What is a Final Salary Pension?
A Final salary pension scheme is a pension provided by an employer for each employee based on your salary at or near retirement. The pensions is usually calculated on an ‘accrual’ basis, which means that the employee will receive a fraction of their salary for each year they have been a member.
If an employee earning £30,000, with 20 years’ service up to retirement, was a member of a final salary scheme providing benefits on a 1/60th accrual basis, their pension would be calculated as £500 for every year of membership – £10,000 a year.
What about tax free cash?
As well as providing you with a pension income at retirement, some schemes also provide a tax-free cash lump sum. For example, some schemes with an accrual rate for pension of 1/80th of final pensionable earnings for each year of scheme membership, may also provide a tax-free cash sum of 3/80ths of final pensionable earnings for each year of scheme membership.
Other schemes may offer you the option of taking a tax-free cash lump sum on retirement in return for receiving a reduced pension. They will specify the maximum amount of tax-free cash lump sum that can be taken and the amount of tax-free cash lump sum that will be paid for each £1 per year of pension that is given up. This is often called the cash commutation factor.
Final salary pension scheme are usually seen as the gold standard for pensions. This is because the offer good annual pensions until you die. The level of pension income they provide is often very substantial and more often than not individuals who have these types of pensions are much better off in retirement.
What is the transfer value on my final salary pension?
This calculator provides an estimate of the transfer value you might be offered based on your deferred pension, the income you could receive and the residual pension fund values that would likely be available to pass onto beneficiaries.
The transfer value will depend on your age, the level of forecast pension when you retire, your retirement date and how generous the annual increases are on your pension both in deferment and when it gets paid.
Should I transfer my final salary pension?
In some cases it may be beneficial to take the transfer value of you final salary pension, you should talk to a pension expert to discover the options you have.