FINAL SALARY PENSIONS
TIME TO ABANDON A SINKING SHIP?
THE RICHER RETIREMENT SPECIALISTS
Rod Thomas FCA
pg 3. Introduction
pg 4. Who else is talking about final
pg 4. What are the big changes that have
impacted final salary schemes?
pg 5. How does a final salary scheme work?
pg 6. What’s gone wrong?
pg 7. What are the consequences of this
pg 7. The deficit and the Pension Protection
pg 7. How big is the funding deficit?
pg 8. Balances and Funding Ratio
pg 9. No protection if you are not retired!
pg 10. Limitations of the Pension Protection Fund
pg 11. How much will your final salary scheme
grow between now and retirement?
pg 12. Why leave your spouse 50% when it could
pg 12. Why not own your own fund?
pg 13. Take control and make better investment
pg 14. Making a pension transfer to a defined
contribution scheme brings pension
freedoms, the right investment strategy
can result in a higher fund value and
income in retirement
pg 15. Reasons to keep your final salary scheme
pg 16. Reasons to move your final salary scheme
to a defined contribution scheme
pg 17. Risk and Reward
pg 17. Will you be allowed to transfer even if you
pg 19. Summary
pg 20. Next Steps
Over the last generation anyone inside a final salary (also
called a defined benefit) pension scheme was considered
to have a ‘gold plated’ pension. People were universally
discouraged by financial advisors from moving to a
money purchase (also called defined contribution)
scheme, except in the most unusual circumstances.
But times change. And the present environment for
investment, combined with the momentous changes the
Government has made to the pension laws from April
2015 and into 2016, should, in my view, mean that its
crucial to take a very close look at any final salary pension
scheme that you belong to.
“These ‘gold-plated’ schemes are
supposed to be guaranteed – but
savers are being misled, a top
pensions’ official has warned. Alan
Rubenstein, head of the Pension
Protection Fund, called on companies
operating pension schemes that are in
jeopardy to be honest with members.”
The Daily Telegraph said that these comments
represented the most overt warning from a government-
backed organisation since the crisis in the early 2000’s,
when thousands of workers faced the loss of their
pensions as companies collapsed with deficits in their
This special report is primarily to holders of final salary
schemes in the private sector, predominantly where
you no longer work for the company and have a ‘frozen’
pension. If you still work for a company and benefit from
a final salary scheme, there’s also a lot to think about.
If you work in the public sector, with an ‘unfunded’
scheme, you are no longer (from April 2015) able to opt
out of your existing scheme, and therefore this report
doesn’t apply to you. This includes, for example, the NHS,
Teachers, Police, Fireman and more. The exception in the
public sector is local authority employees who belong
to a ‘funded’ scheme and may still transfer out of their
As always the views and opinions expressed in this report
are my own. And in no way represent advice on moving a
pension – which can only be provided by a fully regulated
financial advisor. From April 2015, if you are considering
moving a final salary pension you will be required by
law to have regulated financial advice unless the fund is
worth less than £30,000.
WHO ELSE IS TALKING ABOUT FINAL SALARY SCHEMES?
Many people it would seem. In recent months
final salary schemes have hit the headlines:
• “Final salary pension? Your retirement income is at risk”
• “Is it worth ditching a final-salary pension for cash?”
• “Freedoms spark rush from final salary pensions”
• “Why UK Final Salary Schemes Will Move to DC (Defined
• “Fears more will exit ‘gold-plated’ pensions to win Budget
freedoms - so can it ever pay to give up a final salary
• “Warning over final salary schemes as combined pension
fund deficit grows”
WHAT ARE THE BIG CHANGES THAT HAVE IMPACTED FINAL
Here’s a quick bullet point list, which we will explore
in more detail in this report.
• Poor investment performance
• Impact of fees and charges
• Inability of companies to fund the pension to the
• Opportunity to get better investment growth
• New rules for pension schemes that provide new
benefits for defined contribution schemes.
• Potential withdrawal of up to 100% of the pension
fund, but only after transfer to a defined contribution
HOW DOES A FINAL SALARY SCHEME WORK?
If you are one of the few who understand how a final
salary scheme is designed to work, and know how the
deficits have arisen, skip this section. Otherwise read on
for a quick primer that will set you up to understand the
rest of this special report.
At its most simple, a final salary pension promises
you a set of benefits (e.g. income, cash on retirement,
life insurance, widows and maybe children’s pension)
which are then funded by the company based on three
elements of cash going into the pension:
• Contributions from the company
• Contributions from that employee
• Investment growth over the time
The actuary (the professional that does all the
pension calculations) has to do two big jobs:
1. Calculate the pension you are likely to qualify for on
retirement, taking into account promotions, wage
rises, length of service, inflation and more. And then
calculate, from the annual pension, what capital sum
will be needed to provide that pension. It’s a tricky
calculation across maybe thousands of employees
on different pay grades and maybe with different
2. Calculate how much needs to be contributed to the
pension, in the three ways noted above, to ultimately
provide the right amount in the fund to pay your
pension until you die, and then maybe to your
surviving spouse and children.
