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How do final salary pensions compare with private pensions?

There has been a lot of hype in the news lately about the new pension freedoms and how many savers can get hold of their pensions more readily. This is all well and good, but there are a section of pension holders whom this does not apply to, those with final salary pensions.

These pension schemes pay out an income for life rather than being a pot of set savings. Some final salary scheme holders have decided to look into transferring their pensions into personal pensions in order to take advantage of the new rules.

Final salary schemes have always been popular. They allow you to provide for your retirement for as long or as short as it may be with the security of various guaranteed benefits even if you were no longer an active scheme member.

So why would you want to switch?

What are the attractions to changing to a personal pension from a final salary pension? Well here are some of the benefits of a personal pension:

  • You can pass the whole fund on at death to your spouse or partner and then onto your children should you wish it. Most final salary pensions only allow 50%.
  • You can access your pension pot before the government’s stated retirement age, whereas you cannot with a final salary scheme except if you suffer ill-health.
  • With a personal pension you can change the amount that you withdraw at any one time for example of you have a large expenditure to deal with you can raise your pension income, and then cut it down when your state pension comes in and you have more income.
  • Income tax is easier to deal with. You have more control over the rate at which you pay tax as you can control the amount you withdraw over the course of a financial

Why stay with a final salary pension?

The Telegraph has researched into this and found that final salary pension holders can actually take a transfer value for their pension and this means that they can have a pot of cash released to them instead of taking the pension itself. They have found that some people are being offered more money than others and this seems to be linked to the size of the company. So, the bigger the employer, the larger the transfer value is likely to be. Large financial companies, big airlines, banks and telecoms companies are currently offering generous deals.

Research collected by Tideway, who are a financial advisory firm, reported that the generosity of some company’s transfer values created a situation that if a saver took the cash from a transfer and invested it, they would not need to achieve much in investment return in order to obtain the same benefits as they would have had if they had left their money in a final salary pension. Tideway’s example was just inflation plus 1% growth.

You can access your pension benefits in cash form only as long as you first request a transfer value and then move your money.

It is worth checking your pension if you are in a final salary scheme. Your final pension amount can also depend on how fluid your company is as a final salary pension is only as secure as the company is and the funds that they have set aside to pay for the benefits as well as their willingness to continue to support the scheme.

If a business goes into receivership and they cannot pay the funds needed for the pension benefits, then the scheme may qualify to join the Pension Protection Fund which will provide a level of compensation for employees..

These are the up-sides and down-sides to a final salary pension scheme. So, it is worth talking to a financial adviser who can assess your financial situation, your attitude to risk and what you want to achieve with your retirement fund. With all this in mind they can then recommend the right pension for you and the right decision for you should you want to switch pension schemes. A quick or rash decision could be very costly, so take your time and plan wisely.

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