Final Salary Pensions (Defined Benefits)
These schemes offer guaranteed benefits based on your years of service and final salary. Final salary can have many different definitions. It depends on your scheme rules.
For the majority of people final salary scheme benefits cannot be matched elsewhere, however the new freedoms have encouraged some members to want to switch to a Personal Pension, so that the cash can be accessed either in full or part.
This process is a minefield for clients and IFA’sas regulation and legislation clashes.
Personal Pension Scheme (Defined Contributions)
In these schemes money is invested in a pension pot and grows over the working life of the client. Previously the majority of holders would buy an annuity, at the point of retirement. An annuity is an income for life.
Giving us the freedom to choose how we take our personal pension benefits is commendable.
The changes which came into place will make pension saving more attractive for most. Gone are the restrictions that put off many. No need to buy an annuity, no excessive tax penalties.
Personal pension savers can be sure that more of the money saved will be available to you and your families.
That’s the way it should be. We are to be treated as grownups. Finally.
There will be consequences of course. Some good, some bad, some ugly. Here are a few that immediately sprung to our minds.
Flexibility and greater choice.
You can shape your retirement income to suit you. Pension freedoms are transforming the pension landscape, giving you more choice than ever before in shaping your retirement plans to best meet your individual needs and circumstances.
The new rules should give people more confidence to save in a pension as they will retain more control over their money.
Changes include freedom to access your entire pension fund, choices over how to receive the tax-free cash from your pension fund, changes to death benefits and changes to contributions you can make in to your pension fund.
Likely to be one of the bigger issues awaiting the unsuspecting is tax. Aside from the risk of being pushed into a higher rate tax bracket on pension withdrawals, there is the matter of “emergency tax”.
People taking a lump sum from their scheme will be taxed as if they were starting the first of a series of monthly withdrawals which will continue for the rest of the year. Consequently, they will be given an emergency tax rate that pushes them up the tax bands – potentially to 45 per cent – and removes their tax-free personal allowance.
Those aged 65 could expect to live on average until nearly 85 *. How comfortable those years will be depends to a large extent on the decisions they make now. The big risk is that a generation may fritter away their pensions and have nothing for later in life.
Without careful management you could spend your entire pot and run out of money. Good advice will be crucial.
Could your creditors force you to hand over your pension pot to clear your debts? Or cover long term care costs? Only time will tell.
* Source data: Figures based on Prudential analysis of ONS figures for non-gender-specific period life expectancies at birth and at 65