Final Salary Pensions are good for pensioners compared to other types of workplace pension with respect to their guaranteed benefits in payment. However, Final Salary Pensions are no longer offered to new employees, and many have closed to future accrual meaning they no longer accept any new contributions from members.
Closed to future accrual takes away a big part of why Final Salary Pensions are good for employees building up their retirement savings. Salary increases are not reflected in a Final Salary Pension arrangement once the scheme is closed to future accrual.
However, the benefits already built up in the scheme are very valuable as they increase with inflation and all the investment risk lies with the scheme and not the member. The future liabilities of these schemes need to be managed carefully so they do not fail to meet their commitments.
Are Final Salary Pensions good for those who have built up pension benefits? The answer has to be a resounding yes, they are because the member generally has a choice as to whether they take the benefits as regular income at their retirement age or whether they convert the benefits to a Cash Equivalent Transfer Value (CETV) before retirement.
Even though Final Salary Pensions are good, Final Salary Pension transfers are not uncommon with thousands of transfers being completed every year. However, they are getting progressively harder to implement because the Financial Conduct Authority (FCA) is continually raising the bar for advice firms higher and higher.
Adviser Firm permissions are being taken away from poor operators and the cost of insuring this type of advice has skyrocketed. This means that advice firms are either choosing to stop providing this service due to spiralling costs or they are being told to stop by the regulator (FCA).
The Pension Freedoms Act 2015 (pension freedoms) ushered in a major change for UK pensions. Historically, the expectation was that all types of pensions would be taken as a guaranteed annual benefit for life so, whatever retirement lump sum you had built up would be converted into an annuity.
Mandatory annuity buying caused a lot of dissatisfaction with pensions putting people off from saving for retirement. Now with pension freedoms, modern pension contracts allow for maximum flexibility on drawdown from age 55 (rising to 57 in 2028).
Funds in a Final Salary Pension Scheme cannot be accessed flexibly. They can only be paid out as fixed pension benefits and usually, from set retirement age. Defined benefit schemes such as Final Salary Schemes comply with the Pensions Freedom Act indirectly in so far as they must offer transfer valuations for eligible members so they can take advantage of pension freedoms.
This way a member could transfer a Cash Equivalent Transfer Value (CETV) into a defined contribution scheme so that the funds can be accessed flexibly. Financial advice is mandatory if the CETV is over £30,000 and a full and proper assessment should be carried out to ensure that a transfer is suitable.
The advice must come from a Pensions Transfer Specialist who works with an advice firm regulated by the Financial Conduct Authority that has the appropriate FCA permissions for pensions advice. The advice process is rigorous and often takes around 2 months to complete.
Transferring out of a Final Salary Pension Scheme would result in having a personal pension with one or more pension pots which could be invested in different investment funds with different risk attributes. This is where a financial adviser would explain how specific investment funds would meet long-term income and or lump-sum requirements.
State pensions are an important part of the retirement income mix as they do provide guaranteed income which ideally meets most of the essential household expenditure such as utilities and food. To be entitled to a full new state pension requires 35 years’ worth of National Insurance contributions credits.
This article looked at an introduction to "are Final Salary Pensions good" but there is a great deal more to consider than is covered here. The advice can only be given to an individual after a thorough assessment of all personal (and their partner’s) financial circumstances.
Why wouldn’t you want to get some professional advice to gain increased financial peace of mind and family security? The next step is to have an informal exploratory chat with a qualified adviser to see if it is worthwhile proceeding to the formal process known as regulated financial advice.