If the company does fail, then the pension scheme will be run by the Pension Protection Fund (PPF) which is essentially a compensation scheme for people who are members of a final salary pension scheme.
Under the compensation rules, if you are old enough to draw a pension when the company becomes insolvent, you will receive 100% of your pension promised by the original scheme. But if you are younger, you won’t get your full pension from the compensation scheme - because the value will be reduced to 90% of what you would have got, regardless of whether you have retired or not.
Under the rules, if you are at the age for drawing a pension by the time of the insolvency, you will receive 100% of your pension. Those who aren’t, will get 90% regardless of whether you have retired or not.
The PPF also applies a cap, or limit (£37,420.42 for 2016/17), to what pension income you will receive if your compensation is limited to 90% of your scheme pension, depending on your age. For example if you are 55 the current cap is circa £28,000. This capping process is something to give serious consideration to, if you expect a particularly large pension from pension scheme, and have reservations about your company’s ability to remain solvent. You can avoid this by transferring.
Simon had a pension from a previous employer that had a transfer value of £210,000. The deferred income was £8,400, however as he had accrued significant wealth elsewhere in investments and property, he felt that this income was surplus to his requirements and that the underlying value was more important to his family.
Rewrite your own rules. Defined benefit pensions have fixed terms that have little to do with your circumstance. Your rules mean more flexibility and control over your pension fund based on your needs now and for your future.
If you find the option to draw a much larger tax-free cash lump sum appealing, then moving from a defined benefit pension may suit you. Extra tax-free cash entitlement from a Final Salary Transfer scheme allows a more generous pay out.
Defined benefit schemes are based on the assumption that everyone in the scheme is married and takes no account of your child or marital status. Transferring gives you the advantage of passing the full fund value to beneficiaries outside your estate.
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