1 October 2020

Final Salary Pensions, Your Options & How to Take Advice

In this blog we try to shed some light on an area of financial advice that our clients often feel is a more complicated area to understand fully.  Should you prefer more interactive content then a short video is attached below for your viewing.  

What is a Final Salary Pension?

A final salary pension (also known as a defined benefit or DB pension) is a special type of workplace pension. Instead of building up a pension pot over time, it provides you with a guaranteed annual income for life, based on your final or average salary (hence the name).  In essence, think of this a “promise to pay” from your employer.

DB pensions are most often provided by the public sector (health, education etc) and government employers. Some private sector employers do still offer them, however many of these have closed to new members so if you are lucky enough to have one then you should consider yourself fortunate. 

What are the benefits of final salary pensions?

Defined benefit and final salary pensions are often seen as ”golden” pension arrangements.  This is because final salary pensions give you a guaranteed income when you come to retire, which often rises with inflation each year and pays attractive death benefits (such as a pension to your surviving spouse). This kind of pension is often expensive to replicate in the open market due to these guarantees. 

Should I transfer my final salary pension benefit?

Generally speaking, transferring out of a Final Salary (or DB) Pension is not in the interest of the majority of people.  Furthermore, pension Transfer Advice is complex and can be viewed as expensive.  It’s important you have enough understandable information about the generic advantages and disadvantages to enable you to decide whether to go on to take advice on the transfer or conversion of your pension benefits.

Firms like ours who adhere to the Pension Transfer Gold Standard and are fully regulated to provide you with advice in this area will ensure they provide you with information ‘at arms-length’ so you are able to increase your understanding of the various types of pensions and are aware of the costs that are involved before proceeding to take advice.

Reasons some people give to leave their benefits where they are:

1. This pension will be my sole or primary source of income in retirement and the fact that it is guaranteed and has built in indexation is reassuring to me
2. I believe that I have a normal life expectancy so the fact that the pension will pay out until I die, whenever that might be, is important to me
3. As this is my sole or primary source of income in retirement I am reassured that it will not be reduced if stock markets fall
4. I have a partner who will also be dependent on this pension income, and I am pleased that it will continue to support them if I die before they do
5. I am happy that, although this pension is a reduction in income from the level I earn in employment it is enough to meet my financial needs in retirement

Reasons some people give to transfer their benefits into a flexible pension:

1. My retirement is likely to be a gradual affair and I expect to have varying income needs from year to year, so it is important for me to be able to vary the income I receive from my pension accordingly
2. Unfortunately, I am not in good health and as a result my life expectancy is likely to be below average; I understand that a flexible pension gives greater options for my heirs and dependants
3. I am planning to take early retirement – at least partially – and value the flexibility that a flexible pension can give me in this regard
4. I have a range of financial assets at my disposal to support my retirement, so this particular pension will not be my sole source of income. The guarantees within this particular pension are therefore not important to me and flexible pensions give me more options.
5. I fully expect to manage my various pension and non-pension assets myself and together with my adviser decide where to take income from as appropriate

Should you be considering taking advice in this area, please get in touch to discuss your personal situation on 01786 431 703 or by emailing info@retinvest.co.uk.  We would be delighted to make the complex more understandable for you.