With a cash balance plan, you’re usually guaranteed a minimum pension pot when you retire. And you can take that money however you want. They operate like defined contribution schemes, but have some features of defined benefit schemes.
What’s in this guide
- How cash balance plans work
- Who manages the plan?
- How much do I have to contribute?
- Investing the fund and contributions
- Taking money from your pension
- How can I find out what guarantees my cash balance plan offers?
- Can my employer change the level of the guarantees?
- What to do if you’ve the lost contact details for your scheme
How cash balance plans work
Did you know?
Cash balance schemes can guarantee that your pot will grow at a minimum rate, and at retirement you can take money from the pot in any way you want.
Cash balance plans work in much the same way as defined contribution schemes – but they also include:
- a guaranteed minimum investment return, or
- a guaranteed percentage of pay built up for each year of service.
For example, a scheme might offer a guaranteed lump sum when you retire of, say, 20% of pay for each year you contributed to the scheme.
Who manages the plan?
A cash balance plan is usually run by trustees, on behalf of the employer.
Trustees are responsible for all aspects of the scheme – including paying out benefits to retired members.
A scheme administrator, appointed by the trustees, handles the daily management of the scheme.
How much do I have to contribute?
Your employer will contribute to the scheme. But you might also need to contribute – at least a minimum level.
If you decide to contribute more, your employer might decide to match your extra contributions.
Your employer decides the levels of contributions to the cash balance plan. Contributions are usually a percentage of your earnings.
The pension scheme’s rules will define what is meant by ‘earnings’. For example, some schemes don’t count extra earnings – for example, overtime, commission or bonuses.
The scheme might also only count a proportion of your weekly or monthly wage or salary. Your earnings that are used to calculate retirement benefits are often called ‘pensionable earnings’.
Your employer might be using the scheme to meet their automatic enrolment duties. If so, the law says what counts as pensionable earnings and the minimum contribution level that your employer must pay.
Contributions made to a cash balance scheme by you or your employer (or both) are invested in your individual ‘pot’. This is held in your name, in the same way as a defined contribution scheme.
Both you and your employer get tax relief on contributions made, subject to certain conditions. This is money that would have gone to the Government as tax, which goes into your pension instead.
Investing the fund and contributions
The trustees will appoint investment managers to invest the funds held in each member’s pot and contributions, as they’re received.
They will invest in a range of different assets – chosen to support the minimum level of investment return.
Is the investment return you’ve earned on your pots in a particular year less than the minimum guaranteed level? If so, your employer will make more contributions. This will top up your pot to the minimum guaranteed level.
If the achieved investment returns are higher than the minimum guaranteed level, your employer might hold back some, or all, of the excess from your pots. They’ll then use this amount to top up pots in future years – when the minimum guaranteed investment return isn’t achieved.
This structure means that it’s your employer – and not you – who is exposed to the scheme’s investment risk before your retirement. This is a feature of defined benefit schemes.
Some schemes also allow you to make extra contributions into a separate defined contribution pot, alongside the guaranteed element of the scheme.
So when you retire, you would have both a guaranteed pot plus a defined contribution pot. The value will depend on how the investments have performed.
Taking money from your pension
When you decide to take money from your pension, you usually have the same choices as you would have from a normal defined contribution pension:
- You can get a guaranteed retirement income — you can use your pension pot to buy a guaranteed income for life or for a fixed term – also known as a lifetime or fixed term annuity. You can usually take a quarter (25%) of your pension pot tax-free at the start and any other payments will be taxed.
- You can get a flexible retirement income — you can leave your money in your pension pot and take an income from it. Any money left in your pension pot remains invested, which may give your pension pot a chance to grow, but it could go down in value too. You can usually tak a quarter (25%) of your pension pot tax-free and any other withdrawals will be taxed whether you take them as income or as lump sums. You may need to move into a new pension plan to do this. You do not need to take an income.
- You can take your pension pot as a number of lump sums — you can leave your money in your pension pot and take lump sums from it as and when you need, until your money runs out or you choose another option. You can decide when and how much to take out. Any money left in your pension pot remains invested, which may give your pension pot a chance to grow, but it could go down in value too. Each time you take a lump sum, normally a quarter (25%) of it is tax-free and the rest will be taxed. You may need to move into a new pension plan to do this.
- You can take your whole pension pot in one go — you can take the whole amount as a single lump sum. You can usually take a quarter (25%) of your pension pot tax-free — the rest will be taxed. You will need to plan how you will provide an income for the rest of your retirement.
- You can also choose to take your pension using a combination of some or all of the options over time or over your total pot.
Got questions about how your pension can be paid?
If you need help making sense of how and when you can access your pension pot, you can speak to someone from Pension Wise, a free service from Money Helper.
How can I find out what guarantees my cash balance plan offers?
You would usually have been given a booklet or access to online information when you joined the scheme.
This would give you details of the guarantees.
If you no longer have the booklet or online access – it’s best to contact the administrator and ask for details.
Can my employer change the level of the guarantees?
Sometimes, it might be necessary to change the guarantees and benefits under the scheme; for example, because of changes in the law or in the employer’s financial position.
These changes affect future benefits – but not the benefits that you’ve already built up in the scheme.
In most cases, employers must consult you about any change to the scheme that might reduce future benefits.
What if your employer becomes insolvent? If this happens, any guaranteed element of your pension is protected by the government’s Pension Protection Fund.
If your employer is making changes that improve your benefits without subjecting them to higher costs, they don’t need to consult you. But they should still tell you about the changes.
What to do if you’ve the lost contact details for your scheme
If you’ve lost track of your pension details, the government’s free Pensions Tracing Service can help you to find the current contact details.
