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10th September 2010
:: Scheme Member | Drawing My Benefits | Early Payment | Pensioner members of a DB scheme

Early Payment – Pensioner Members
This Factsheet discusses some of the main issues relating to early payment of your pension benefit (other than on the grounds of ill-health).
 
It is written for people with a pension benefit currently in payment from a defined benefit scheme where your benefits have started being paid earlier than your Normal Retirement Age. As a pensioner member you may have retired from work, or begun taking your pension from a previous employer whilst working with another. 
 
Summary & Key Points 
 
 
Introduction
 
If you have commenced taking your pension earlier than your Normal Retirement Date, there are still a number of issues that can affect your benefits. This Factsheet look at some of those issues, HOW they can impact upon your pension benefits, and WHY you should continue to keep appraised about pension-related issues.
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Can my pension scheme withdraw the option of early payment?
 
Once you have taken up the option of early payment and started to receive your pension benefit, the scheme cannot withdraw or reduce it unless the scheme is wound up with insufficient assets to pay full benefits.
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Pension Increases once your pension commences
 
Increases to your pension in payment are called ‘escalation’. You may be receiving different rates of increase to different parts of your pension, although you might not be aware of it.
 
Your scheme will be able to tell you what increases you get and whether these alter at different ages, such as at Normal Retirement Age or State Pension Age. As your pension is in payment, your pension increases can be:  
  • Statutory - determined by legislation, these increases are required by law and cannot be changed
  • Guaranteed - these increases will be applied as they will have been written into the Scheme Rules
  • Discretionary - as the name suggests these are optional increases notified from time to time
  • Catch-up - sometimes used to address the impact of inflation over a period of years where the scheme hasn’t provided adequate inflation protection on some benefits
Discretionary and ‘catch-up’ increases were quite common in the eighties and nineties, but have become less common in recent years, with low inflation and much higher statutory increases. They may be granted on a regular or irregular basis. Some schemes may have a ‘published practice’ (e.g. ‘discretionary increases matching inflation up to 70%’).
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Step-up pensions, Bridging pensions, Pension Deductions & Offsets
 
Step-up pensions, Bridging Pensions or Pension Deductions generally involve the way your pension benefit interacts with the Basic State Pension Scheme or its obligation to provide a minimum pension as a consequence of the scheme being contracted-out between 1978 and 1997. They only apply for a fixed period or from a fixed date after your pension started to be paid.
 
Step-up pensions and Bridging Pensions may also be used as a method of ‘levelling-up’ pension benefit due to Equalisation (which addressed most sex discrimination issues in pension schemes). Not all defined benefit schemes operate Step-up pensions, Bridging Pensions, Pension Deductions or Offsets, but it is important to identify whether yours does, and if it does, whether it applies to your benefits.
 
Step-up pensions, Bridging Pensions or Pension Deductions usually apply when pension benefit is paid either: 
  • before Normal Retirement Date as an Early Payment or
  • before State Pension Age (i.e. if your Normal Retirement Date is 60, but your State Pension Age is 65)
and then no longer apply once you have reached State Pension Age.
 
Each of these terms could be described as follows:
 
Step-up Pension: as its name tends to suggest, is an addition to your pension benefit at a given age. Your pension scheme calculates the amount to be added to your pension and should explain to you the reason for the Step-up.
 
Bridging Pension: would usually be in the form of a ‘temporary’ pension payable between two dates. The reason for the Bridging Pension should be provided by your pension scheme who will also have calculated the amount.
 
Pension Deduction: would see your pension benefits reduce by an amount at a particular age. It could be levied for a number of reasons. The reason for the Pension Deduction should be provided by your pension scheme who will also calculate the amount.
 
Offset: would usually involve the process of a pension scheme granting pension increases (escalation) between early payment age and State Pension Age and setting these against any increases in Guaranteed Minimum Pension you may have if you were Contracted-out of the State Earnings Related Pension Scheme between 1978 and 1997. The amount of Offset would be calculated by your pension scheme.
 
You should have been notified of any changes to your pension in payment, at the time you started to receive it, and when each escalation increase arises.
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Pension Protection Fund issues
 
The Pension Protection Fund (PPF) was set up in April 2005 to pay compensation to members of defined benefits schemes whose sponsoring employer failed. A pension scheme must undergo an assessment by the PPF before members become eligible for compensation.
 
Where a scheme is accepted by the PPF, members who have already reached their scheme’s Normal Retirement Age will receive 100% compensation up to a ceiling, currently £30,856.35 at age 65 (effective from April 2008).
 
The PPF administrator may also review the eligibility of members to ill-health early retirement benefits and could indeed terminate payment.
All other members – including those who have received their pension from their pension scheme under early payment terms – will receive 90% compensation (i.e. currently a maximum of 90% of £30,856.35 = £27,770.72 from April 2008).
 
Pension increases during retirement from the PPF for all pensioner members may also be lower than the increases you would have received from your pension scheme before it entered into the PPF.
 
For more details, go to the PPF website.
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Summary & Key Points
 
When making enquiries about your pension benefit it is very important that you make it clear whether you are a pensioner member rather than an active member or a preserved member. Active, preserved and pensioner are different classes of membership of a pension scheme and any definitions and paragraphs contained within your Scheme Rules or scheme literature relating to any benefit may differ considerably between these categories.
 
For each pension benefit you need to consider the following items: 
  • Will the rate or method of pension increases you are receiving change at a particular age? (e.g. if you reach State Pension Age after you commenced drawing your pension benefit).
  • Will there be any Step-up Pension, Bridging Pension, Pension Deduction or Offset?
  • Keep informed. Your scheme may modify benefits and Rules. Legislation may change. Your circumstances may alter.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
 
 
Early payment v1.2 Pensioner
Last updated 07/12/2006
 
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Glossary
View our Glossary for definitions of the terms used in our Factsheets
 

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Early Payment - Pensioner Members
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