Defined Benefit Pension Schemes
What are they?
Defined Benefit pension schemes are often referred to as Final Salary schemes, are the crème de la crème of pensions and are now very rarely available from many employers.
This type of pension will pay a member a secure income at retirement based upon how many years they built up benefits with the employer. The pension will be paid for the rest of their life (and typically their spouse’s lives) and will increase each year, in line with the scheme rules.
Why are they so highly regarded?
Once in payment the income is guaranteed, it will not run out, and it will not reduce only increase!
The sponsoring employer contributes to the scheme and is responsible for ensuring there is sufficient assets in the scheme to pay the pension incomes when members retire.
Members are also able to make personal contributions which will qualify for tax relief.
What will I be paid at retirement?
Your income at retirement is based on your pensionable service (how long you have worked for the employer), your pensionable earnings (your salary at or close to retirement or some companies may use an average earnings of your career) and finally the accrual rate of the scheme (usually 1/60th or 1/80th for each year of pensionable service).
When can I take my pension?
You can take your pension from aged 55 years as you can with any other personal pension however most defined benefit schemes have a normal retirement age of 65.
Depending on your scheme, if you take your pension early it may reduce the amount you get.
If you do not want to take your pension at normal retirement age that is ok too. You can defer your pension until you require income and it may mean you get higher yearly pension when you come to take your benefits.
Will I be able to get any pension commencement lump sum?
Yes. Depending upon the scheme you can usually choose to reduce your initial pension by up to 25 % and this income will be exchanged for a tax free pension commencement lump sum dependent upon the conversion rates used by your scheme.
What happens if I die?
Most schemes will offer a spouses pension, this is usually 50 % of pension benefits built up to the time of your death. In some cases, the scheme may also offer a dependant children’s pension this is usually limited to a smaller percentage.
However, when your spouse or children die, the pension benefits will stop.
Is my pension protected?
As you may have of heard in recent times many employers offering defined benefit schemes have been unable to meet their future pension commitments, which has caused concerns for many members.
Don’t worry however as defined benefit pension schemes are protected by the Pension Protection Fund (PPF).
The fund pays compensation to members if the sponsoring employer to a scheme becomes insolvent and there are insufficient assets in the scheme to secure benefits at least equal to the level that the PPF would provide.
You should be aware that the level of pension secured within the PPF may not be the full amount you would have expected if the scheme had not become insolvent.