So we have two separate calculations. If all is calculated
correctly, and the many assumptions that are made turn
out to be reasonably correct, there will be a fund of the
right level that can then provide your promised pension
for the many years ahead.
Only, most probably, there won’t!
WHAT’S GONE WRONG?
There are five fundamental problems that have arisen
with final salary schemes that impact the ability to pay
the promised pension:
Problem One: Lack of investment performance
If the investment return was expected to be (say) 5%
a year, and over a 25 year period it averages 2%, the
difference in outcome is extraordinary. Here’s an
example with a starting fund of (say) £100,000 and
running it for 25 years ahead.
• If you achieve 5% a year growth, the fund will be
• If you achieve 2% a year growth, the fund will be
This is roughly 50% less. What this means in real life is
that if the planned pension required a fund of £338,000,
and the actual fund is only worth £164,000, there is a
deficit of £174,000 on your personal fund.
If this deficit is not made up by the retirement date what
happens? Either you get a smaller pension, or the fund
runs out before you die.
Problem Two: Low interest rates and low investment
Here’s the second big problem. Let’s say the actuarial
calculation was that you would be entitled to a pension of
£16,900 per year. If the assumed interest rate/investment
growth was 5%, then the calculation to work out the fund
size needed is simply this:
Take the pension of £16,900 and multiply it by 100/5
which gives you, no surprise here, £338,000, which is
exactly the same as the fund size we expected to achieve
at a growth rate of 5% over 25 years.
So all is good, except this is not what happened.
The actual growth rate has been 2%, representing rock
bottom interest rates and poor investment performance.
So now to deliver the promised £16,900 annual pension
we need to do a different calculation, viz:
£16,900 x 100/2 which gives you a fund size of £845,000.
Really! Please check the calculations yourself.
But given this scenario, what fund size have we achieved
at a 2% growth rate? Refer to the previous paragraphs
and you will see that the available fund is not £338,000
The bottom line is that the company has a fund of
£164,000 to provide a pension which now requires a fund
If you think this is scary, it is.
Problem Three: Inability of company to make the
When the actuary completes the calculations one
element will be to decide how much the company should
contribute. Of course in your contract of employment it
probably says how much the company will pay towards
your pension. For example, 10% of salary.
But suppose 10% of salary isn’t enough to provide the
planned benefits? The company needs to contribute
more to make up the shortfall. Maybe trading is bad and
they just can’t! Or maybe they choose not to! There is no
contractual requirement for them to make additional
payments to your pension if you are not retired yet (do I
hear a gasp of surprise!).
The failure of companies to make up pension deficits is
the single biggest reason that final salary schemes are in
the mess that they are, and there’s little likelihood of it
changing anytime soon.
Problem Four: Removal of Advance Corporate Tax
Do you recall when ex-chancellor Gordon Brown raided
the pension funds? His tax change resulted in a reported
loss of £5bn annually to pension funds.
Problem Five: Life extension
We are living longer and therefore final salary schemes
have to pay pensions for an increasing number of years.
The speed of increase in life expectancy has been greater
than the actuarial adjustments, resulting in another
requirement for increased funding which wasn’t planned
and for the most part can’t be afforded.
WHAT ARE THE CONSEQUENCES OF THIS MASSIVE FAILURE?
“Most final salary schemes in the
private sector are in massive deficit”
• Most final salary schemes in the private sector are in
massive deficit (more later).
• The only way for companies to make up the
enormous deficit is to pay big additional contributions
to the pension fund. Most can’t afford it.
• When the company goes out of business, the fund
can’t get any new money and has to be rescued by
the Government Pension Protection Fund (PPF).
• Companies are running away from final salary
schemes just as fast as they can.
THE DEFICIT AND THE PENSION PROTECTION FUND
Because of the potential political fallout from major pension
schemes going bust the Government created the PPF
(Pension Protection Fund). This is designed to provide a
level of protection for individual pension holders in schemes
that can no longer support their liabilities in the future.
The PPF is a great source of data about final salary
schemes and it is instructive to see the current situation
and extent of the problem. Graphs below courtesy of PPF.
HOW BIG IS THE FUNDING DEFICIT?
This chart shows that the total ‘surplus’ of all schemes
that are in surplus had fallen to about £30bn, whilst the
total ‘deficit’ of all schemes in deficit had increased to
about £300bn, both by end of December 2014.
What this means is that taking all final salary schemes
together, there is a net deficit of £270bn and increasing.
Given that the Government is trying to find just £30bn
of savings on our national expenditure in the next
Parliament, what chance is there of this deficit suddenly
The situation, in real life, is actually far worse than
this graph shows. The gap between pension schemes’
investments and the value of actual promises made to
pensioners is far higher than the £300bn that would
deliver the PPF level of payouts. One independent
estimate, by Citigroup, put the real gap at £850bn.
