Company/Occupation Pension Schemes fall into two groups – Final Salary and Money Purchase.
Final Salary – pay a defined income at retirement based on a commitment from the company assuming it has the funds and are trading at your time of retirement. The Scheme Trustees do have the ability to change the terms assuming the majority of members do not block the changes.
Money Purchase – an annuity is purchased with your pension fund and the income is dependent on your fund accumulated and annuity rates.
This article relates to UK’s final salary pension schemes, which fell further into the red during April. The collective deficit is now nearly £216.8billion (across 6,432 schemes – an increase in deficit of almost £11billion). This is a massive increase on the deficit of just above £8billion at this time last year (but off the peak of £255billion recorded by the Pension Protection Fund in December 2011).
The soaring cost of paying for pensions has been blamed on the Bank of England’s quantitative easing programme (QE). Its £325billion asset buying has depressed the yield or return on government bonds (commonly called Gilts). Final salary pension schemes have to use gilts to provide a guaranteed return in order to meet their promises to scheme members. QE has made funding final salary scheme more expensive.
When comparing your retirement benefits ensure your funds are best placed to offer the best potential to retirement income. With the reduction in the Gilt Yield’s, in some circumstances, the Cash Equivalent Transfer Value has been enhanced to a value to consider a transfer to a personal pension or Section 32 pension regime. Each case must be reviewed on its’ own merits and the specific client and their personal views, goals, needs and aims.
The concept is – due to the reduced Gilt Yields, the cash value of benefits increase and depending on the time to retirement, the client may see a better retirement income by moving to a personal regime.
This is just a concept and principle, professional advice is required to assess the personal situation. The purpose of this point is to highlight you have options and it may be worth investigating further. This article is for information only, and is not a recommendation and advice.
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