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Company Pensions: Defined Benefit (Final Salary) schemes

With a defined benefit scheme (or final salary pension as they are often called), the pension you receive at retirement is directly related to your final salary before retirement and the number of years of service you have had with your employer.

As your salary in the years leading up to your retirement is normally at its highest, this method of calculating retirement benefits will secure a very good pension, particularly if you have been with the employer for several years. The retirement pension benefits are often topped up with additional provision for a spouse and dependants’ pension, inflation proofing or escalation of income. Many schemes also offer a tax free lump sum in return for a reduced level of income.

Given the option, most of us would opt for a final salary scheme, if one is available. Unfortunately, final salary pensions are very expensive to provide and the majority of employers have changed to money purchase (or defined contribution) pension schemes where the costs are fixed but the benefits variable dependant on the investment return achieved.

If you are lucky enough to be in a final salary pension scheme, it is normaly good advice to stay in it. However, there are circumstances such as ill health which might make it beneficial to move your benefits to a money purchase arrangement.

Please seek professional advice if you are in this situation and remember with the freedom to access all of your pension there will be plenty of people trying to get hold of your pension pot and some of them will inevitably be fraudulent. Please be careful with your hard-earned pension savings and think very carefully before cashing them in or moving them. If you’re offered a scheme which seems too-good-to-be-true it probably is. For further information, see www.pensionsadvisoryservice.org.uk/pension-problems/making-a-complaint/common-concerns/pension-scams.

Please do not hesitate to contact us if you would like to discuss your retirement options in more detail. Remember we offer a free no obligation consultation and will be happy to help if we can.

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