Do you have a Final Salary pension? If so, this kind of pension is one of the most generous and secure policies available. However, it isn’t the most flexible kind, and some people choose to trade in their Final Salary pension for that exact reason.
Before you make any drastic moves, ensure you understand the implications of this decision. Read on to find out how much your Final Salary pension is worth.
To determine the value of your Final Salary pension, your employer will take a percentage of your salary pre-retirement and multiply it by the number of years you have worked at the organisation. Loyalty is rewarded by this policy.
Defining A Final Salary Pension
A Final Salary pension promises you a certain income from the point of your retirement and for the rest of your life. This is what makes it so desirable: it guarantees you a certain level of financial security, and some policies even continue making payments to your spouse if you die before them.
The most common form of pension in the UK isn’t a Fixed Salary pension; it’s a Defined Contribution pension. This is different because its value depends on your contributions alongside the performance of your investments. Both policies are their advantages and their drawbacks.
How Does A FSP Differ From A Standard Scheme?
The way this pension works is that a percentage of your final salary is considered alongside the number of years you’ve spent at the organisation to determine your Final Salary pension. This will then be paid to you every month, just like a salary, for the rest of your life.
You may be able to trade in your pension in exchange for a lump sum. If you work in the private sector, it’s more likely that you’ll enjoy this option as part of your scheme. If you choose to do this, it’s called a Final Salary Pension Transfer.
Your Final Salary Pension Transfer Value
If you wish to leave your Final Salary pension scheme, you can request to be released and your employer will offer you a sum of money which is your Cash Equivalent Transfer Value. You may then wish to join a contribution-based pension scheme instead.
Why do people choose to leave a scheme that guarantees them an income for life? They may find that the lump sum is more useful for their particular financial circumstances. It does mean that they have to manage their pension money wisely, though. Unlike in a Final Salary scheme, this pension could run out.
Taking Your Tax-Free Cash Sum
You may choose to withdraw money from your Final Salary pension. There is a limit on what you’re able to take out without paying tax, and that’s decided by HMRC. Of course, when you withdraw money from your scheme, that will have an impact on the future payments that you receive from your pension.
The amount of money you’re able to withdraw and the impact that this has on your future payments is referred to as a commutation factor. A higher commutation factor is generally seen as indicative of a better deal. To ensure you’re making a smart financial decision, it might be worthwhile to consult an advisor before taking your tax-free cash sum.
How Do I Calculate What My Final Salary Pension Is Worth?
You can find out what your Final Salary Pension is valued at by requesting a valuation from your pension scheme. Many employers offer the option to be bought out of the scheme, as this releases them from future liability. The amount you’re offered is known as your policy’s Cash Equivalent Transfer Value. It’s worked out based on how much your pension payments would be and an estimate of your lifespan, which can determine whether a CETV is generous or not.
Where Can I Find A Final Salary Pension Transfer Calculator?
You can work out an estimate CETV by using one of the many online calculators available. However, you must remember that the only true evaluation comes directly from your pension scheme.
Is My FSP A Good Value?
Because this is such an important decision, involving several fairly complex calculations as well as detailed knowledge about available pension plans, it makes sense to consult a financial advisor before trading in your Fixed Salary pension. They will be able to advise you regarding your CETV and whether this is actually a good value offer for your Fixed Salary pension.
