Because they are deferred pay, workplace pensions are an important part of your pay package. They are, however, the part that is frequently misunderstood. A lack of understanding contributes to poor pension decision-making, so here are some pension basics. Before we dive deep into the discussion, let’s have a look at one of our YouTube videos below that discusses the Gold-Plated Pension.
Occupational Pension Plans
When you start working for a company in the United Kingdom, they can offer you either a defined benefit or a defined contribution scheme.
Now, let’s talk about defined benefit pensions. When you retire, a defined benefit pension scheme, also known as a final salary scheme, pays you a fixed sum of money from your former employer’s pension scheme. It will provide you with a guaranteed income for the rest of your life, regardless of how long you live. Please click here for a more detailed explanation of the DB scheme and its benefits.
Why Is the DB Pension Scheme Seen As Gold-Plated?
Defined benefit plans are referred to as “gold-plated” pensions. This is due to the fact that they provide a guaranteed, index-linked income in retirement.
Because of this guarantee, the risk associated with these types of pensions is carried by the sponsoring employer. If the employer and employee contributions do not produce the expected returns, the employer must make up the difference.
Not only that, but if the benefits paid out by this type of pension are higher than expected (due, for example, to rising life expectancy), the extra funding must also come from the employer.
As a result, many defined benefit plans are in deficit and have recovery plans in place for sponsoring employers to cover the scheme’s shortfall.
If an employer becomes completely bankrupt and the pension scheme’s funding falls short, the Pension Protection Fund serves as a safety net.
On the other hand, DC schemes function similarly to a bank account. In retirement, you use whatever money is in your ‘pot’ to generate income. The amount of income you receive is determined by the size of the pot. This is influenced by both the contributions made and the rate of return on investment.
As a result, the level of benefits from a DC scheme is unknown until close to retirement; the risk of poor investment returns falls on the individual, whereas your employer would pay extra contributions to offset any poor investment returns in a DB scheme. In short, one reason a DB pension may be considered ‘gold-plated’ is because of its greater certainty.
What Should You Do Now?
So, that’s a brief summary of why the DB scheme is gold-plated. However, it is entirely dependent on your specific situation. Two clients with the same scheme who started and finished their jobs on the same day may have different conditions. In terms of DB Pension Transfer, you might be suitable or unsuitable for a transfer.
Now, if you have any questions, or if you’ve had a very slow transfer process, or if you’re still deciding whether a transfer is right for you, please contact us through the button on the right side for a free initial consultation call with one of our qualified IFAs at Cameron James, and we’ll help you with the proper UK pension transfer advice that is tailored to your situation.