Protection Benefits & Leaving Service | PENSION SCHEME DESIGN

Protection Benefits

The main protection benefits in final salary schemes normally include:

§  pensions to partners and/or dependent children on death in service or following retirement;

§  a lump sum (often four times salary) on death in service;

§  a pension on premature retirement due to ill health.

In a defined contribution scheme, the benefits available are similar, but may be provided differently, for example:

§  lump sum benefit on death in service of up to four times salary;

§  dependant's pension on death in service purchased with accumulated fund and/or provided through insurance policy;

§  the benefits (if any) on death after retirement are selected by the individual when an annuity is purchased;

§  ill-health benefits are typically provided by means of a 'permanent heath insurance' policy, which pays an income of 50–75 per cent of salary for employees on long-term sick leave (some final salary schemes also take this approach).

Leaving Service

When an employee leaves an employer (or withdraws from the pension scheme), the normal entitlement is to:

§  final salary - subject to two years' service, a deferred pension based on salary at and service to date of leaving and payable from retirement date: the link to final salary is lost, but the pension must be revalued to retirement in line with inflation (or 5 per cent per annum compound, if less);

§  defined contribution - the fund built up to date: this will continue to accrue investment returns up to retirement.

In both cases, the employee may also request that the value of the pension be transferred to a new employer's scheme or an individual pension contract.

In the public sector, employees can often change employer with little change to their accrued pension.