This sounds like great news – but there is an important catch. Alternatively, you might take a higher income – e.g.

If you were to achieve slightly higher growth on your pot – say 2 per cent – then your pot would last over 34 years at the same rate of spending. If you were to achieve a mere 1 per cent average growth on your pension pot, you could withdraw £12,000 a year for over 28 years before your money ran out. You can see that even with no growth at all, you could withdraw £12,000 a year from £300,000 for 25 years. If you were to receive this ‘low’ value of £300,000 CETV, how might it compare to your original final salary pension of £12,000 a year? In other words, how long might your pension last? A more generous valuation might use a multiplier of 30 or even higher, to give a CETV of £360,000 or over. A modest valuation might multiply this projected income by 25, to give a CETV of around £300,000. Suppose you are currently 55, and have a final salary pension projected to pay you £12,000 a year from the age of 65. Different providers may use different methods for calculating transfer values, but the following is a good rule of thumb. Here is how the CETV valuation can work in practice. Example of Cash Equivalent Transfer Value (CETV) This sum can be invested in a pension pot from which you can then draw an income from the age of 55. This money won’t be in the form of cash, but something called the ‘Cash Equivalent Transfer Value’ (CETV). In a final salary pension transfer, your pension provider may offer you a certain amount of money in exchange for giving up your guaranteed pension for life. This is known as a final salary pension transfer (or defined benefit pension transfer). You can ‘trade in’ a DB pension for a fixed-size pension pot of the kind found in defined contribution (DC) pensions. What is a defined benefit pension transfer? However, there may be a limit to how much the PPF can guarantee. In most such cases, pension benefits will still be paid to members via the Pension Protection Fund (PPF), which safeguards DB pension schemes. If you die prematurely, there may be a widow’s pension for your spouse, but most of the benefits will be lost, and nothing passes to your children.Īlso, there is the small risk that your pension scheme may collapse at some future point, if it is no longer adequately funded (e.g. Also this kind of pension cannot be inherited by your beneficiaries. You can’t vary the income you take from it, nor draw out larger lump sums (apart from the tax-free lump sum offered by some final salary schemes). What are the drawbacks of a defined benefit pension?ĭespite the attractions of a DB pension, in some ways it is not as flexible as a DC pension pot. So long as the pension scheme itself remains funded, your pension income will be paid no matter how long you live. What’s more, the payouts from a DB pension are guaranteed for the rest of your life. What are the advantages of a defined benefit pension?ĭB pensions are often seen as more generous, because it would take an above-average defined contribution (DC) pot to be able to buy an annuity that pays you the same amount as a DB scheme.

The amount you’re paid will depend on a number of factors – find out more about final salary pension income.

The scheme will assign you a ‘ normal retirement age’, and your pension will be paid from this date. When you are a member of a DB / final salary pension scheme, your employer pays into a central fund on your behalf (unless your scheme is directly funded by the taxpayer). Historically they have been seen as a very attractive kind of pension. Some private sector employers do still offer them, however. Instead of building up a pension pot over time, it provides you with a guaranteed annual income for life, based on your final or average salary (hence the name).ĭB pensions are most often provided by the public sector (health, education etc) and government employers. What is a final salary/defined benefit pension scheme?Ī defined benefit or DB pension (also known as a final salary pension) is a special type of workplace pension. This is a big decision and an irreversible one, so it’s important to understand exactly what this means, and what the pros and cons for you might be. If you have a defined benefit (DB) pension, you may be offered the option to transfer it into the more common type of pension (defined contribution).

Define dtransfer