PTM023200 - General principles: arrangements: types of arrangement

Glossary PTM000001

Types of arrangement
Classifying an arrangement

Types of arrangement

Section 152 Finance Act 2004

The rules governing the payment of benefits under a registered pension scheme vary depending on whether the scheme provides benefits on a money purchase or a defined benefits basis.

The legislation therefore categorises arrangements based on how benefits will be provided to the member under that arrangement. The legislation defines five types of arrangements:

  • money purchase
  • cash balance
  • defined benefits
  • collective money purchase
  • hybrid.

A money purchase arrangement that is neither a cash balance arrangement nor a collective money purchase arrangement may be referred to as an ‘other money purchase arrangement’.

Further information on other money purchase, cash balance, collective money purchase and hybrid arrangements can be found at PTM023300 to PTM023600.

Top of page

Classifying an arrangement

Section 152(9) Finance Act 2004

Although ‘arrangement’ is not specifically defined in the legislation, every arrangement relates to a member and every member has at least one arrangement relating to them under which they are entitled to benefits.

An arrangement cannot be of more than one type (except a cash balance arrangement or a collective money purchase arrangement which are types of money purchase arrangement). If the way benefits are provided under a scheme in respect of a member varies in any way, these differing entitlements are treated as held in separate arrangements for the purposes of the tax legislation.

For example, a member of a scheme that provides defined benefits but which also allows the member to pay additional voluntary contributions (AVCs) on a money purchase basis will have at least two arrangements under the scheme. (One or more defined benefits arrangements will hold the main scheme benefit, and one or more money purchase arrangements will hold the AVCs.) The same would apply to a scheme that provided money purchase benefits to its members, but also provided a lump sum on their death based on a multiple of their final salary (defined benefits).

The position is different where only one type of benefit will ultimately be provided to a member under the scheme, but which type that will be will depend on the circumstances at some future point in time. This is a hybrid arrangement - see PTM023600.

Benefits of a different variety (defined benefit, cash balance, collective money purchase, other money purchase) will always be treated for the purposes of the tax rules as being within separate arrangements.

Bar that exception, the tax rules for registered pension schemes do not constrain whether an individual’s benefits are being delivered from more arrangements, for example, all a member’s defined benefits in a scheme might be in one arrangement, or divided between two or more.

What arrangements apply, and how and when the arrangements that apply are established is a matter for the scheme administrator to determine. In doing so, the scheme administrator will need to take into account any matters of fact and the scheme construction:

  • matters of fact here could include previous explicit determinations made by the scheme administrator as to whether a member’s benefits are contained in a single arrangement or are contained in separate arrangements within the same scheme

  • matters of scheme construction here could include explicit statements in a scheme’s rules about those issues.

It is not possible to change previously determined scheme arrangements, for example, to treat a previously single arrangement as two or more arrangements and vice versa. Nor is it possible to override retrospectively an explicit statement on that point in the scheme rules. But to the extent that a scheme administrator may not have actively considered how many arrangements there may be so that no such explicit determination has been made, then (subject to the distinction between defined benefits, cash balance benefits, collective money purchase benefits and other money purchase benefits noted above) it is for the scheme administrator to determine what has applied in the past.

When considering other issues such as the annual allowance or lifetime allowance, the five different types of arrangements are often each subject to separate rules and restrictions.