UNDERSTANDING A DEFINED BENEFIT FINAL SALARY PENSION FROM EXPERT PENSION ADVISERS

FINAL SALARY PENSION

Do you have a final salary pension? Have you been a member of a defined benefit pension plan? Are you looking forward to securing your income for your retirement? You will have an option to receive a retirement income for life but may want to know your options.

WHAT IS A DEFINED BENEFIT PENSION?

Defined Benefit Pension or DB pension (also known as a final salary pension) is often considered as the privilege pension plan of workplace pensions. It is an alternative type of pension pot where it promises a retirement income for life, depending on your final or average salary pension scheme. Unlike slowly building up a pension fund for your retirement savings, it allows a precise pension income for your life and might provide a lump-sum amount or a series of payments.

Although it is not usually as flexible as some other pension plans, it entitles valuable benefits at your retirement.

A Final salary pension or defined benefit pension is regarded as the most generous and safest pension available, as it guarantees to pay out an income based on your earnings and accrual rate. The payment you receive will be set on the number of years you are a member of the scheme, and you will get paid at the appropriate time such as retirement.

HOW DOES A DEFINED BENEFIT PENSION WORK?

If you are a member of a final salary pension scheme, your pension scheme is funded directly by your employer and sometimes by you as well until retirement when you commence an income. Under the scheme, you can expect a taxable income to be paid at retirement. Typically, there are different final salary pension schemes, with each varying the pension income you will receive in retirement.

Contact us now for a free initial appointment to get the right pension type that is essential after your retirement. You will get complete guidance and we can help you understand your defined benefit pension scheme. When you pay into a pension, you might also benefit from tax relief from HMRC. The two main defined benefit schemes are:

• Final salary scheme is where your pension income is calculated based on the length of years you have served by your final salary
• Career average scheme is where the pension depends on the average salary throughout your career

Both of these pension types give valuable benefits, which are calculated differently. Defined benefit pension schemes often calculate from the retirement age, which may be 55, 60 or 65. If allowed to, should you draw this earlier than the retirement age there can be a sizeable reduction in the income and/or lump sum you receive. If you are in a defined contribution (DC) then you can normally access your pension from the age of 55. You need to be aware of the rules and regulations while choosing the scheme.

Can I transfer a final salary pension? Not every defined benefit pension is transferable. If you have decided to transfer a final salary pension, it needs to be a private sector defined benefit plan or public sector funded scheme. Normally with advice from a suitably qualified pension transfer specialist (PTS) you can transfer into a defined contribution pension. With DC schemes, you will get more flexibility while accessing cash at retirement, however, you will lose valuable guarantees and should be thought through carefully.

When considering your options with how to access your final salary pension, cashflow planning can help to model the different outcomes over your lifetime and even your family’s lifetime if appropriate. For example, should you take a greater tax-free cash lump sum or should you take a greater pension income with a reduced lump sum. You need to take advice from top-rated planners and advisers at Future Planning who will be happy to help you make the correct decision appropriate for your circumstances.

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