The Final Salary Hook - Charlie Reading

The Final Salary Hook

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If you are one of the lucky ones with a Final Salary Pension Scheme, you may read this and think that none of this applies to you. Think again. As a member, or a deferred member, of a Final Salary Pension Scheme, you can ask your scheme for what is known as a ‘Cash Equivalent Transfer Value’ (CETV). Instead of receiving a fixed, although probably increasing, income at a chosen retirement date for the rest of your life, you can ask for a CETV. The pension scheme doesn’t have to offer a transfer, but most schemes will because they want to be rid of you, particularly if you have already left the company and are a deferred member. You may not have worked for this company for 20 years, and yet you sit on their balance sheet as a debt until the day you die.

For the company, it’s like moving out of a rented flat, but being asked to continue with the upkeep for the rest of your life. Understandably, most schemes that can afford to would ideally pay you to clear off and manage things yourself.

At Efficient Portfolio, we have been reviewing Final Salary Pension Schemes for over ten years. For probably seven of those ten years, in 95% of the schemes we reviewed, we advised the holder to keep that particular scheme as it is, because the lump sums offered did not sufficiently compensate them for the income they would be losing in the future. We made this assessment by looking at how much growth is needed to provide the retiree with the same amount of income as she would have received through the pension. We also look at a Lifetime Cash Flow Forecast to see how they can draw this new flexible income to minimise tax, in comparison to the set, fixed income the retiree would have received, to see if these funds can be used better.

Final Salary Scheme - Charlie ReadingA member of a Final Salary Scheme effectively has the same choice that someone in a Personal Pension has. So why would you give up this wonderful, guaranteed income? What if I said to you that instead of giving you an income of £20,000 a year for the rest of your life, I would give you £700,000 instead? And what if I said that, with this lump sum, you could facilitate a more flexible income, which allowed you to take more in the early years of retirement when you are healthiest; to increase and decrease your income to meet your requirements whilst minimising tax; and to leave what is left over to your children or other loved ones? The option sounds more appealing. Finally, what if I said that your fixed income is dependent on your previous employer’s success? If your company goes bust before retirement, you stand to lose 10% of your income as a minimum, and more if you have a sizeable income. Also, the increases after retirement are likely to be less too, and your choices much more restricted.

As you can see, the possibility of transferring is becoming more and more appealing for people in this situation. They, of course, have the same drawdown analysis as someone coming from a Personal Pension environment, but with many more factors to consider. Because this issue is so complex, with so many things to consider, the government will not permit individuals to transfer out of these schemes without seeking impartial advice. It is a massive decision to transfer out of a Final Salary Pension, and it is important you understand the pros and the cons. But is a decision that can pay dividends to you and your family in the right situation. If this does apply to you, don’t wait until you are about to retire to make the decision. Ask a qualified adviser to assess your pension to see if this is a viable consideration. That adviser needs to have advanced pension qualifications (G10 or AF3) to be able to advise on this area, so select wisely. My team and I at Efficient Portfolio are qualified to help! If you would like our assistance, please call us on +44 (0)1572 898 060 or email

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