by the legislation if:
- before the abolition of defined benefit (DB) contracting out:
- they leave contracted-out employment before scheme pension age
- a GMP is preserved for them
- after abolition of DB contracting out:
- they cease to be in pensionable service before pension age under a scheme that was, before the abolition of DB contracting out, a COSR scheme
- a GMP is preserved for them
Alternatively, members, and their widows or certain widowers and surviving civil partners are protected by the legislation if they:
- have a scheme pension age before age 60 for women or age 65 for men
- defer retirement until after age 60 for women or age 65 for men
A member’s benefit is protected if:
- the GMP is increased during an interval between:
- the termination of contracted-out employment or (after abolition) the point at which the member ceases to be in pensionable service in a former COSR
- the date on which payment of the GMP commences
- on the day after termination, scheme benefits have built up which exceed the GMP at that time
- contracted-out employment ended after 31 December 1984 or (after abolition) the member ceases to be in pensionable service in a former COSR scheme
Pension provision for a scheme member
Former contracted-out schemes must provide a pension at or after age 60 for women and age 65 for men which is more than the sum total of:
- the weekly rate of:
- pension, if (before abolition) the member reaches normal scheme pension age on or before termination of contracted-out employment, or (after abolition) reaches normal scheme pension age on or before the point at which the member ceases to be in pensionable service in a former COSR
- pension earned up to the date contracted-out employment terminated, if before normal scheme pension age but employment continues
- short service benefit, if employment ends before normal scheme pension age
- the amount by which the GMP has been increased from the date of termination of contracted-out employment (or, after abolition, has been increased from the date on which the member ceases to be in pensionable service in a former COSR scheme) to when the GMP becomes payable
- any further pension benefits which may have been built up under the schemes after contracted-out employment ends
- any increases in the benefits in excess of the GMP due to their payment being deferred
- any increase during the period up to the normal scheme pension age to that part of short service benefit in excess of the GMP
Occupational pension schemes must provide equal treatment for men and women in the overall pension paid to members for pensionable service from 17 May 1990.
Circumstances in which a widow’s, widower’s or surviving civil partner’s benefit is protected
A widow’s, widower’s or surviving civil partner’s benefit is protected if the:
-
GMP is increased during an interval between:
- the termination of contracted-out employment or (after abolition) the point at which the member ceased to be in pensionable service in a former COSR scheme
- the date on which payment of the GMP commences
- pension to which the widow, or widower or surviving civil partner would have been entitled, had the member died on the date of termination, exceeds half the member’s GMP
- member’s contracted-out employment ends after 31 December 1984 or (after abolition) the member ceases to be in pensionable service in a former COSR scheme
Pension provision for widows, widowers or surviving civil partners
The pension a contracted-out scheme must provide for a widow, widower, surviving civil partner is more than the sum total of:
- the pension to which the widow, widower, or surviving civil partner would have been entitled under the scheme on the day after the member’s contracted-out employment ended or (after abolition) on the day after the member ceased to be in pensionable service in a former COSR, had the member died on that date
- the amount by which the guaranteed minimum payable to the widow, widower or surviving civil partner exceeds one half of the member’s GMP when contracted-out employment ended or (after abolition) the member ceased to be in pensionable service in a former COSR scheme
- any further widow’s, widower’s pension or surviving civil partner’s or pension which may have built up due to the member’s employment after the termination of contracted-out employment
- any increase in the widow’s, widower’s or surviving civil partner’s pension in excess of the GMP due to the postponement of the member’s Retirement Pension
Exemptions from the legislation
The legislation does not apply if:
- at age 60 (for women) or 65 (for men), no increase is required to alternatives to short service benefit provided in accordance with the Pension Schemes Act 1993 (PSA 1993) – the value of any alternative provided either before or after age 60 or 65 must reflect any increase under the anti-franking and revaluation legislation
- an immediate pension equal to or larger than short service benefit is paid with the member’s consent before normal scheme pension age, for example, because of ill health or redundancy – any widow’s, widower’s or surviving civil partner’s benefit under these arrangements is also exempt
- a scheme member has opted for and been granted an alternative to short service benefit – any following widow’s, widower’s or surviving civil partner’s benefit is also exempt
- an occupational pension payable earlier than SPA is adjusted to take into account State Retirement Pension when State Retirement Pension comes into payment – the protection will apply only to the rate of pension payable after such an adjustment is made
- the annual rate of the earner’s pension to be paid is the greater of that related to salary and another method of calculation not directly related to salary – if the alternative method gives the higher amount, then the protection applies only to the sum related to salary
- any higher rate of widow, widower or surviving civil partner benefit paid during early bereavement, can be ignored when applying the above provisions, if the increase ends no later than 6 months after the member’s death or, if the member dies after starting to receive a pension, 10 years after the commencement of such a pension, if this is later
- the qualifying conditions for preservation are not satisfied and the member opts for an alternative benefit other than a money purchase benefit
- a transfer was decided on or before 1 January 1985, even if it was not carried out by that date – the transferred benefits are excluded
- a transfer was agreed after 31 December 1984 – the amount of any GMP included in a previous transfer which related to the period before 1 January 1985 can be ignored
Short service benefit
Short service benefit is the minimum benefit to which an early leaver, who satisfies the preservation requirements in accordance with Section 71 of the PSA 1993 is entitled or to which they would be entitled if there were no minimum period of service.