What is the payment process?
A member is retiring, all the relevant forms have been sent in and he or she wants to know when the benefits will be paid.
Despite the best of intentions, sometimes benefits are not paid on time so we will look at some factors a member should be aware to avoid a period of financial hardship immediately after retiring.
1. Defined contribution schemes
For members of defined contribution schemes, the money in the member’s pot needs to be disinvested before any benefits can be paid.
Timing is crucial!
If the pension pot is disinvested too soon there is potentially a period of investment loss.
The scheme should have a financial management policy in place which states how far in advance a disinvestment can take place. Administrators need to ensure that the following are taken account of in the timing:
The member may receive several quotations leading up to the time the benefits are to be accessed but the value of the fund is not known until the monies are actually received. If there has been a change in the value of the investment, this will have an impact on the final benefits so for example the final PCLS amount may differ from the amount originally quoted.
If the money is being used to purchase an annuity and there has been a change in the fund value and/or the annuity rate, this will have an impact on the amount of income the member will receive.
Also, with regard to any annuity to be purchased, it can take several weeks before the member actually receives any income, even though the purchase price is paid to the insurance company on the required date. Most insurance companies take 4 to 6 weeks to set up an annuity and unfortunately, there is nothing that can be done about this so the member needs to be aware of this time gap. When the member does receive the first payment, it will be backdated to their retirement date.
2. Defined benefit schemes
Due to the way defined benefit schemes are funded timing is not so crucial. However, a disinvestment may be required to cover any PCLS so it is important to ensure there are sufficient monies available in the scheme bank account in order to make the payment on time.
In some circumstances the benefits may need to be recalculated, particularly if the retirement date falls around the scheme renewal date and final salary details need to be updated.
The pension will be paid by the scheme and the rules will state when the first payment will take place for example, on the first of the month after the member’s retirement date etc.
The member should also be made aware of whether the payment is made in advance or arrears. If the payment is made in arrears, the first amount may only be small so the member needs to ensure they have sufficient income for the period until the next payment date.
3. AVCs
If a member has paid AVCs they may be invested separately from the main scheme assets and if an external party is involved, there may be a timing delay in settlement of which the member should be made aware.
4. Pay As You Earn (PAYE)
The pension quoted to a member is always the gross amount. As the pension is income, it is subject to tax, normally on a PAYE basis. National Insurance Contributions do not apply, only tax.
If a member is not able to provide a P45 on retirement then the pension will be taxed under the emergency code until HMRC notifies the pension provider of the tax code to use. Once the correct tax code is applied, if too much tax has been deducted, the scheme will pay any refund due through subsequent pension payments.
The member’s personal allowance is reduced to take into account any state pension the member receives.
Example of the State pension collected via a company pension scheme
| Scheme pension is | £6,000 |
| State pension is | £5,577 |
| Personal Allowance is | £10,500 |
Step 1
| Personal Allowance | £10,500 | |
| Less the State Pension | £5,577 | |
| £4,923 | Remaining amount of income the member can receive tax free |
Step 2
| Scheme pension | £6,000 | |
| Less remaining income Allowance | £4,923 | |
| £1,077 | Amount of scheme pension the member will pay tax on |
5. Overpayment of benefits
Sometimes a pension is overpaid due to an error in the benefit calculations. It can also happen if the pension is paid in advance and the member dies so some of the pension needs to be reclaimed.
The law states that no-one is allowed to profit from a mistake therefore the scheme trustees normally ask for the overpayment to be paid back to the scheme. If it is a large amount that needs to be repaid, it may be possible for the member to agree with the trustees that it can be repaid in instalments over a period of time so that they do not suffer financial hardship.
The member may want compensation for distress or inconvenience and a small amount may be agreed upon.
In such cases, the member should be advised of the process that applies for making such applications for compensation.
