Chartered Financial Planners

What is a Final Pension Salary Scheme?

Posted By on March 12th, 2021 in Blog, Financial Advisor

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If you have a defined benefit pension you may be offered the option to transfer it into the more common type of pension, a defined contribution pension. This is a big decision to make, and it is irreversible once done, so you need to understand what exactly it means and what the pro’s and con’s are.

What is it and How Does it Work?

A defined benefit, or DB pension (also known as a final salary pension scheme) is a special type of workplace pension. Instead of building up a pension pot over time, as is commonly the case, it provides you with a guaranteed annual income for life, based on either your final or average salary. Final salary pension schemes are most often provided by the public sector (health, education and government employees), some private sector employers do still offer them, but it is not as common.

If you are a member of a final salary pension scheme your employer contributes to a central fund on your behalf. The scheme will assign you a ‘normal retirement age’ and your pension will then be paid from this date. The amount you receive is based upon a number of factors.

What are the Advantages and Disadvantages?

This type of pension is often seen as more generous, because it would take an above average DC pension pot to be able to buy an annuity that will pay you the same amount as a DB scheme. On top of this, the payouts from a final salary pension scheme are guaranteed for the rest of your life. As long as the pension scheme remains funded, your pension will be paid for as long as you live.

Despite the obvious attractions of a DB pension scheme, in some ways it isn’t as flexible as a DC pension pot. You can’t vary the income you take from it, and often you can’t draw out large lump sums. Furthermore, this type of pension cannot be inherited by your beneficiaries. If you die prematurely there is the possibility that your widow may get a pension, but most of the benefits will be lost and nothing will pass to your children.

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