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  Introduction   Employer benefits to members
  Beneficiary lump sum   Beneficiary pension income
  Spouses lost benefits   Pension member benefits
     

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Introduction
The scheme member of an employer pensions are usually provided with benefits in addition to the pension income at normal pension age (NPA). These could be benefits in kind such as a car or private medical insurance that are taxable and can enjoyed by the member immediately.

Alternatively, the scheme trustees could enhance the members pension income entitlement as a discretionary benefit. For private pensions the member will have to pay for further benefits and this includes any lump sum death benefits to beneficiaries, whereas employers typically provide this at no cost to the member. On death of the member, private pensions will pay the fund to the beneficiaries whereas the rules of the employers scheme will determine the benefits to be paid if any.

For pensions on divorce the CETV Method will not consider these benefits yet these are the rights a former spouse will loose. A suitably adjusted CETV will reflect the spouses lost rights and determine the fair value for the retirement benefits.



Employer benefits to members

In addition to an employees basic salary, an employer will often provide benefits in kind as part of the employment agreement. These benefits in kind are potentially pensionable under normal Inland Revenue rules and can represent an important part of an employees income, which may be lost when the employee retires. Examples are a company car or medical insurance that could be taxable as benefits in kind and therefore qualify as pensionable earnings.

On the 6 July following the end of each tax year, the employer must provide the form P11D benefits to the employees showing the taxable cash equivalent of all benefits in kind. These benefits can be used to frank pension contributions by the employee. Occupational pension schemes offer group additional voluntary contribution (AVC) facilities to do this although, for employees earning less than £30,000, they may be better advised to direct their additional contributions to stakeholder pensions as there is the opportunity to commute part of the pension income to a tax free lump sum.

For an occupational pension scheme the scheme trustees can enhance the benefits to a member in excess of their actual entitlement at retirement age but within Inland Revenue maximum limits and these are referred to as discretionary benefits. For example, the enhancement of a members pension rights could be to give a more generous escalation rate than the limited price indexation (LPI) applied to pension income at retirement age, this then being above the required retail price index (RPI) but below the 5.0% ceiling.

The employer could request the scheme trustees to augment a members retirement benefits on early retirement, redundancy, ill health or even the death in service benefits to the spouse, such as a pension income or tax free lump sum. Also, on the death of the scheme member, the trustees have the discretionary power to award the death benefits as a tax free lump sum to any individual and not necessarily the members nominated beneficiaries. The scheme rules may also allow a widows pension if death is during service in addition to the lump sum death benefit but certainly will provide a widows pension if death is after retirement.

A final salary occupational pension scheme will usually allow an employee to continue as an active scheme member even though he or she is not actively at work as a result of an illness or taking a sabbatical and this is known as a temporary absence. The maximum period for such temporary absence is 30 months. During this period retirement benefits continue to accrue and the employee remains covered for death in service benefits.


Pension member benefits
For a private pension it is the individuals responsibility to pay for extra benefits from the contributions made. In the event of a critical illness or accident of a personal pension scheme member, waiver of premium benefit will allow a regular contribution by the member or employer to continue to retirement age.

Payments from an income protection contact will not qualify as taxable earnings. Waiver of premium means the provider waives the regular contributions, usually after a deferred period. Waiver of premium benefit will not be available for policies started from 6 April 2001 with the introduction of stakeholder pensions.


Beneficiary lump sum
For an occupational pension scheme such as a final salary pension, death in service benefits are automatically included as part of the scheme. If the scheme member dies during service a tax free lump sum death benefit will be payable to a dependent or beneficiaries and in the case of a married couple this would almost certainly be the spouse. The tax free lump sum payable depends on each pension scheme rules but is typically four times the basic salary. On payment of this benefit there is no liability to income tax to the dependent.

In small to medium size companies this death benefit is offered through a life assurance arrangement that is separate from the company pension scheme. In large companies the scheme will usually self-insure the risk. Where the spouse is entitled to preserved benefits from a scheme member, the benefits in a final salary scheme can be transferred to a section 32 policy and a tax free lump sum up to Inland Revenue limits can be taken before the balance is used to acquire a pension annuity.

