Leavers Fact Finding (Money Purchase Scheme)


Money Purchase Schemes

In a money purchase scheme, often referred to as a defined contribution scheme, the scheme rules will describe how a member's benefits are to be calculated on leaving service, retirement or death. This element of the resource material will concentrate on the calculation and communication of leaver benefits for a money purchase scheme.

The case studies that you will be referred to in the examinations will include one (1) money purchase scheme:

  • The OPQ Retirement & Death Benefits Plan (which is not contracted out)

TIP: From 6 April 2012 it was no longer possible for money purchase schemes to be contracted out.

There are three (3) distinct retirement calculations and candidates will be tested on each of these in the examinations:

  1. Refund of contributions (for members who are "active" when they leave the scheme)
  2. Preserved pension (for members who are “active” when they leave the scheme)
  3. Transfer out (for members who are “active” when they leave the scheme)

It should be noted that, for the Transfer out option, it will only be necessary for learners to ‘state’ the option (assuming the option exists on leaving the scheme).

Fact Finding

1. How and when can contributions be refunded?

If a member has completed less than 30 days of qualifying service in a money purchase scheme, then a refund of contributions will be offered. For the OPQ Retirement & Death Benefits Plan, the refund option does not apply if a member has transferred-in benefits from a personal pension plan.

2. How and when can contributions be preserved?

If a member leaves with 30 days or more of qualifying service in a money purchase scheme, then the option of preserved benefits within the scheme will be offered.

Alternatively, members can opt to transfer the value of their fund to another arrangement (such as to the registered scheme of a new employer).

When a refund of contributions is applicable, the amount payable typically depends on the contributions paid by the member.

As a rule, the actual member contributions paid (excluding interest and / or investment growth) are refunded after the deduction of tax. This is at the rate of 20% on the amount up to £20,000 and 50% on any amount over and above £20,000. Any interest and/or investment growth is then generally accumulated to the refund, with the onus on the member to declare this additional amount to HMRC.

TIP: On refunds from the OPQ Retirement & Death Benefits Plan, tax is deducted from the member’s actual contributions, with any investment growth on these contributions being accumulated to the net refund without a further deduction for tax.  The member must then declare any investment growth to HM Revenue & Customs.

For members who have at least 30 days of qualifying service (or who have less than 30 days of qualifying service but have a transferred-in benefit from a previous arrangement), the refund option does not apply. In these cases, members are entitled to either a cash equivalent transfer value or preserved benefits within the scheme.

For money purchase schemes, the fund at the date of leaving will remain invested until such time as the member takes his benefits, and no further contributions will be paid. As such, the amount of pension that can be purchased for a member (should that option be taken) will be unknown until the member actually takes his benefits. The pension will then be dependent upon how well the investments have performed and the annuity rates in force when the pension is purchased (plus the manner in which the pension is to be paid; e.g. single life / joint life, rate of escalation and period of guarantee).

3. How are communications with the member / trustees made?

Once the benefits have been calculated they need to be communicated to the member and / or trustees of the scheme in the form of a letter. The examinations will expect candidates to write letters to include all the facts and figures that are required to be communicated.

For leaver case studies from the OPQ Retirement & Death Benefits Plan all letters should include the following (where applicable):

1.Member’s date of leaving and normal pension date (or TRD if Lifestyling applies)

2. Fund value at date of leaving (including unit holdings and fund values, split by contribution type within fund)

3. Statement that the policy account will continue to be invested until benefits are taken

4. Statement that annual benefit statements will be issued

5. Options when taking benefits from the OPQ Retirement & Benefits Plan:

  1. Annuity only using ‘Annuity Bureau’ factors (single life v joint life and increasing v non-increasing)
  2. Tax-free lump sum and reduced annuity using ‘Annuity Bureau’ factors (single life v joint life and increasing v non-increasing)
  3. Single UFPLS

6. Benefits on death before retirement

7. Refund of policy account to legal personal representatives

8. Transfer value option

The list is not definitive and all letters must, for example, refer to any special circumstances and additional information contained in the case study.