Final Salary Pensions

Are they right for everyone?

Final Salary Pensions are usually quite rightly considered to be the ‘Rolls Royce’ of pensions. They are the schemes often provided to employees of large firms, i.e. FTSE 100 private sector companies as well as public sector workers such as teachers, nurses, civil servants etc. The appeal for many is that the pension you receive from them is linked to your length of service and salary. No stock market volatility to worry about and for many people this provides a degree of ‘security’ which is very important.

Of course they are not without issues; one being the liability such generous terms can give an employer or the state. People are living longer and with a guarantee to pay a pension for as long as someone lives, no matter the cost, many schemes in the private sector have ‘funding holes’ and have been closed to current and new employees as the cost of the liability increases.

So if you have such a scheme, you may be right in assuming you would want to hang on to it at all costs. Many feel the security of a pension in retirement is “not something you mess around with”. However part of the roll of a financial planner is knowing a client’s circumstances to the extent that you can discuss and question a client’s objectives and at least consider any alternatives. Sometimes the best way forward is surprising and not in line with someone’s initial thoughts. I remember a client of mine making the comment to me a few years ago, that I knew more about them than members of their family!

Not all advisory companies get involved in assessing final salary pensions. The additional qualifications required and costs in terms of professional indemnity insurance alone, means it is not viable for many. However the risk there is that they may turn a blind eye to someone’s final salary scheme and in so doing might leave the client and themselves exposed.

Take this example – Mr Smith is a single person with no dependents. He has 25 years’ service and membership of a final salary scheme which will provide an excellent pension for him in retirement of £20,000 p.a. He likes the security this provides, but is concerned about his health having had 2 heart attacks last year. Had anyone asked for a transfer value they would have found out it was £333,000. The scheme rules dictate that on death after retirement a 50% spouses pension (£10,000 p.a.) would be payable. Mr Smith retires at age 65, but dies 12 months later. Nothing is paid as he is single and his children are not dependent. One of his sons is a little curious as he has a private pension of his own and is aware that on death either before or after retirement the full value of his pension fund is passed on to whoever he wants to receive it. He mentions this to his father’s adviser, whose response is, “He could have transferred it to a private pension (£333,000) and this would have been paid out but I don’t get involved in that type of work!” Not much consolation to the children is it?

Next month I will provide a few more scenarios where there are surprising advantages to in considering an alternative to a final salary scheme. It is extremely important to state that the above does not constitute advice and because everyone’s circumstances are different, it is always best to seek financial advice.

Author: Phil James, Grosvenor Consultancy Ltd

There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.

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