A final salary pension scheme is typically run, on behalf of the employer by the Board of Trustees, who is responsible for all aspects of the scheme. This includes paying benefits to retired members. Daily management of the scheme is typically done by the Scheme Administrator, who reports to the Board of Trustees.
A final salary scheme normally offers you an income in retirement based on a proportion of your ‘final salary’, although other factors can be taken into account. It’s important to note that ‘final salary’ doesn’t necessarily mean the actual salary that you’re earning at the time you retire and draw your benefits from the scheme. The pension scheme’s rules will define what is meant by your ‘salary’ or ‘earnings’ and how the calculation of ‘final salary’ or ‘final earnings’ is made. For example, some schemes don’t count additional earnings, such as overtime, commission, bonuses or the value of benefits in kind (other benefits that are not paid as cash to the member). The scheme may also only count a proportion of your wages or salary. The amount of earnings that are used to calculate retirement benefits is often called ‘pensionable earnings’.
If you’re a member of a final salary scheme, your pensionable earnings are recalculated each year, to take account of changes in pay. When you decide to retire and draw pension benefits from the scheme, your ‘final pensionable earnings’ are calculated, according to the scheme rules. These may be pensionable earnings in the final year before retirement, or may be an average of pensionable earnings over a specified prior to retirement. As a member, you will build up a fraction (the accrual rate) of your final pensionable earnings for each year of membership of the scheme. Typically, this fraction may be 1/60th or 1/80th of final pensionable earnings for each year of scheme membership, although other fractions may be used. You can check this in your scheme rules.
Example
John is about to retire. He has been a member of his employer’s final salary pension scheme for 40 years. The scheme’s accrual rate for building up pension is 1/60th for each year of membership of the scheme. John’s final pensionable earnings are £30,000 per year.
This means that John can receive a pension of £20,000 per year (40/60 x £30,000) from the scheme.
Benefits
As well as providing you with a pension income at retirement, some schemes also provide a tax-free cash lump sum. For example, some schemes with an accrual rate for pension of 1/80th of final pensionable earnings for each year of scheme membership, may also provide a tax-free cash sum of 3/80ths of final pensionable earnings for each year of scheme membership.
Other schemes may offer you the option of taking a tax-free cash lump sum on retirement in return for receiving a reduced pension. They will specify the maximum amount of tax-free cash lump sum that can be taken and the amount of tax-free cash lump sum that will be paid for each £1 per year of pension that is given up. This is often called the cash commutation factor.
If you have dependents, they may also be able to receive a pension should you die, either before and/or after your retirement date.
The FCA has decided to maintain the position at this stage that an adviser should start from the assumption that a Final Salary Transfer will be unsuitable, however this does not prevent us from recommending a transfer where it is considered suitable for you and where there are compelling reasons to justify a transfer.
We cannot make any recommendations regarding your Final Salary pension without gaining a deep understanding of your personal circumstances, as well as why a transfer may be most suited to your key objectives. Therefore, we have decided that our starting position should be that a Final Salary pension will provide a guaranteed, risk free income in retirement, which are significant and valuable benefits to consider. If we are unable to see clear supporting evidence that you have other sources of income, then we will normally not take the conversation any further.
However, there may also be overriding reasons that a transfer may be the most appropriate option for you. The world of pensions is changing and there may be a desire for greater income flexibility, taking tax free cash in smaller tranches or even a potentially higher tax free lump sum at the outset, the ability to nominate your pension fund death benefit to various beneficiaries other than your spouse or dependants, your overall health may be poor and you expect to live a shorter life than normal or you may have concerns about the solvency of the sponsoring employer.
If you meet all the following criteria, we can offer you DB transfer advice:
- Transfer value of £150,000 or more, unless in agreement with your financial planner
- At least 50 years old
- Under 50 years old if your life expectancy is severely limited
- You are resident in the UK
If you take advice with us, we will give you one of two outcomes:
- We can show that the transfer is clearly in your best interests and suitable for you
- We cannot show that the transfer is in your best interests so we believe that remaining in your current Scheme is suitable for you.
Abridged Advice
We can also offer abridged advice which we believe can be used as stepping stone before you decide to take full advice. We will advise you on whether you should keep your DB Pension Scheme, but without considering a new Scheme. If you want to continue to look at a new Scheme, you will need to take full advice. This is a 2-stage process:
Stage 1: We will start by finding out about you and your current financial circumstances. We need to know about your family, your expenditure and your financial needs, your plans and retirement goals. We will look at what other assets you have to meet those goals and talk to you about the financial risks, including asking you to complete a pension transfer risk assessment and investment risk profiling. We will also ask you to complete our Security vs Flexibility and Retirement Options Questionnaires.
At the end of Stage 1, if we can determine that the best outcome is keeping your DB Pension Scheme, we will write a Report confirming our recommendation and our reasons for it.
Stage 2: If we cannot determine whether you should keep your DB Pension Scheme at the end of Stage 1, with your permission, we will undertake a comprehensive analysis of the benefits of your DB Pension Scheme and a DC Scheme that might be suitable for your needs. This will include cashflow modelling of possible outcomes allowing for all your assets. We will also consider if there are ways of meeting your objectives without giving up your DB Pension Scheme.
At the end of Stage 2, we will write a Report confirming whether we think you should keep your DB Pension Scheme or transfer. This will explain why we think the recommendation is right for you and making sure you are fully aware of the advantages, disadvantages, risks and costs.
We will agree our charges with you first and will not start either stage of the work stream until you tell us to proceed in writing.
In a society where people are living for longer than at any time in our history and the State Pension age is become payable later, planning your retirement is a vital element of your overall plan. The continuing changes in the pension arena mean that the rules and regulations have become yet more complex. There are multiple options for saving for a comfortable retirement, but a pension remains the most popular and tax efficient route for most people, due to the generous tax relief on pension contributions.
Bainlye Drake Wealth has experienced Pension Transfer Specialists who are able to analyse your current arrangements and create a detailed plan based on what you are want to achieve and for the lifestyle you are looking for. We will use the latest generation of cash flow modelling software to assess where you are now, where you want to be in the future, and to ensure that you have a plan to address the difference, which is monitored on a regular basis.