Where final salary pensions have been phased out, they have generally been replaced by defined contribution DC schemes , also known as money purchase pensions. These involve workers putting aside a certain proportion of their salaries every month, along with a contribution from their employer, to make stock-market investments.
These investments are then used at retirement to generate a pension income, either by buying an annuity or by leaving the money invested while making regular withdrawals.
The key difference with DC pensions is that the level of pension income depends on investment performance and is not guaranteed by the employer.
By switching from a final salary scheme to a DC pension, the risk that investments might do badly is transferred from the company to the employee. The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice.
You should not rely on this information to make or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Treat yourself or a friend to a monthly mix of intelligent opinions, fascinating features and exclusive offers. Get FREE advice and all you need to know about equity release. Chris Torney has been a national newspaper journalist for 15 years, mostly specialising in business and personal finance. He now works as a freelance writer for a wide range of business and finance publications.
Disclaimer: Final Salary Pensions are suitable for the vast majority of members. Transferring from a final salary pension scheme is an irreversible decision and it could have a detrimental effect on your retirement planning. The detail on this website is for information purposes only and is not to be taken as a personal recommendation. Before taking any action, you should take financial advice from a suitably qualified independent financial adviser.
Any potential advantages of transferring from a defined benefit scheme to a defined contribution scheme are often outweighed by the costs, risks and loss of benefits involved. The final salary pension scheme is also known as a defined benefit pension scheme. In a final salary pension, your income is calculated according to your pensionable earnings and the number of years that you have been a member of the scheme. Contributions are paid into the scheme by both employer and employees.
A key part of our advice process is looking at your cashflow forecasts and helping you put a robust financial plan in place, so you have the best possible chance to achieve your retirement goals. You should also take your family circumstances into account when deciding whether to transfer. You could have relatives who may well need your support, including elderly relatives with care provision or younger relatives with university fees, or a deposit on a house.
It can also mean a pension fund being passed down through generations in your family, rather than in a Final Salary scheme where scheme rules will only permit a pension to be provided to your spouse or civil partner on your death. You should also carefully consider the respective death benefits, the amount paid to your surviving beneficiaries when you die, of staying in your pension scheme and transferring to another arrangement.
The benefits are very different. The statement you receive from the scheme trustees will give full details of this. Providing for your family, especially when it comes to what happens after you die, is a crucial part of the Final Salary transfer decision process.
We can help you understand the different options and potential outcomes, and recommend the right course of action. Your Final Salary Scheme provides a guaranteed income for life. Maybe you could consider purchasing an Annuity with some of your transfer value to provide a guaranteed income and keep the rest as a lump sum.
If you decide to transfer your Final Salary pension to an alternative arrangement such as a Personal Pension or Flexi-Access Drawdown, the money you transfer will be invested and the value of your fund will be dependent on the increase in value of the fund or funds you are invested in.
We will work out the level of risk you are comfortable taking and make investment recommendations accordingly. Remember, the value of investments can fall as well as rise; unlike having a Final Salary scheme, your Defined Contribution pension will be directly affected by stock market value variations and the strength of national and international economies.
We can help you identify your attitude to risk, along with other criteria such as capacity for loss, and take these into account when making our final recommendation. If you do transfer, we will tailor your investment portfolio so that it matches your risk rating, and stays in line with it throughout your retirement.
The income provided by your Final Salary pension will usually increase each year based on the rate of inflation or cost of living. Currently, a year-old man in England could expect to live on average to almost 84, while a woman could expect to live on average to This is a figure sometimes cited as the overall rate of inflation that is impacting on someone in retirement rather than someone still working.
Think about how inflation will impact your financial position in retirement, and what action you might want to take to protect against the impact of this. Current levels of inflation are historically low, but that may not always be the case, so you should factor in the impact of higher inflation rates and rising prices on your retirement income planning.
Poor health can also impact on the decision you make. Ill health may well mean a restricted life expectancy. In this event, you may be able to take your Final Salary scheme benefits early, and receive a higher income than originally forecast.
Alternatively, you might want to take advantage of the new-found flexibility through Pension Freedoms or leave a lump sum for your dependents when you die; something which may not be possible with your Final Salary scheme. You also may be able to purchase an Impaired Life Annuity, which would provide you with a greater income for someone of the same age who is in good health. As we said, your health and life expectancy are significant factors to consider when deciding whether or not to transfer your Final Salary pension or remain in the scheme.
A financial planner will take these into account when making their recommendations. A couple of years ago you may have heard in the news about the closure of British Home Stores BHS and the collapse of their pension scheme. There is a Pension Protection Fund, run by the Government, which protects members of schemes that do collapse in the way the BHS scheme, and others, have done.
In this circumstance, you could be left out of pocket in retirement and may have to reduce expenditure or find a different source of income, such as continuing to work for longer than anticipated. That said, a lower income may still be better than the Defined Contribution alternative if you are a risk-averse investor. If you do transfer your Final Salary pension to a Defined Contribution scheme, the full value of insured fund investments will be protected, but other funds and investments may well be subject to the Financial Services Compensation Scheme FSCS compensation limits.
The level of protection provided by some other schemes is more complex. Your financial planner will outline the differences as part of your advice process.
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