The options open to you with a Final Salary pension


Final Salary pensions have featured in the news a lot recently. Press coverage has focussed on the numbers of people choosing to transfer out. It may mean you’re struggling to decide what to do with your pension; so, we’re taking a look at the options you can choose from.

What is a Final Salary pension?

A Final Salary pension, also known as a Defined Benefit pension, provides you with a set level of pension at retirement. How the amount is calculated varies between different schemes. Typically, it will depend on your salary before retiring or leaving the organisation and how long you were a member for.

Final Salary pension schemes will be linked to inflation and often come with other benefits, such as a pension for your spouse.

Final Salary schemes are seen as ‘gold-plated’ pensions because they provide you with a certain amount of income that you can depend on. Due to the expense of running Final Salary schemes, many have closed to new members in recent years.

They’ve been making the news recently as more Final Salary pension holders are choosing to transfer out of their scheme in favour of a lump sum. In 2017/18, around 72,700 Final Salary pensions were transferred to alternative arrangements with a total value of £14.3 billion, according to The Pensions Regulator (TPR).

If you have a Final Salary pension, you essentially have two options; transfer out of the scheme or remain a member.

Transferring out of a Final Salary scheme

If you choose to look into transferring out of a Final Salary scheme you will be given a Cash Equivalent Transfer Value (CETV). This is the lump sum you can transfer. If the value is more than £30,000 you will need to seek financial advice before making a decision.

The biggest draw for transferring out of a Final Salary scheme will probably be the amount you’re offered. Your CETV is likely to be around 25 to 30 times the expected annual income your pension would provide. It’s not unheard of for a CETV to be as much as 40 times the annual amount. We can help you understand what your transfer value is and, more importantly, what the right thing to do is.

On top of that, Pension Freedoms give you far more flexibility in how you access your pension.

With a lump sum amount, you can immediately withdraw 25% tax-free. You’re also free to choose how it’s invested, accessed and whether to buy an annuity. The money transferred out of a Defined Benefit pension will also benefit from death benefits. That means that the remaining amount left over when you pass away can be passed on to your loved ones.

While the CETV can sound life-changing, it’s important to realise that you’re giving up a guaranteed income for life. You’ll be responsible for ensuring that the money withdrawn from your pension will support you throughout the remainder of your life. This can be a daunting prospect.

You’ll need to balance inflation devaluing your money in real terms with investment risk. Depending on what you choose, you could end up with less money and financial insecurity during your later years. That being said, there are cases where transferring out means you’re better off, for example, if you have a life-shortening medical condition.

Before making a decision, you also need to look at the other benefits your Final Salary scheme offers. Many will provide a pension to your spouse or civil partner should they outlive you, giving you peace of mind that they’ll be taken care of.

Remain a member of a Final Salary scheme

If you want security and stability throughout your retirement, remaining a member of your Final Salary scheme may be the option for you. You’ll know how much you’ll receive each month, allowing you to budget. In most cases, remaining a member of a Defined Benefit scheme is the right thing to do.

In most cases, your annual income will be linked to inflation. So, you won’t have to worry about your spending power diminishing in your later years. When you first hear the CETV of your Final Salary pension, it’s tempting to take it. But the value of having a guaranteed income for life shouldn’t be underestimated. As mentioned above, you may also have additional benefits that can be valuable depending on your circumstances.

Of course, there are drawbacks to drawing a Final Salary pension to consider too. You won’t have the flexibility to access larger sums in your early, typically more active, years of retirement.

Another concern is that some schemes are operating at a deficit. There have been examples of schemes collapsing, such as the British Steel Pension Scheme. The Pension Protection Fund was set up to provide support for those that are affected in these circumstances. The fund will offer compensation, but it’s not guaranteed to match the full amount you’re expecting.

Ultimately, which option you choose to go with will depend on your personal circumstances and what your plans for retirement are. To discuss your Final Salary pension, which option is best for you and your wider retirement plans, please contact us.