Final Salary Pension Transfer

Defined Contribution Schemes

Recent pension freedom rules have allowed final salary pension schemes also known as defined benefit (DB) to switch into defined contribution (DC) arrangements. The advantages of the new arrangement are:

  • Access entire pension pot from the age of 55
  • 25% of the pot can be taken tax free
  • Remaining balance taxed at savers marginal rate

Pension income provided by DC schemes is variable:

  • The amount paid in
  • Pension scheme charges
  • Investment Performance

Defined Benefit Pension

DB schemes are a more traditional format to employment pensions that can now be switched to the more popular Defined Contribution schemes.

What does a Defined Benefit scheme offer:

  • Guaranteed pension income
  • Income subject to earnings amount
  • Income also dependent on years of service

Defined Benefit members are attracted by the offers in the Defined Contribution schemes; the value of the older DB schemes should not be overlooked and therefore the decision to switch to the new DC scheme should not be taken lightly.

Factors to consider:

  • Critical yield – the return (year on year) for the DC scheme to match the DB scheme – could be high
  • Current cash equivalent of transfer value
  • Gilt yield value (currently low)
  • What are your objectives, assets and income
  • Health, family history

Presently the majority of people in a DB scheme are being advised to stay put as we often have to concur, as the majority will be unlikely secure a guaranteed retirement income from any other arrangement.

Cash For Your Final Salary Pension

Final salary pensions are considered the gold standard of company pensions. Hundred of thousands of savers are in this type of scheme. Many are planning to trade in their future guaranteed income for a cash lump sum, many have already done just that.

Due to the sweeping reforms the options do bear an attractiveness for some. There is the option for defined benefit scheme members to take the cash lump sum and use it as income drawdown. This is a pension allowing retirees to continue investing in their own pension, whilst taking a flexible income from it.

Large Pension Pots

For individuals with larger pots where inheritance tax might have to be paid, there is a strong incentive for people who would like to bequeath their pension to children and grandchildren. They lump sum can be used for income drawdown in this instance, unlike final-salary schemes, drawdown pensions can be passed to any named beneficiary.

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