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tel: 01173 823 823
Contact@leafifa.co.uk
A Final Salary pension scheme is one where the pension amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned. Historically the salary level used was the salary level at the end of your career (hence “Final Salary”) although it is becoming increasing common to see a career average used.
Final Salary pension are also referred to as Defined Benefit, as your income in retirement is defined and protected. Another term is “Gold Plated” pensions due to the generally higher quality of the benefits received compared to alternative types of scheme.
Each Final Salary scheme will have its own rules in terms of who may join, the rate at which the pension benefit builds up and what type of additional benefits may be offered. However, the vast majority are quite similar in how they operate and how the pensions are accrued and importantly they all share the key characteristic that they provide a pension income for life for an amount defined in the pension agreement.
Final Salary schemes are getting increasing rare, and it tends to be only public sector organisations and a few large companies that still offer them. Your latest pension statement will give you an idea of what type of pension you have and what the benefits are and how much your pension income might be. If you haven’t got one, ask your pension administrator (or employer) to send you one.
The main alternative to a Final Salary pension is a Defined Contribution scheme. In this pension arrangement employees and employers make contributions (which often benefit from tax relief) into a pot which is invested. When the employee retires they will have a lump sum which is based on how much they’ve contributed and the investment performance.
At retirement, the employee will have to decide how they will access the pension pot to best ensure it lasts for the rest of their life. Note that this is the main contrast between a Final Salary scheme, where the amount of pension an employee receives is not linked to investment performance but is guaranteed (usually linked to how many years you’ve been a member of the scheme and either your final or average salary).
Current regulation requires that for any pension which has “Safeguarded Benefits” (which would be the vast majority of Final Salary/Defined Benefit pensions) above £30,000 you must receive financial advice from an adviser which is Authorised to provide this service to:
More broadly, if you have a Final Salary pension above £30,000 and you wish to do something that is not taking the pension as it’s intended, you will likely need specialist advice.
This may seem onerous, but please remember that your pension is likely to be one of the biggest assets you build in your lifetime. Transfers can be complex, and it is important to make sure it is arranged in the best way possible.
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The simple answer is that it depends on the rules of your pension schemes. The easiest way to find out is to contact them and this way you’ll be sure of when you can start taking your defined benefit pension.
More generally, most final salary schemes have a ‘normal retirement age’ (NRA), which is the age at which you can begin to draw your pension. This tends to be at least 55 and often older.
Most final salary pensions would allow members to retire before the final salary pension’s retirement age if you are 55 or over. However, the amount of income would typically be reduced by what is referred to as an early retirement penalty. This simply means you’ll get less income each year than you’d be entitled to if you retired at the scheme’s normal retirement age.
A “frozen pension” is a common term to describe pension schemes from a previous employer. This term is rather misleading as the pension, in most cases, will continue to grow. A more correct term would be either a deferred or preserved pension.
The benefits you have earned in a Final Salary Pension from an employer you are no longer with will remain and will continue to grow, by at least roughly in line with inflation.
The main alternative to a Final Salary pension is a Defined Contribution scheme. In this pension arrangement employees and employers make contributions (which often benefit from tax relief) into a pot which is invested. When the employee retires they will have a lump sum which is based on how much they’ve contributed and the investment performance.
At retirement, the employee will have to decide how they will access the pension pot to best ensure it lasts for the rest of their life. Note that this is the main contrast between a Final Salary scheme, where the amount of pension an employee receives is not linked to investment performance but is guaranteed (usually linked to how many years you’ve been a member of the scheme and either your final or average salary).
Current regulation requires that for any pension which has “Safeguarded Benefits” (which would be the vast majority of Final Salary/Defined Benefit pensions) above £30,000 you must receive financial advice from an adviser which is Authorised to provide this service to:
More broadly, if you have a Final Salary pension above £30,000 and you wish to do something that is not taking the pension as it’s intended, you will likely need specialist advice.
This may seem onerous, but please remember that your pension is likely to be one of the biggest assets you build in your lifetime. Transfers can be complex, and it is important to make sure it is arranged in the best way possible.
Please fill out the below form and an Adviser will call you back at your requested time:
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Leaf Financial Advisers Ltd is registered in England and Wales, Company number 12950412. Registered office: 39 Cromwell Road, Bristol, BS6 5HD.
Leaf Financial Advisers Ltd. is an appointed representative of Julian Harris Financial Consultants, which is authorised and regulated by the Financial Conduct Authority, FCA number 153566.
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Leaf Financial Advisers
39 Cromwell Road,
St Andrews,
Bristol,
BS6 5HD
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