What is a Final Salary Pension?
What Are Final Salary Pensions?
Final salary Pension schemes are a type of pension scheme that are offered by employers. They promise to pay a retirement income for life, based on salary and length of service, and typically increase each year in line with inflation.
They are increasingly rare as most employer pensions are now group personal pension schemes whereby you and your employer contribute a certain amount to your pension each month which is then invested, which will then become your pension pot to fund your retirement.
The main reason for their decline in popularity with employers is the increasingly heavy burden they represent on their finances. Schemes are usually funded largely by investments in government bonds, which have consistently underperformed in recent years amid ultra-low interest rates. Add to this the increasing life expectancy of our population and the result is generally a longer commitment to provide benefits from poorly performing assets meaning there is often creating a shortfall between the pot and the pay-out.
Thus many employers are offering higher-than-usual transfer values to incentivise transfers and lessen their long term liabilities. All this means that if you have a final salary pension you could be entitled to a potentially large cash equivalent transfer value that may be worth releasing.
Is transferring my Final Salary to a personal pension a good idea?
It is important to note that this decision is irrevocable and means forgoing guaranteed income for life in favour of an invested pension which will always involve an element of risk.
It is thus key that you consider the pros and cons of the options available to you:
Advantages of staying with your final salary pension
+A guaranteed sum paid monthly in retirement, for life
(assuming the sponsoring employer survives)
+Pension income is index-linked
(increases each year to cover at least some of the impact of inflation)
+Often pension payments continue to a spouse after holder’s death
(at least in part however rules vary)
Advantages of transferring
+Transfer values are higher now than ever before
( The average value of Final Salary Pension transfer is £323,000)
*True Potential Wealth Management May 2019
+Can bequeath any remaining pension fund to anyone upon death
(also full value of pension is passed on excluding any tax due)
+Flexibility over how much you draw from your fund and when
(controlling income may result in tax efficiency & lump sums available whenever desired after 55)
What You Need To Consider
Whether to transfer or keep your Final Salary Pension scheme is by no means a simple decision, which is reflected in the mandatory advice regulation for final salary transfers over £30,000.
Although this can be somewhat frustrating for some, as it is an irrevocable transfer it is important that you fully understand all of the implications and risks.
Please note that the above points are only a very condensed and brief summary as each scheme is different and should be considered in conjunction with your personal circumstances and financial goals/priorities.
For example another option available to you would be to transfer your final salary and later down the line use some or all of the funds to purchase an annuity if rates become attractive again.
1) Ben age 56
23 years for same company
Salary of £21,000 pa
Annual Final Salary Income £7,980
Transfer Value £187,986
2) Jane age 49 and Jim age 48 both planning to retire at age 65
They want to ensure that their daughter who is in university will inherit the full amount of Jane’s pension.
At age 65 Jane can either take her final salary and will receive £18,000 pa or take her transfer value of £448,000.
She wants to take her 25% Tax Free Cash at age 55 but does not want to draw income immediately after that something she cannot do if she takes her final salary as is.
If Jane did not transfer and were to pass away her husband would receive £5,800 pa and unfortunately her daughter would receive nothing.
How We Can Help
We are currently offering a free initial consultation to discuss your pension options, please get in touch if you are in need of guidance. Or ask us a question specific to your circumstances using the form below.