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What Does Changing Final Salary Transfer Legislation Mean for Me?

Final salary transfer legislation has been created to give pension holders more freedom with regards to accessing their retirement savings.

A type of defined contribution (DC) scheme, this pension plan allows jobholders to take a percentage (or all) of their defined benefit (DB) scheme and transfer the savings into a private pension account. This gives the pension holder more financial independence, providing them with the option of accessing their fund whenever they like.

Nevertheless, there are some notable disadvantages associated with a final salary transfer – one of which is loss of your company benefits. Some financial experts also believe that this type of pension scheme carries a certain degree of risk. Given that your pension savings will no longer be invested by your employer, you are less likely to enjoy the benefits of increased value.

How is final salary transfer legislation changing?

Private sector

According to new laws, individuals with a final salary pension have three options when it comes to accessing their retirement savings. These options are as follows:

  • Employees can receive their pension at a pre-determined retirement age
  • Employees can opt to get their pension fund before retirement, but with a penalty
  • Employees can obtain a Cash Equivalent Transfer Value (CETV) and manage their own retirement fund, without being dependent on their employer’s increasing/decreasing scheme deficit.

The last point is perhaps the most important change. From the age of 55, workers can exchange their pension fund for money and pay a reduced tax rate (25%). It will be possible to start transferring your savings up to a year before retirement, giving individuals plenty of time to decide the right course of action.

Despite this, there are some limitations. The government will not tax the first 25% of any money you withdraw, but the rest will be taxed at a regular rate. This will occur in the first year of taking out your pension savings.

If workers do not wish to enter their savings into a personal pension scheme, they could also invest their pension in a new workplace pension scheme or a stakeholder scheme.

Public sector

Public sector workers will not have the option of obtaining a final salary transfer scheme in 2015. However, there are still several important points that public sector workers may wish to consider.

People will no longer be required to purchase an annuity, giving them more individual rights over how they access their pension.

According to the government’s 2014 Budget, these changes have been partially introduced to reduce Annually Managed Expenditure (AME) and give employers more responsibility for meeting the cost of public sector pension schemes.

What are the benefits of final salary?

Final salary schemes have a number of key benefits, however, this will depend entirely on the individual and employer.

Regular income

Final salary schemes are often considered the best pension option for workers. This is because final salary plans provide employees with a regular income once retirement begins.

Your income amount will depend on (1) how long you were a member of the scheme and (2) your earnings during employment, adjusted for inflation.

Tax-free benefits

In addition to your monthly salary, final salary plans provide retirees with three times their gross pension as a tax-free lump sum. It is possible to take a larger pension and smaller lump sum, or vice versa, but some employers may set limitations on this.

If you have any uncertainties regarding your final salary entitlements, then please contact us for more information.

Are there any transfer incentives?

An employer may give staff members a transfer incentive to opt-out of a defined benefit (DB) pension scheme. This could include:

  • Offering more money on top of the CETV, or other pension scheme benefits
  • An increase to the calculated transfer value

It is worth keeping in mind, however, that some employers may offer the option to transfer all of the pension savings into another scheme or give the transfer incentive in cash.

What are the risks associated with transferring to a defined contribution scheme?

A common concern for individuals who transfer to a defined contribution scheme is a lack of predicted retirement income.

In these circumstances, your income will depend on the following factors:

  • The amount invested in the pension
  • Any withdrawals from the pension savings
  • The success of the pension investment

With this in mind, there is a certain degree of risk associated with any defined contribution scheme.

If you are ever unsure about your pension entitlements, or which options to offer your staff, you should consult a specialist finance advisor straight away.

What is a cash equivalent transfer value?

A Cash Equivalent Transfer Value (CETV) is a means of determining how much your pension savings are worth if they were to be transferred into another savings account.

For employees enrolled with a pension trustee scheme, then the trustee has the responsibility to assess the CETV in preparation of moving to a DC scheme.

What will I get from financial advice regarding final salary transfers?

Financial advice can be particularly useful for small to medium sized businesses that lack the in-house resources to make difficult pension decisions themselves.

This is especially true of defined contribution schemes, which can sometimes appear overly complicated. An expert financial advisor will be able to:

  • Help employers understand the benefits and potential downsides associated with changing from a DC to DB pension scheme
  • Assess whether employers wish to offer their own pension scheme or work with a government-approved trustee, like NEST
  • Discuss your full range of pension – helping you to reach the best possible decision for both you and your staff

To learn more about final salary transfers, or anything else regarding the 2015 pension changes, please contact us today.

Our trained specialists have an in-depth understanding of how pension changes in April 2015 will impact businesses – including which schemes are the best option for individual employers.

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