Final salary pension schemes
These are also referred to as ‘defined benefit’ (‘DB’) pension schemes and have what are termed as ‘safeguarded' benefits.
You may be reading this because you are contemplating referring your ‘safeguarded’ benefits into a more flexible personal pension arrangement. If you are, this is important information for you.
In the 2014 Budget the Government announced legislation (sometimes referred to as ‘Pension Freedoms’) that came into effect in the 2015/16 tax year. As well as introducing additional flexibility in how benefits can be taken (for example, anyone aged 55 and over can take the whole amount of their pension fund as a lump sum, the majority subject to personal taxation) it recognised the additional complexities and responsibilities such ‘freedoms’ introduced, by making the taking of regulated financial advice compulsory for anyone looking to transfer what it termed ‘safeguarded’* benefits of more than £30,000 (*this means Defined Benefit/Final Salary Pension Schemes, Guaranteed Minimum Pensions (GMPs) and pensions with Guaranteed Annuity Rates (GARs)).
Following these changes, a significant increase in benefits being transferred from employer Defined Benefit/Final Salary Pension Schemes has and is taking place, requiring many to seek regulated financial advice for the first time.
As a member of a defined benefit pension scheme (or pension scheme with safeguarded benefits) we hope the Gold Standard, that we as a firm very much support and adhere to, enables you to better understand what good advice on what to do with your pension looks like.
Please be aware that the Financial Conduct Authority (FCA), the regulator of financial advice firms, maintains the view that the value of guaranteed benefits available to members of a defined benefit or final salary pension scheme are such that for most scheme members a transfer to a money purchase arrangement, where you take on the investment risk of your pension fund, is unlikely to be in your best long-term interests.
We, very much support that view, and as an advice firm that has adopted the Gold Standard, we are committed to an advice process that is underpinned by adherence to nine principles, which are referred to in the consumer guide that you are able to download here.
Should I move my safeguarded pension benefit?
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. Should you engage us to provide advice on a possible transfer of your safeguarded benefits, and our advice is that you should not transfer, then we will not agree to implement the transfer, even if you insist.
Below are a few statements which will explain some of the more common circumstances that cause people with safeguarded pension benefits to either leave those benefits where they are or to transfer them into a flexible pension.
Reasons some people give to leave their benefits where they are:
- 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.
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- I am planning to take early retirement – at least partially – and value the flexibility that a flexible pension can give me in this regard.
- 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.
- 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.