If you joined the Pension Scheme before 1st April 2004 you joined the Hybrid Section of the Scheme; after this date you would have joined the Defined Contribution (DC) Section.
If you are a member of the DC Section find out more here.
Pension at Normal Retirement Age
Under the Scheme Rules the normal retirement age from the Hybrid Section is age 65, which means that the Final Salary Pension that is calculated is for a pension income that starts on your 65th birthday and is paid to you for the rest of your life.
When you retire from the Hybrid Section of the Scheme, you will receive the Final Salary Pension or the Money Purchase Pension, whichever is more. You only get the higher of the two possible pensions.
You do NOT receive both pensions.
As a member of the Hybrid section of the Scheme you may not be entitled to a Final Salary Pension; this is usually because you waited too long after being employed to join the Scheme. In this case the Money Purchase Pension is the only benefit that can be paid to you under the Scheme Rules.
Even if you are entitled to a Final Salary Pension, the Money Purchase Pension may still provide you with a higher income in retirement.
If you are unsure whether you qualify for the Final Salary Pension, please contact us.
Why are there two types of Hybrid Pension?
This is because of the way the Scheme is funded.
Put simply contributions you and the employer have paid on your behalf have been invested. The intention is that by the time you retire this invested money should be enough to pay for the Final Salary Pension that the Scheme has undertaken to pay you, which is based on your salary and service.
However if there is an extended period of investment performance that is significantly better than expected, it is possible that the income that could be bought using the invested money – known as the Money Purchase Pension – turns out to be more than the Final Salary Pension.
In this situation the Scheme Rules state that you, the member, should benefit from the better-than-expected investment performance, and so you are paid the higher Money Purchase Pension instead of the Final Salary pension.
This type of hybrid pension arrangement is sometimes called a Money Purchase Underpin, because your eventual income is underpinned by the actual investment performance of your Money Purchase Account.
Regardless of actual investment performance you will always be paid an income that is at least the Final Salary Pension that the Scheme has undertaken to pay you.
Your benefit statement tells you whether your income payable at age 65 would be a Final Salary Pension or a Money Purchase Pension, given current conditions at the statement date.
Because the two pensions are calculated in two completely different ways and are dependent on current conditions, it is not possible to accurately predict today which one will give the better income when you actually come to retire.
You can find out more about how the two different pensions are calculated here.
Pension Commencement Lump Sum
At the point your pension starts you may take a tax-free cash lump sum. If you chose to do this, you must give up some of your monthly income in exchange. You may do this regardless of whether you receive the Final Salary Pension or the Money Purchase Pension.
If you have money in your AVC Account - arising from AVCs, an employer augmentation or a transfer-in from another pension arrangement - you can use this money towards the lump sum and so obtain a smaller reduction in your monthly income.
The maximum lump sum you may take is restricted by a complex calculation set out by tax legislation, but currently it is very roughly five times your annual pension income at age 65, assuming you have no AVC Account.
It is worth noting that your monthly pension income is taxable under the same rules as your salary, whether you take a lump sum or not.
AVCs and Additional Benefits
If you have made additional voluntary contributions (AVCs) to Prudential, received an augmentation payment from your Employer or transferred-in a pension from another pension arrangement to your Hybrid Pension, this money has been added to a separate AVC Account.
In addition you may have saved AVCs with Legal & General, Utmost Life (formerly Equitable Life) or Clerical Medical.
You can take all the money in this account and any other AVC account as part of your Hybrid Pension, either to increase your income or as part of your pension commencement lump sum.
Alternatively you can take this money as a completely separate lump sum before or after your main Hybrid Pension.
HM Revenue & Customs limit the pension you can build up over your lifetime without an excess tax charge and this limit is known as the Lifetime Allowance.
If you were working for Which? on 1st April 2004, you may have switched to the DC Section of the Scheme any time from that date.
Pension Wise is a free and impartial government service – see www.pensionwise.gov.uk.
Pension Wise only provides guidance on defined contribution pensions, such as Additional Voluntary Contributions (AVCs). You can book an appointment to get guidance over the telephone or a face to face meeting. You can talk about your pension options and what you can do next. At the end of your appointment you will get a printed summary of the options and next steps you need to take.