Final Salary Pension Review

The Final Salary Pension has been brought to the fore again by a case we are working on at the moment has highlighted how reviewing your future plans, especially with regards to how your previous pension arrangements fit in with your plans for the future.

We have a client who is looking to retire in a couple of years and has been speaking their previous employers to ascertain what pension benefits can be drawn at age 56 as opposed to the waiting until the scheme retirement date of 60.

To draw the final salary pension 4 years early the client would be subject to an actuarial reduction of 17% of the income they would receive at age 60.  This means they would receive a pension of roughly £14,000 per annum without any commutation for tax-free cash.

Rather than accept this, we have approached the final salary pension scheme trustee’s on the client’s behalf to ask what value they would be prepared to pay to get this pension liability out of their scheme.

The trustees have advised that they are prepared to offer the client circa £340,000 as a lump sum to buy out this liability from their scheme with no actuarial reduction.

Assuming very modest growth of 5% p.a (average) on these funds the client would be able to withdraw up to £90,000 of these funds tax free from age 55 and then access the remainder of the fund on a flexible basis as and when they require it.

Having carried out various cash flow modelling exercises the client will be able to draw down in excess of what is available from the existing scheme and maintain the buying power for remainder of their life, with the balance of the remaining fund passing to their chosen beneficiaries after death.

Of course, this is not the correct course of action for all clients, however, in this scenario the overwhelming additional flexibility and control meant it was right for the client to proceed with the transfer.

Another point to note is that as a result of a drop in gilt yields we are seeing some much higher than expected transfer values at the moment.

This simply should demonstrate that we should all revisit the previous thoughts and planning around how income in retirement will be generated as what we assumed was the right way previously, may not be the best way as the new pension freedoms come into effect.

As always, appropriate independent financial advice is the fundamental key to ensuring you get the most of the assets you worked hard to accumulate.

I realise this won’t apply to everyone but it is an interesting point to note for those who may have preserved benefits from previous employment or those who may have clients in that position.

You can get more information here at the Pension Advisory Service

As always your feedback, comments and ideas and welcome here.

This email is not intended as advice as should not be treated as such.