Final Salary pension may be much revered, but are you sitting on a gold mine?
Final Salary Pensions are one type of defined benefit pension; this is a pension that is defined by the benefits you received at retirement rather than the fund value you have accumulated. Typically, a final salary pension will be a promise to pay you a percentage of you leaving salary for the rest of your life. You may get other valuable benefits with it, such as a spouses pension if you die first and increases in payments on an annual basis.
The guarantees and certainty you get with these types of pension is why they are seen as so valuable to people when planning for their retirement.
You do have the option of transferring defined benefits pensions. Your scheme administrator will calculate a cash value that they will offer you to move your pension away. This is known as a Cash Equivalent Transfer Value (CETV). If you decide to do this, you can then decide how to draw an income when you retire. You could buy an annuity (a guaranteed income for life) or you could leave your pension fund invested and draw an income directly from the investment. This is not right for most clients as there is capital and market risks associated with moving your pension as well as fees and charges.
Why Review your Final Salary Pension?
The way in which your Cash Equivalent Transfer Value (CETV) is calculated depends, in part, on long term interest rates. As the Bank of England base rate has been at near-zero for a decade this has increased the CETV of these pensions. Lots of clients are surprised at the sum they could receive by transferring their pension. Care needs to be taken to evaluate the benefits you are giving up and advice should always be sought.
Benefits of transferring your Defined Benefits Pension
- Drawing your income from an investment allows you to be flexible with your income. If your income needs vary from year to year this option will allow you to plan how much you need to withdraw each year and set your income at the required level.
- Defined Benefit pension schemes usually offer a spouse’s benefit. However, this income will stop when you both die. If you transfer your defined benefits pension you will have created a fund value, and assuming the find hasn’t been exhausted this can be inherited by your loved ones when you die.
- If you have a defined benefits pension and the employer becomes insolvent, you may not be entitled to what you expect. There are certain protections in place to guarantee you a level of income (through the Pension Protection Fund), but the income you are relying on could be lower that you had hoped.
- Some final salary pension providers don’t let you access your income early or have punitive reductions for doing so. By transferring your pension, you have the flexibility to access your pension early.
- Depending on your level of income, the flexibility of a pension transfer could be advantageous for higher rate tax payers or those with an Inheritance Tax position.
Despite the advantages mentioned above, in most cases it will not be in your interest to transfer a defined benefits pension. It is important to seek advice from an independent pension specialist, like Mather and Murray Financial, before making decisions about this.