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Final salary pensions – take a look at the fine print

Much of the conversation around final salary pensions has been about the unusually high transfer values [1] offered by many schemes. It’s great that people are talking about these ‘gold plated’ benefits. If you wait until near retirement before finding out what you are going to get, it is often too late to take any significant action to meet your retirement objectives.

What final salary pensions do best is to provide certainty. However, to get to that certainty you absolutely need to look at the fine print of your particular scheme.

All that glitters isn’t gold

This is certainly true for final salary pensions. Whilst most increase in line with inflation, some don’t at all, and for others the increase is severely limited. Sometimes the increases up to retirement are different to those when you start taking benefits. These differences are relatively easy to identify from the information schemes provide.

You can’t measure progress against a goal unless you know what you have. So this is where we start. Over the last year we have reviewed many final salary pension schemes for our clients.

While many schemes make some provision for your family members, an area that we think needs highlighting is exactly what a scheme means by ‘spouse’ (or indeed ‘children’)!

Is your spouse/partner included in your scheme?

According to the Oxford English Dictionary the word spouse means ‘a husband or wife, considered in relation to their partner [2]’. In the UK, this is generally accepted to include people in Civil Partnerships.

However a pension scheme might not include Civil Partners in their definition. Indeed some schemes specify that the Marriage or Civil Partnership had to start whilst employed by the company. Others won’t pay anything to them if they are significantly younger than you.

Are your children included in your scheme?

Children are generally defined as someone under 18 years old. Where a pension scheme provides a children’s pension when you die, this often extends to age 21/23 if they are in full time education or vocational training. At this point the benefit stops. However, what is sometimes buried in the small print is exactly which children benefit. If you have children from a previous marriage, or step children, are they provided for? One high street bank will only provide a pension to a child if they were conceived whilst you worked there! Children’s pensions tend only to be for a small proportion of your full pension, but it is worth checking if they are covered.

Weighing up the benefits

It can be difficult to find this information and when you do find it what should you do about it. Sometimes the solution might be as simple as putting money aside separately or taking out life assurance to plug the gap. For some people it might be worth taking advice about whether a transfer would better meet their financial planning needs. At the very least make sure that you are in an informed position about what you have.

If you are considering transferring your final salary pension, the first step should always be to get advice. A good starting point is our recently published guide to transferring your final salary pension [3].

Victoria Groves
Senior Technical Consultant