A final salary pension scheme uses contributions to invest in the stock market with no risk to the employee. You’ll receive a fixed amount based on your salary when you retire, along with other benefits for your dependants.
What is a final salary pension?
A final salary pension, also known as a defined benefit pension, is a pension scheme that pays out a guaranteed amount when you retire. During employment, you and your employer’s contributions are invested in the stock market, but the payout upon retirement is fixed so there is no risk to the individual.
Your pension income in these schemes increases over time, sometimes linked to Retail Index inflation. With more people living for longer, these pension schemes are not as easy to find as they once were. However, in a court ruling in 2021, these caps were removed.
Drawing your final salary pension early
You can usually access your final salary pension if you retire at the age of 55 or later. However, the final salary pension amount will be reduced. In most cases, the annual pension payment at 55 could be around 50% of what it would be if you did not retire until 60-65. Most policies will not allow you to draw your final salary pension before the age of 55, from 6th April 2028, this age limit will increase to 57.
Forced retirement and final salary pensions
If you are forced to take early retirement due to ill health, you will receive the full final salary pension. You will need to provide evidence that ill health has forced you to retire.
Dependant benefits of final salary pensions
If the worker dies before reaching retirement, their partner, spouse and/or dependants will receive death-in-service payments. This is one of the main benefits of using a final salary pension. If the individual dies in the early years of retirement, some providers of these pensions will pay a larger lump sum to the dependants as well.
Transferring a final salary pension
Individuals are allowed to transfer their final salary pension to a defined contribution pension. Regulated financial advice must be given before making any transfer and the Financial Conduct Authority warns advisers to be cautious when providing advice surrounding pension transfers. Forgoing your final salary pension could put you in a worse financial situation in the future.
This should not be confused with a final salary pension transfer as part of a Cash Equivalent Transfer Value (CETV) agreement where the individual accepts a lump sum instead of pension income. This can be an advantageous option for people who want to offer more financial security to their family after death, or in the event of serious ill health and a projected short lifespan. However, it is not the right option for some people, and they should consult with a financial adviser before making a decision.
Transferring out of a Final Salary scheme/Defined Benefit Scheme is unlikely to be in the best interests of or be suitable for most people.
What if my pension provider goes bust?
Some people wish to transfer away from their final salary pension out of fears that their pension provider will go bust. However, there is protection and assurances to ease these worries. Since 2005, the Pension Protection Fund (PPF) will ensure that the pension holder will receive 100% of their pension capped at £41,461.07. Others will receive 90% of their pension income capped at £37,315.
I have lost my final salary pension details, what now?
If you think you have a final salary pension but can’t find the documentation to locate it, you can search for it with the help of The Pension Tracing Service. You can use their online database or call them on 0800 731 0193.
