Hybrid Pension Schemes


These are occupational pension schemes which offer a mixture of defined benefit and defined contribution pension rights, the Unilever UK Pension Fund being an example of this.

It will usually be the case that the scheme offers pension benefits relating to a member’s pay and period of pensionable service until a certain “changeover” date. For pensionable service after that date, benefits will not be accrued by a formula, rather they will be related to the fund built up from employer and employee pension contributions and accumulated investment returns over the period from the “changeover date” to the eventual date of retirement.

Schemes of this type can have certain unusual features, in particular the maximum tax free lump sum at retirement may be assessed using the normal Finance Act 2004 rules in aggregate over both schemes. This may mean that an individual member can choose to take their maximum tax free cash sum out of their defined contribution pension only at retirement instead of having to give up some of their valuable defined benefit pension to generate a lump sum at the point of retirement. This may mean that in some cases more than 25% of the defined contribution pension rights can be taken as a tax free cash lump sum and in certain cases even 100% of the defined contribution can be taken as a tax free lump sum.

Another feature to be aware of is that when it comes to pension sharing, some hybrid schemes may require that the defined benefit and defined contribution elements of the scheme must be shared in the same percentage, whereas other hybrid schemes may have more flexibility in this respect. It is recommended that divorcing parties or their solicitors always check with the pension scheme to clarify the position on this point to ensure that there is no confusion in this area when the pension sharing annex to the final consent order is being drafted.