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Should you be reviewing your final salary pension scheme?
Final salary or defined benefit (DB) pensions are known for being generous and typically anyone who is a member of a final salary or defined benefit pension is usually advised to remain in it. These pensions pay an income in retirement that is based on a multiple of years worked and a percentage of the member’s final salary. It is guaranteed and inflation-linked.
This is very different to the defined contribution scheme where the member receives a pot of money which then should be used to provide an income in retirement.
Transfer values for final salary or defined benefit pensions have increased to near record highs in recent months. This is due to falling interest rates and gilt yields. Lower gilt yields increase the cost to defined benefit schemes of meeting its obligations to members. A couple of years ago £5000 a year pension could be swapped for a £125,000 lump sum which is 25 times the annual income however in recent months we have seen this rocket to more than 40 times in some cases.
If you have a final salary pension it is a good time to review. Professional advice should be sought before requesting a transfer value as some providers will only issue one transfer value per year, these are normally guaranteed for three months.
A transfer should not be taken lightly but defined contribution schemes do have advantages. You would have greater ownership of the money, with options to take lump sums on an ad-hoc basis and being able to vary the level of income you receive. One of the biggest changes though is on death. Any unused funds in a Defined Contribution scheme can now be passed on to your family, including children and grandchildren which now enables your pension assets to be passed down the generations. This is also extremely efficient from an Inheritance Tax stand point.
With a final salary scheme the pension ends on the death of the member and generally a reduced pension would be paid to the surviving spouse. This is often 50% of the member’s pension and remains taxable in the hands of the spouse. These significant changes mean that reviewing Final Salary schemes should be the norm as part of ensuring you have the right “Financial Plan” which aims to achieve your goals and objectives.
To find out more please feel free to contact David Hardman