For a money purchase scheme where the responsibility of the pension is with the individual, any extra benefits must be purchased out of the contributions made. The rules applying to personal pensions or retirement annuity policies (RAPs) allow pension linked term assurance to be incorporated within the premiums paid into these schemes. There is a limit to the proportion allocated to purchasing term assurance, however members can claim tax relief at their highest rate on the premiums paid.

On death of the member before any benefits are taken the beneficiary, that could be any person nominated by the member, will receive the whole fund of non protected rights as a tax free lump sum. Benefits from protected rights payable to a spouse will not be accessible until retirement age but benefits to children will be payable as a tax free lump sum at that time.


Beneficiary pension income
For personal pensions the death of the scheme member prior to retirement will mean the widow or widower will receive the pension fund value of non protected rights as a tax free lump sum from which an income can be drawn. If the member has already secured a compulsory purchase annuity, there would have been an option within the contract when it was purchased to provide a pension income for a spouse in the event of death.

Alternatively, an open market option can be used to find the best pension annuities by the spouse. Before purchasing an income, learn more about pension annuities, compare annuity rates, and secure a personalised annuity quote offering guaranteed rates. It is also possible where the spouse requires the maximum possible income to use the tax free lump sum to buy a purchase life annuity. There are annuity taxation advantages for doing this rather than taking the pension fund as a pension income which is then subject to income tax at 20% for a basic rate taxpayer for the tax year 2009/10. The purchase life annuity pays the income as capital and interest where the capital is tax free and only the interest is subject to savings tax of 20%.

For occupational pension schemes the maximum the Inland Revenue will allow for spouse or dependents pension rights is 2/3rds of the members pension. This means the maximum widows pension of 2/3rds, times the maximum members pension of 2/3rds will give the widow a maximum pension income of 4/9ths of the members pensionable earnings. How much is actually offered will depend on the rules as set out by the scheme trustees but the survivors pension will be expressed as a percentage or fraction of the pension the scheme member would have received at retirement age, based on the members current pensionable earnings.

The surviving spouses pension is also subject to equalisation rules in the Pensions Act 1995. However, the scheme trustees paying a percentage of expected pension income to a widow can limit payment to a proportion earned since 17 May 1990, which is the date of the Barber Judgment and the European Court of Justice (ECJ) conclusion regarding equalisation rules. The widows pension will retain other benefits such as LPI where the income will increase at the RPI to protect the pension income from inflation until death.

However, there may be certain payment conditions in the scheme rules such as stopping or reducing a widows or widowers pension on remarriage or paying a lower pension if she is considerably younger than the late member. If there are young dependent children then an extra amount could be payable until they are 18 or 21 if still in full-time education. In the event of the death of the widow, the widows pension may continue to the children if they are still dependent.

A dependent can be a wife, husband or under-age child even if they are not dependent financially. A dependent can be an unmarried partner such as 'common-law' wife, husband or partner of the same sex. The dependents pension income will be paid if death occurs after retirement and the pension will be increased by limited price indexation.


Spouses lost rights
For a couple on divorce or nullity of marriage the partner is a pension scheme member, the former spouse will lose retirement benefits that he or she would have been entitled to had the marriage continued. For an occupational pension scheme such as a final salary pension the spouses lost rights will include a share of the members pension rights at retirement age, as a pension income and with the option of a commutation to a tax free lump sum.

If the spouse was preceded in death by the partner a widows pension would have been payable until the death of the spouse. Had the partner died before reaching the NPA, a death in service benefit would be payable by the scheme trustees to the dependants that almost certainly would be the spouse, as well as a widows pension.

The spouses lost rights should be reflected in the valuation method as an adjusted CETV of the retirement benefits as documented in a pension audit undertaken by as independent financial adviser (IFA) with the relevant qualification such as G60 Pensions or equivalent.

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