Glossary · UK
What is Pension in Payment?
A pension that has been crystallised and is actively being drawn -- the member receives regular income, which is subject to income tax via PAYE.
Full Definition
A pension "in payment" is one that has been crystallised -- the member has formally accessed their pension benefits and is receiving income. For defined benefit (DB) pensions, this means the scheme is paying a regular income (usually monthly) determined by the scheme's formula. DB pensions in payment must increase annually by at least CPI up to 5% for benefits earned after 5 April 1997, and by CPI up to 2.5% for benefits earned before that date (known as Limited Price Indexation, or LPI). For defined contribution (DC) pensions, being "in payment" typically means the fund has been designated into flexi-access drawdown or an annuity has been purchased. Drawdown funds remain invested; the member can take any amount of income as needed. Pension income is subject to income tax at the member's marginal rate, collected by HMRC via PAYE. For inheritance purposes, most pensions remain outside the estate as trust property, meaning they are generally not subject to Inheritance Tax -- though proposed changes from 2027/28 may bring unused pension pots into scope for IHT. Once in payment via drawdown, the Money Purchase Annual Allowance (MPAA) of £10,000 applies if flexible income has been taken.