Why Review Your Final Salary Pension Scheme?

The advent of Pension Freedoms brings along far greater flexibility to individuals holding a Personal Pension or Self Invested Pension Plan.  This provides more options for individuals looking at how to best draw their pension in retirement  and therefore anyone holding a final salary or defined benefit arrangement should consider exploring the benefits of their existing scheme and whether a transfer out to a personal pension would be beneficial or not.  Logic Wealth Planning can provide advice in this specialist and most complex of subjects.    

The table below illustrates the differences between a Defined Benefit or Final Salary pension scheme against a Personal Pension Plan and Self Invested Pension Plan:-


Current Final Salary Pension Scheme



Personal Pension/SIPP
The Scheme Investment Options are chosen by the Trustees. This is designed to meet the cost of the benefits. The benefits may be adversely affected by changes to the company or scheme. The company can wind up the scheme and transfer benefits to a Deferred Annuity.



The individual controls investment and provider choices. Can access alternative funds, purchase commercial property, shares or in their own business. Benefits unaffected by changes to scheme or company after transfer.
The scheme could become underfunded – 80% are 80% funded. The scheme trustees may:

  • reduce benefits
  • request higher contributions
  • alter investments

Additionally, they can look to restrict retirements, prevent transfers, reduce Transfer Values, undertake Enhanced Transfer Value exercises.

  Long Term


The individual makes the investment decisions and can choose the level of risk they are willing to take. The plan is underwritten by the Provider and held separately from company assets. In the event of failure of the provider, another provider will usually step in and if there is any shortfall, the Financial Services Compensation Scheme applies.
The company underwrites the scheme; it is only as secure as the company. Scheme costs show in the company accounts (IAS 19), which make the company less able to borrow and less desirable to prospective purchasers. If the scheme is in deficit and the company fails, the funds may pass to the Pension Protection Fund (PPF).

·         Funded by a levy on defined benefit schemes and investment return on the assets held by the PPF

·         There is no government underpin

·         PPF restricts the benefits to 90% of a cap (£34k), at NRA of 65

·         Earlier retirement may be declined by the PPF

·         It is not possible to transfer out of the PPF




Adviser is monitored by the Financial Conduct Authority. Provider monitored by the Prudential Authority. Historically when providers fail the assets are purchased by another similar firm.

The Financial Services market is underwritten by the Financial Services Compensation Scheme.

The Financial Ombudsman Service deals with consumer complaints.

All advisers carry Professional Indemnity Insurance.


The current lump sum death benefits under Defined benefits Schemes are likely to be minimal – usually a return of personal contributions, possibly with interest. The  capital value of the taxable pension is also assessed.

Death Benefits


Usually, the entire fund can be paid as a tax free lump sum in the event of member’s death, up to the Lifetime Allowance.
Benefits due are fixed as at date of leaving. Those benefits are increased from then until retirement in line with inflation capped at 5% (from May 2009 that reduced to 2.5% pa).Retail Prices Index replaced by Consumer Prices Index in January 2011.



Benefits depend on the fund and annuity rates available at retirement. Investment performance may provide a higher return increasing the potential benefit.
Pre A Day Protected Cash was based on salary and service increased in line with RPI until A Day and then by the Lifetime Allowance. Post A Day it is 25% of the costs of providing the pension benefits.  This is affected by scheme commutation factors.

Tax Free Cash


The Tax Free Cash is based on fund size.

The Tax Free Cash is usually larger on transfer.

This may be further improved by good investment performance.


The scheme decides when and how the member draws benefits. The scheme reduces benefits drawn before the scheme Normal Retirement Age (NRA).The reductions applied may be varied at any time.

The scheme may not increase benefits deferred after NRA.




Individual decides when to draw benefits, within HMRC rules. The individual may draw benefits at any time after 55 and at age 75, the taxation position changes. A member with a right to draw benefits earlier can retain it.

Individual may defer drawing benefits and increase pension due to investment return in the interim.


Member is required to draw cash and full pension at one time. Benefits must be in the form of a fixed guaranteed pension. Tax Free Cash must be drawn in full at outset or the right is lost.



Tax Free Cash may be taken in stages. Income need not be drawn when Tax Free Cash is taken. Income can be adjusted to suit client needs. Flexible Access Drawdown available in April 2015.