If you started a pension scheme in the 60s, 70s or 80s, it’s likely you may be one of the luckier few enrolled in a final salary pension – otherwise known as a defined benefit pension. This ‘income for life’ pension scheme is calculated on your final salary, multiplied by the number of years you have been in the scheme. Which means you could see a hefty payout when you retire.
Recently reworked to a less generous ‘career average pension’, this type of work-based pension may seem attractive – but it doesn’t come without risks. Here we give you everything you need to know on the common pitfalls associated with this type of work place pension – and how to avoid them.
No guaranteed payout on your final salary pension
Worryingly, a recent report carried out by the Pension & Lifetime Savings Association (PLSA) claims ‘millions of people’s retirement incomes are now at risk’. This is down to an increase in life expectancy as well as record low interest rates over lower interest returns.
Employers offering this type of pension scheme have allocated £120 billion over the past decade in order to reduce overspending – which should in theory prepare for large payouts on a final salary pension. Despite this, deficits remain at extremely high levels, and the PLSA claims that 3 million people now have only a 50% chance of seeing their payments in full.
These are big numbers. But there is a way round this. The Pension & Lifetime Savings Association has championed the creation of ‘superfunds’. This would give employers, struggling to meet demand, an option to consolidate their final salary pension schemes. Which means you’d be more likely to be paid in full.
Low bond yields mean higher transfer values – and a push to exit your pension scheme
Transfer values are at a record high. This is good news, of course, but it may also give you a push you’re not ready for, and force you to exit your pension scheme when you’re not prepared. Low bond yields force the cost of pension schemes through the roof. Which means employers are keen to reduce their liabilities and get final salary pensions off the system.
It is important not to feel pressured into making a decision, and to speak to a professional for advice on important money matters. You may be wondering, ‘where does my state pension fit into all of this?’ The silver lining is that, in the event of your final salary pension becoming a risk, you will still have your state pension to fall back on.
State pension rates, although not the most fruitful of policies, have risen again earlier this year. If you’ve been prepared enough to invest in a number of different pensions, the new state pension amount will help to supplement your main lump sum.
Defined benefit pensions prove a risky investment
In later life, it’s natural that we should not only want to seek security, but also enjoy our later years. If you’re looking to transfer a lump sum from a final salary pension – as opposed to the latter formed career average pension – there will naturally be some risks on your investment.
Once your money is no longer within the pension scheme, it will be down to you alone to make any investment decisions. The most sensible option would be to seek the help of an experienced financial advisor, which will of course allow you to make informed decisions during your retirement.
Speaking with a financial advisor will give you the peace of mind you really need to relax and make the most of your hard-earned down-time. A professional advisor means you can avoid overspending and will be in the best position possible to make your money go further.
Get in touch with our experienced team today, and we’ll ensure that taking out your final salary pension will be a smooth and rewarding journey.