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29th June 2017
Final Salary Pensions

Final Salary Pension July 17

Final salary pensions are an area that a number of clients have enquired about over the last twelve months and for good reason. There have been a number of legislative and economic factors that have, to a certain extent, made transferring such arrangements to a standard personal pension more attractive.

For those unfamiliar with such pensions, a Final Salary scheme (also known as an occupational pension or defined benefit scheme) will typically provide an ongoing pension income once you reach a specified retirement age. This income is provided by the scheme itself which in turn is funded by a sponsoring employer. The amount of income you will receive will depend on how long you were employed and the specifics of the scheme. Historically such schemes were very popular but due to rising costs many have now closed to new members although they are still widely available in the public sector. Their greatest appeal is that once you retire you will receive a secure, inflation-proofed income at no cost to yourself. So why would you want to give this up by transferring to a personal pension?

The key answer to this question is flexibility. In April 2015 the government made a number of sweeping changes to personal pensions allowing, for the first time, unused pension pots to be inherited tax efficiently by beneficiaries other than a spouse. Comparatively, final salary pensions while secure are fairly inflexible.

Once you retire and start to receive an income it cannot be stopped, which could be inefficient from an income tax perspective. They also typically offer only a spouse or a dependant a percentage of your pension (usually 50%) on death. Should you have neither and pass away prematurely your pension will end.

Unfortunately there are no easy answers when it comes to deciding whether to transfer a final salary pension or not. The FCA takes a very strict view with such advice and rightly so as once you transfer, it cannot be undone. As a result, you need to be certain that sacrificing this secure, inflation proofed, income is not going to jeopardise your retirement. When we review such cases the majority of our time is spent discussing advantages and disadvantages with clients and understanding what their retirement goals are. We then utilise a number of tools that help to project what their financial retirement will look like and if transferring is feasible.

If you are interested in understanding more about final salary pensions or other pension arrangements and how they fit into your retirement plans please get in touch.