A final salary pension is sometimes called a defined benefit scheme or a salary related scheme. It is a pension scheme that pays you a retirement income that is linked in some way to your salary rather than the value of your pension fund. For the purposes of this document, we will refer to these pensions as Final Salary Pensions.
Maybe, maybe not. The final salary pension is determined by scheme rules, there is usually a little flexibility in the rules such as the ability to take a lump sum, but the benefits are largely set by the scheme. Typical final salary pensions will pay an index linked income that will fall by 50% in the event of your death (if you have no qualifying partner the pension will cease). Most schemes will pay a pension for a minimum period of five years though. This structure will suit some people, but if your retirement plans fit this structure, then this is purely by chance. Taking a final salary pension transfer is an irreversible decision and it may not be suitable for you. We would urge all final salary scheme members to review their plans to ensure that they are suitable for their retirement.
If you are in a final salary scheme of a private company or in a funded final salary scheme, you have a legal right of transfer. You can apply for a Cash Equivalent Transfer Value (CETV) which is a cash alternative to the pension offered by the scheme. Please note that schemes do not have to provide a transfer value in the year before the normal retirement age of the scheme.
You have the right to transfer this amount into a Personal Pension. Under new rules you could then take this as a lump sum. In our experience taking the entire pension as a lump sum will not be suitable for most people, nor is it tax efficient. Whilst this route is making headlines, we believe that pension funds will generally still be used to provide a retirement income.
Yes, you don’t have to take investment risk with your transfer value. You can purchase a guaranteed retirement income. The difference is that you can structure your pension options. You may prefer a higher income at outset that doesn’t increase, or you may be single and would not benefit from the spouse’s pension offered by the scheme. You could also receive an enhanced income if you are ill or if you smoke. Even if you want a guaranteed income, you should review what the scheme is offering against what you could achieve on the open market.
Final salary pensions can provide an excellent pension throughout retirement, but they are not for everyone. If you take a final salary pension, the decision is irreversible, even if your circumstances change dramatically. If you inherit a sum of money, or if you have funds invested, you may wish to use the funds to provide income, but you may require some continued flexibility and the ability to pass funds on to dependants. You would not necessarily buy a guaranteed income for life with these funds. Many people would now like to consider similar flexibility for their final salary pensions.
In the first instance, you might find it useful to call us or send an email with a brief idea of what you are looking to achieve and we can direct you from there. It is always worth making an initial call to see if your circumstances make a review viable.
From that point we will send our review pack to you, where we will gather detailed information about your circumstances and priorities. We may need to write to your pension schemes for further information. Once we have everything that we need, we will issue a formal report to you with advice. We will then discuss the report with you and help you proceed in line with our recommendation.
There is no charge for our initial consultation and discussions, and after this initial conversation, it may be apparent that transfer of your pension is inappropriate and no action will be required.
If you complete and return our review documents, and we prepare a report, there will be a charge. If you transfer, then this report fee is waived, and we charge a transaction fee. This charge can be taken directly from your pension, so you do not have to pay us anything directly. The transaction fee varies depending on the size of your transfer value.
The scheme pension is set by the scheme rules. These may or may not be suitable for your needs. You may wish to look at your options
If you are under age 55
If you are over 55
Your final salary pension is based on a pension (or pension plus lump sum) at retirement. You have a legal right to a Cash Equivalent Transfer Value (CETV). This is the lump sum or cash value put on your benefits. The formula used to calculate the cash equivalent is determined by the scheme trustees and aims to provide you with a fair exchange for the benefits that you are potentially giving up.
You can apply for a Cash Equivalent Transfer Value at no cost to yourself, but the scheme can charge if you request more than one in a 12 month period.
Disclaimer: Final Salary Pensions are suitable for the vast majority of members. Transferring from a final salary pension scheme is an irreversible decision and it could have a detrimental effect on your retirement planning. The detail on this website is for information purposes only and is not to be taken as a personal recommendation. Before taking any action, you should take financial advice from a suitably qualified independent financial adviser. Any potential advantages of transferring from a defined benefit scheme to a defined contribution scheme are often outweighed by the costs, risks and loss of benefits involved.
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