We all understand the importance of having a pension and making sure that we provide for our old age. The problem is that there are so many different types of pension out there that it can be truly difficult to understand which one will provide the best options for our retirement; an event that can seem like it is so far into the future.
If you have any questions about pension it is always best to seek advice from a professionally qualified financial advisor who will be able to give you the best advice based on your circumstances.
What is a final salary scheme?
Sometimes referred to as a defined benefit pension scheme, a final salary pension scheme is one that has the promise to pay out an income on retirement that is based on the amount that you earn at the point at which you retire; your final salary.
Unlike those pensions that have define contributions the amount that you will get when you retire under a final salary scheme is a guaranteed amount that is paid directly to you. You do not need to use the money that has accumulated in your pension, or the “pension pot” to decide where you will buy your pension.
What are the main benefits?
All pensions have their own different benefits, and these will vary from one type of pension to another. Different types of pensions will be suited to different people depending on a huge number of factors including. These include but are not limited to such things as personal circumstances, the amount that you have paid in and even your age at retirement.
The main benefit of a final salary scheme is that they provide a guaranteed income for life that is paid regardless of the length of time that a pensioner lives for after retirement. There are several factors that are taken into consideration when calculating these annual payments:
- Years of Service – Essentially a final salary scheme rewards those employees who have worked for a company for a long time. This is referred to as pensionable years and is used to calculate the payment amounts.
- Pensionable Earnings – only money that is considered to be pensionable earnings is used to calculate the payments, so depending on your position within the company and the way in which you are paid this may not be as much as it could be.
- Accrual Rate – this is a complex figure that is a proportional representation of the amount of pensionable earnings that a person has combined with the number of years of service they have put in. This is used to determine the pay-outs from a final salary scheme.
There are also some other benefits that may apply to some, but not all, final salary pension schemes. These are usually offered on an individual scheme basis and are therefore not always available. Once such benefit is additional contributions that are provided by the scheme itself, however this is not a common benefit; in the past it was offered as a benefit to discourage members from transferring out of the scheme, which in turn helped employers to retain valuable employees.
Contact a specialist
If you are considering a final salary pension transfer, then it is really very important to speak with a company who are qualified to give you impartial advice and will be able to help you work out what the best option is for you. Once a transfer has been completed it is not possible to reverse it, so it is important that you understand any of the benefits you could be missing out on by transferring.
