QROPS and final salary schemes:
Anyone who has UK pension rights with a final salary scheme, also known as defined benefit scheme, is likely to enjoy much higher levels of retirement income than members of money purchase schemes.
For members of final salary schemes who are perhaps considering a QROPS transfer or any other kind of pension restructuring, it is important to properly understand the benefits that you may be giving up.
Final salary pension schemes were designed to provide the highest levels of financial security in retirment.
The pension income level is guaranteed for life and in some cases there may be automatic annual increases of up to 5%.
For this reason final salary or defined benefit schemes are designated under UK pension regulations as ’secured pension options’.
Annuities are also designated as ’secured pension options’ in the UK.
However if the transfer value of a defined benefit scheme was used to purchase an annuity, the resultant income would be significantly lower than that available from the final salary scheme.
If the same transfer value was structured as a money purchase arrangement, it is unlikely that the income from the final salary scheme could be matched without following a somewhat ‘aggressive’ investment strategy, which is not generally appropriate for retirement planning.
Final salary schemes can also provide benefits other than retirment/pension income, which money purchase schemes do not.
For this reason any restructuring of a final salary pension needs very careful consideration and we would caution anyone considering this type of retirement planning to think very carefully before making a decision which probably cannot be reversed.
Source: QROPS Bureau