A final salary pension scheme or defined benefit (DB) scheme is a scheme that links your pension to your salary, meaning that all members receive an income when they retire; usually all or part of this will increase in payment. Transferring your pension out of this scheme, however, has often been considered a risky strategy for jobholders. But the changes to pension legislation have made this option more attractive to some members.
It is possible for anyone with a defined pension scheme to transfer their savings into a Personal Pension and take benefits in a more flexible way than a defined benefit scheme will allow.
The first step in transferring a final salary pension is acquiring a Cash Equivalent Transfer Value (CETV). This information is provided by your pension administrator.
A CETV is the lump sum value placed on your pension benefits. This is the amount available for transfer into a personal pension.
Once you have the Cash Equivalent Transfer Value, it is possible to compare this with the benefits that you are giving up if you were to transfer away from the scheme. The scheme will usually provide a pension and the option of a lump sum. The CETV is compared against the scheme pension to see if it offers good value. This can be a key element in determining if a transfer is suitable.
The April 2015 changes have not had a major direct effect on final salary pensions, but final salary scheme members will be able to place their savings into a DC scheme (such as a Personal Pension). This will allow access to the new options available such as flexible access and cashing in your pension. It will also be possible to access 25% of your pension on a tax free basis.
This is a complex decision and you should take financial advice before making any decision. There are many factors that determine whether a final salary pension transfer is suitable and there is often do clear right or wrong answer as to whether you should transfer.
Yes you can leave your final salary pension where it is and take no action. The Pension will generally revalue (increase) each year until you choose to take benefits from the scheme.
Unfortunately, there have been several cases of pension liberation fraud in recent years where individuals have lost their pension savings. If you take advice, please ensure that this is from an individual who is regulated by the Financial Conduct Authority. In particular you should avoid any schemes that offer access to your benefits under the age of 55.
There are several different types of pension members who will benefit from a final salary transfer:
Here is also a list of some individuals who might not benefit from this scheme:
Transfer is not suitable for everybody, but we would suggest that a regular review of your scheme is a sensible approach. If you would like to learn more about final salary pension schemes, or anything else related to recent pension legislation changes, then please contact us today. We will be happy to answer any questions or concerns you may have.
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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