Final Salary and Career Average Schemes
If you are in a final salary or career
average scheme, at retirement your scheme will provide a
pension based upon your pensionable service and final pensionable salary and the scheme's
accrual
rate.
The accrual rate is the proportion of your salary that you
receive in pension for each year of service. For example, if the
accrual rate is 60ths, you will receive 1/60th of pensionable
salary for each year of completed pensionable service.
It may also be possible to choose a tax-free lump sum. The amount of the lump will depend
upon the scheme's rules and in any event will be limited to 25% of
the capital value of your pension.
If you are able to draw your pension earlier than the scheme's
normal retirement age, the amount of pension will normally be
reduced to take account of the early payment. The ability to early
retire and the extent of any reduction will depend upon your
scheme's rules. Often the ability to take benefits early will
require the agreement of your employer, the scheme's trustees, or
both. Sometimes, better terms are offered if retirement is as a
result of ill health or redundancy. In any event, early payment of
pension (except on grounds of ill health) is not allowed before age
55.
Money Purchase Schemes
If you are in a money purchase scheme, at
retirement you will need to use your pension fund to purchase an
income. You will also have the option to use part of your savings,
up to 25%, as a tax-free cash sum. The remainder will provide your
income, normally in the form of an annuity.
The amount of pension payable from the scheme is dependent
upon:
- the amount of money paid into the scheme (by you and your
employer);
- how well the investments has performed; and
- the annuity rate at retirement. An annuity rate is the factor
used to convert your pension savings into a pension.
Click here to read
about annuities.
Retirement Age
The earliest age you can draw retirement benefits is 55.
It may be possible to draw retirement benefits earlier if you are
in poor health and unable to work.
Click here to read more about
minimum retirement ages.
Maximum Benefits
The maximum total retirement benefits you can draw aggregately
from all pension schemes (excluding the state pension) must be
within the Lifetime Allowance. Otherwise a
tax charge will apply on the benefits in excess. For the tax year
2010/11, the Lifetime Allowance is £1.8m. Rates for other
years are as follows.
- 2006/07 - £1.5m
- 2007/08 - £1.6m
- 2008/09 - £1.65m
- 2009/10 - £1.75m
- 2010/11 to 2015/16 - £1.8m
Flexibility
From 6 April 2006, unless scheme rules require otherwise, it is
no longer necessary to cease work to draw a pension from the same
employer. It's now possible to continue working and draw pension
and if the scheme allows, build up further pension rights. It is
important to note however that this option is dependent upon the
scheme's rules allowing it.
Open Market Option (OMO)
If you have money purchase (or defined contribution)
benefits, you will have the opportunity to use the
OMO.
The OMO gives you the option to transfer your
fund and get an annuity from another provider. This
allows you to shop around the annuity market for a better
deal. It may be possible to increase your income by up to 30%
through the OMO.
The Financial Services Authority
(FSA) provides an online service for comparing annuity
providers. By entering some basic information, you can get a
table showing the best providers for your needs. Click here for
the FSA's comparative tables.
An independent finnancial adviser (IFA) may be able to help you
search the market for the best deal. If you have more than
one plan and are looking to merge them into one annuity, an IFA may
also be able to help co-ordinate this. Click here to
find IFAs in your local area.
Further Reading
Both the FSA and the Pensions Regualtor have produced leaflets
to help members with money purchase benefits consider their
retirement options.
Click here to dowload the FSA's leaflet - Your
pension: its time to choose
Click here to download the Pensions Regulator's
leaflet - Making your retirement choices: think before you
choose
Q & A's
If your pension is from a final salary scheme, it is valued
using a factor of 20:1. If your scheme is a money purchase scheme,
you should use its market value. Any pensions already in payment
are valued using a factor of 25:1.
This will depend on your scheme rules. Ask your pension scheme
about the scheme's requirements and to whom applications should be
addressed. You should also check how much reduction, if any is
applied in the event of a pension being drawn early.
To receive a cash lump sum most final salary pension schemes
require you to give up part of your pension in exchange. However,
some public sector schemes offer a pension and lump sum separately
so you do not have to give up any of your pension for a cash lump
sum.
In a money purchase scheme, part of your fund can used to
provide a cash sum and the excess used to purchase an income.
