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Many defined benefit pension schemes insure their members’ pensions with an insurance company like Royal London. This is done via two steps: first a buy-in, then a buyout. Together, these steps help make sure that the members’ pensions are secured with an insurer for the long term.
What is a pension buy-in?
A pension buy-in is when a pension scheme buys an insurance policy from an insurer to protect against the risks associated with paying members’ pensions, such as how long people live and how the investments of the pension scheme perform. The insurer guarantees the funds needed to meet members’ pensions each month. This means:
- The pension scheme still exists and runs as normal.
- The insurer remains in the background providing payments to the pension scheme.
- Members won’t see any changes – they keep receiving payments from the scheme as they normally would.
Why are pension buy-ins used?
Improved security for members
When a pension scheme purchases an insurance policy, the members’ benefits are often seen as more secure as they are guaranteed by a low risk, financially strong insurer.
De-risking the pension scheme
A buy-in transfers the key funding risks to an insurer helping to reduce uncertainty and stabilise the pension scheme's financial position.
What is a pension buyout?
A pension buyout is a financial agreement where the selected insurer becomes responsible for paying members their pensions directly. At this stage, members become policyholders of the insurer. This means their pension benefits remain the same, but they will now be looked after by the insurer who takes on responsibility for paying their pension, managing their records and supporting them when they need help. This means:
- The insurer issues individual annuity policies for each member.
- The pension scheme no longer needs to operate and so can be wound up.
- Members now receive their pension directly from the insurer.
Why are pension buyouts used?
Simplifying operations
Running a pension scheme can be time-consuming, complex and costly for the companies who support them. A buyout simplifies things by transferring administration, payments and customer support to an insurer.
Specialist capability that improves outcomes
Insurers have dedicated teams, established processes and the scale to invest in modern technology. This allows them to deliver reliable day‑to‑day administration, accurate and timely pension payments, and enhanced customer support.
Their investment in high‑quality systems and service design helps reduce errors, streamline processes and provide policyholders with a smoother, more consistent experience. Over time, this specialist focus helps ensure policyholder benefits are managed efficiently and accurately.
What's the difference between a buy-in and a buyout?
While both buy-in and buyouts help pension scheme members, they work in slightly different ways.
| Stage | Who administers the policy? | Who pays the members? | What happens to the pension scheme? | Who handles member queries? |
|---|---|---|---|---|
| Buy-in | The pension scheme | The pension scheme | The pension scheme holds the insurance policy but runs as normal | The pension scheme |
| Buyout | The insurer | The insurer | The pension scheme winds up and members become policyholders with the insurer | The insurer |
To put it simply, the buy-in keeps the current scheme running, while a buyout results in a full handover of the scheme to the insurer.
What does this mean for me?
The below sections explain how things will work for you as the process moves forward.
During the buy-in stage
During the buy-in stage, very little changes for you. Your pension scheme stays in place and continues to pay your pension benefits exactly as before. The main difference is that the insurer provides financial backing to the scheme, helping it to protect the benefits of its members. You should notice no difference in your day-to-day experience with your pension scheme.
During the buyout stage
Following buyout, your pension benefits will now be paid by the insurer. The amount of pension you receive remains the same. The difference is that your pension benefits will be paid by the insurer rather than the trustee of the previous scheme and their administrators.
You’ll also become a policyholder of the insurer, which means they’ll handle all future administration. This includes keeping your records up to date, paying your pension and providing support when you need it.
