Using your assets to create flexibility with a Final Salary pension
Chris Broome – Chartered Financial Planner
Pensioners transferring out of their Final Salary pensions, also known as Defined Benefit pensions, have made headlines recently as retirees seek more flexibility.
But using other assets to create a flexible income throughout retirement can mean security and the ability to create an adjustable income to suit retirement plans.
Final Salary pensions are often referred to as ‘gold plated’ as they provide retirees with security. The amount you’ll receive at retirement and the age at which you’ll receive it are pre-defined when you become a member.
This is usually dependent on the number of years you’ve been a member and either your final salary or a career average. The pension you receive isn’t linked to investment performance, it’s a guaranteed income for life.
While this is valuable, retirement lifestyles have changed enormously over the last few decades. Today, many retirees want a flexible income to suit their lifestyle, where income needs may change significantly over time.
As a result, some retirees have chosen to transfer out of a Final Salary pension in return for a lump sum that can then be deposited in a Defined Contribution pension scheme, which can be accessed flexibly. However, this isn’t in the best interests of most people.
The benefits of a Final Salary pension
The key benefit of a Final Salary pension is the level of security it offers. You don’t have to worry about investment performance or ensuring pension withdrawals are sustainable. You know that you’ll have a regular income for the rest of your life.
What’s more, many Final Salary pensions have auxiliary benefits too. This could include paying a pension to a spouse or dependent should you pass away. Depending on your personal situation, these can be valuable in providing peace of mind and play an important role in your overall financial plan.
While a Final Salary pension does provide security, you may also want income flexibility in retirement. Assessing and using your other assets means you may be able to have the best of both worlds. Three options for creating flexibility with a Final Salary pension are:
- Defined Contribution pensions
First, you may also hold a Defined Contribution pension. These types of pensions are more common than Final Salary pensions and if you’ve worked for several companies, you may have a mix of Final Salary and Defined Contribution Pensions.
With a Defined Contribution pension your contributions, along with employer contributions and tax relief, are added to a pension pot which is then invested.
The value of the pension is dependent on contributions and investment performance. Once you reach age 55, this pension becomes available to access in a range of ways, including taking a flexible income as and when you need it.
Using a Defined Contribution pension to supplement the income of a Final Salary pension when you need it can create flexibility without having to sacrifice security. One thing to keep in mind with a Defined Contribution pension is that you’re responsible for deciding how it’s invested and that withdrawals are sustainable with your plans in mind.
Having a regular income through a Final Salary pension can relieve some of this pressure but it’s still important to assess how you’re using pension savings.
- Depleting savings
After decades of diligently saving, some retirees are reluctant to start depleting their savings, even if providing financial freedom in retirement has been what they are saving for.
It’s natural to worry about accessing savings. You may be concerned that you don’t have enough or that an unexpected expense will need to be covered. Having a strong financial plan in place can help put your mind at ease here.
Using a range of tools, including cashflow planning, we can show you how your wealth will change over time, including if you begin to access your savings to add to your Final Salary pension income at certain points in retirement.
- Using investments
Finally, investments held outside of a pension can also provide a useful boost to your retirement income when you need it. These may be investments that are held within an ISA or an investment portfolio.
Selling investments can provide you with a cash injection when you want it, for example, if you’re planning a once in a lifetime experience or big-ticket purchase that your typical Final Salary income wouldn’t cover.
As with savings, it’s important to understand how accessing your investments at different points in retirement will affect your wealth and financial security to provide peace of mind.
Next Steps
Please contact us if you have a Final Salary pension and want to understand how it can fit into your retirement plans.
By looking at your lifestyle goals and priorities during retirement, we can help you create a plan that matches your aspirations, including creating income flexibility where needed.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Transferring out of a Defined Benefit pension is not in the best interest of the majority of pension savers.
A Defined Contribution pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income will also be affected by the interest rate at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.
