The Final Salary Pensions Debate
24 April 2017
In the UK, there are currently 6,000 final salary pension schemes – with approximately 13 million workers contributing to these.
Final salary pensions promise to pay a salaried retirement income, based on your salary and length of service. These typically rise and fall in line with inflation. However, owing to increased life expectancy within the UK, this type of pension scheme is set to cost employers significantly more money.
These pension schemes were once viewed as the most profitable for workers because the scheme takes all the investment risk and is obliged to meet the promise of a pre-defined amount of income each month.
But higher transfer values and lower rates of inflation are causing a slight bit of turbulence.
A discussion paper produced by the government back in February floated the idea that employers would be allowed to pay less generous inflation increases to those with a final salary pension or, in extreme cases, none at all.
Reforms within the Spring Budget now mean that those workers within a final salary scheme will have unrestricted access to their pension pot.
There has been much debate recently as to whether or not it is more financially lucrative, therefore, for workers to “cash out” their final salary pension.
For instance, if the total of your final salary pension was £65,000, you may well be offered a sum of £60,000. Yes, the amount is less – but you can then transfer it into an account where the returns may outweigh those if you remain within the final salary scheme.
However, industry experts have warned that whilst the promise of being in charge of your own pot sounds exciting and even ‘safer’ than a final salary pension, this is not a decision to be taken lightly and full financial advice should be sought.
Final salary pensions offer the certainty of a regular income once you have finished working but if employers no longer need to adhere to inflation increases, it will certainly provide food for thought for those reaching the end of their career.
Most workers are in limbo as to whether or not sticking with a final salary scheme or cashing out would put them in the most advantageous position for old age.
Pensions are always subject to fear and scare-mongering, so seeking independent advice is an essential first step for those who are unsure as to how to secure their future income.
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Written By Matthew Ferguson