Comfort in later years… (Photo: Flickr/Alex Brown)
Active members of defined benefit or final salary schemes are sadly a dying breed but for those fortunate enough to still be building pension benefits in this way there are a number of options to fund further benefit accrual.
Additional Voluntary Contribution Plans
These arrangements typically will have been set up with the buying power of the employer, having the effect of driving down the charges associated with the contract e.g. insurance company’s administration charges as well as the cost of investing. Often there will only be a limited range of funds to select from when looking to invest your contributions.
Members who join these policies will be building a fund or pot of money which will sit alongside their main scheme benefit. On retirement, the pot will typical buy an annuity or may have some of the pension freedoms introduced by the Chancellor in April 2015. The plans are unlikely to be able to accommodate all of the flexibilities that pension legislation permits via a defined contribution pension plan; meaning that an additional change of contracts would be needed at some point to enjoy complete pension freedom and control. These plans would merit consideration if tax free cash can be taken through the AVC contract rather than from the main pension scheme, the defined benefit element.
Buying Additional Pension Years
It is possible to buy additional pension years. There are often restrictions in terms of the minimum and maximum pension that can be bought e.g. a multiple of £250 to a maximum of £6,000 per year. These benefits are added to the main scheme benefit (the defined benefit pension), that is, you boost your per year pension. Often the cost of the additional pension that you are buying will be reassessed at scheme valuation points, every 3 years, which adds an element of uncertainty in terms of what additional pension you are actually funding; the cost may change. The benefits being purchased can be indexed in payment and can buy spouse’s and dependants benefits.
These arrangements may well suit those who require an additional increasing income in retirement, who need to provide further spouses benefits , are confident that their salary is likely to increase significantly in the latter part of their careers or where the conversion rate from pension to a cash lump sum is particularly generous.
Self Invested Personal Pension (SIPPs)
SIPPs once the preserve of the more affluent are now a mainstream contract with competitive charges and a plethora of fund choice. SIPPs embrace the pension freedoms introduced by George Osborne putting clients firmly in charge of when (post age 55) and how benefits are taken. The contract will allow annuity purchase, partial annuity purchase, income drawdown or simply deferral of the benefits. Pension benefits that are not enjoyed can easily be passed onto future generations.
Those lucky clients fortunate enough to be active members of final salary schemes now have an even wider choice of option, when building additional funds within their pension savings.