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Final Salary Pensions

Due to the pension changes, introduced in April 2015, there has been an increased interest in final salary pensions transfers (or defined benefit transfers). It is now possible for many people to transfer out of a final salary pensions scheme into a defined contribution scheme, to take advantage of the new pension rules which allow full access to a pension fund.

As people are now living longer, employers are having to pay more to provide these type of guaranteed pensions and the cost of running these schemes can be very expensive for them to maintain. Once you have left the scheme you won’t be entitled to any future benefits of the scheme, but will get a pension lump sum which could be quite substantial and can be invested in a way that you choose.

When You Can Take Your Pension

  • Most defined benefit schemes have a normal retirement age of 65.
  • This is usually when your employer stops contributing to your pension and your pension starts to be paid.
  • Depending on your scheme, you might be able to take your pension from the age of 55, but this can reduce the amount you get.
  • It’s also possible to take your pension without retiring.
  • You might also be able to defer taking your pension.
  • This might mean you get a higher income when you do take it. Check your scheme for details.
  • Once you pension starts to be paid, it will increase each year by a set amount (your scheme rules will tell you by how much) for life.
  • When you die, it might continue to be paid to your spouse, civil partner or dependents.
  • This is usually a fixed percentage (for example 50%) of your pension income at the date of your death

Taking your pension as a lump sum

You might be able to take your whole pension as a cash lump sum.

If you do this, up to 25% of the sum will be tax free, and you’ll have to pay Income Tax on the rest.

You can do this from age 55 (or earlier if you’re seriously ill) and if:

  • The total value of all your pension savings is less than £30,000.
  • Your pension is worth less than £10,000, regardless of how much your other pension savings are. You can do this for up to three different pensions.

Protecting your defined benefit pension

  • Defined benefit schemes are protected by the Pension Protection Fund.
  • This pays some compensation to scheme members if employers become insolvent and the scheme doesn’t have enough funds to pay their benefits.
  • The compensation might not be the full amount and the level of protection depends on whether you’re:
  • Already drawing benefits
  • Still contributing to the scheme
  • A deferred member who has left the scheme but has built up an entitlement

Tracing lost pensions

If you can’t find the details for an old defined benefit pension scheme, you can use the Pension Tracing Service.

The Advantages & Disadvantages

Research has shown that only two thirds of final salary pension members are even aware of the higher transfer values available to them and therefore are potentially missing out on the opportunity to take advantage of the benefits.

The advantages of transferring out include:

  • Complete access to the transferred value of the fund
  • Potential for greater tax-free cash
  • Opportunity to pass on as inheritance
  • Option to choose how benefits are taken
  • Opportunity to buy an annuity with the proceeds
  • Benefits can be taken from any age after 55
  • Transfer values can be high due to low gilt yields

So, what are the dangers of final salary pensions transfers? A final salary pensions scheme mitigates many of the risks of retirement for you and puts those risks with the scheme, the former employer and also the Pension Protection Fund. If you decide to transfer out of a final salary scheme, then the risks become yours!

Other disadvantages of transferring out include:

  • Lose guarantees attached to the scheme
  • Lose any benefits under the Pension Protection Fund
  • Final salary schemes provide inflation protection and inflation proofing

It is possible to transfer out of most final salary pensions schemes, although it is not possible to transfer out of a final salary scheme if it is being paid. It is also not possible to transfer out unfunded government schemes. However, local authority pensions can be transferred.

Pensions of the following can not transfer out:

  • NHS
  • Teachers
  • Police
  • Armed Forces
  • Civil Forces

The starting point for any transfer out of a final salary pensions scheme is that it should not be transferred unless there are some very sound reasons to do so…

So what should you bear in mind if you are considering transferring out of a final salary scheme:

  • Be sure you understand what you are giving up including your guaranteed income
  • Be aware of scam schemes
  • Ensure you understand the risks you are taking on with a new scheme
  • Consider all your options