“Citygroup estimates the real pensions
deficit at £850bn”
Even figures from the Pensions Regulator, the body
charged with monitoring schemes’ solvency, suggest that
if schemes had to pay all their pensions as promised
today, they would be 45pc short.
This table shows that of the 6,057 private sector final
salary schemes, at the end of December 2014, 4,936 are
in deficit, up from 3,416 just a year earlier.
These numbers are so big that it may be easier to see
some actual examples of companies that have large
pension deficits. Here’s just a small sample:
British Airways £3.3bn
British Telecom £7.0bn
Lloyds Bank £31.3bn
Dec 2013 Nov 2014 Dec 2014
Number of schemes
3,416 4,781 4,936
Deficit of schemes in
£87.6bn £261.6bn £300.7bn
Number of schemes
2,641 1,276 1,121
Surplus of schemes
£96.4bn £40.4bn £34.3bn
BALANCES AND FUNDING RATIO
The final chart shows some important trends over time.
Back in 2007, The total surplus balances of all private
sector final salary scheme were valued at £160bn. Today
they stand at -£270bn. It’s not just the negative number,
but the fact that final salary schemes are £430bn worse
off than just seven years ago.
“Final salary schemes are £430bn
worse off than just seven years ago”
What do you think happened back in 2007 and before,
when final salary schemes realised that they were
carrying a substantial surplus balance? A prudent view
might have been to put the money aside in case the
current positive trend didn’t continue (it didn’t!). Actually
most schemes took a contribution holiday and companies
stopped contributing as much, or at all, to their pension
Over the same time period from 2007-2014 the funding
ratio (what proportion of liabilities can be covered) has
fallen from 120% of all liabilities (ie. No net deficit across
all schemes), to just about 80% of all liabilities – meaning
that on average only 80% of promised pensions can be
funded. Of course there’s far worse to come because
there is no quick fix to the poor investment performance,
low interest rates or lack of companies ability to make up
Just in case you think I am making this up, here’s a quote
from Alan Rubenstein, chief executive of the Pensions
Protection Fund (PPF). “Many of the 11 million people
with a supposedly guaranteed, inflation-linked pension
were being led to believe their pension was safe, when
for many that isn’t the case”.
“Many of the 11 million people with a
supposedly guaranteed, inflation-linked
pension were being led to believe their
pension was safe, when for many that
isn’t the case”
NO PROTECTION IF YOU ARE NOT RETIRED!
You may believe that contributions you and the
employer have made to the final salary pension, plus the
investment growth on your fund, are ‘protected’. If you
believe this you are simply wrong.
There is no protection in place for people who are not yet
retired, when their final salary pension scheme is wound
up after employer insolvency. Most people think that
their pensions are protected, but they are not - even after
the 1995 Pension Act, the introduction of the Minimum
Funding Requirement (MFR), the Myners Review and
Pickering Report. An employer’s final salary scheme
may provide no pension at all for members who have
contributed loyally for 30 years or more.
“An employer’s final salary scheme
may provide no pension at all for
members who have contributed loyally
for 30 years or more.”
The final salary pension is not ‘guaranteed’ by employers
at all for those who are still working - people do not
generally realise this. If the employer decides to wind up
the scheme, or becomes insolvent, they may get much
reduced pensions or even no pension at all.
Why is your pension at risk? That’s because of the ‘rules’
that say that pensioners who have already retired (and
also Directors who have taken early retirement) have
priority over deferred pensioners. Those who are still
working may not even get their own contributions back
if the assets in the scheme are insufficient on wind-up,
after having to pay pensioners first.
One of the big problems is that the 1995 Pensions
Act (which was designed to protect pensions after the
Maxwell case) introduced a particular ‘order of priority’
which must be followed, when a scheme’s employer
becomes insolvent and there are not enough assets in
This order of priority says that the assets of the fund
must be spent on pensions already in payment, plus
their full inflation-linked increases, before the pension
promises of members who have not yet started drawing
their pension can be paid.
Even fully solvent employers can decide to wind up their
pension scheme. If they do not want to keep running
their final salary scheme, it is quite easy for them to just
walk away from their liabilities. Employers in the past
have generally referred to their schemes as ‘guaranteed’
pensions, but the law currently allows them to just
decide to wind up the scheme and leave members short-
The law only requires an employer to pay in to their
scheme enough to provide pensions for members who
have not yet retired at a level specified by what is called
the ‘Minimum Funding Requirement’ or ‘MFR’.
In fact, at the moment, the funding level will only buy
about 40% of the pensions promised to workers under
age 45. Even if the employer can well afford to pay in
more, the law does not require them to.
Until recently, Government rules stopped people
from contributing to a private pension if they are in
an employer’s scheme. This means most people have
had no way of providing any other retirement income
for themselves, yet their pension contributions are not
People can contribute for over 30 years and end up with
no pension. This is like encouraging people to put all their
money into one share on the stock market. However
strong the company is, no-one would ever be advised to
do this with their life savings (and their job), but that is
what happens when an employee is in their employers
final salary scheme.
LIMITATIONS OF THE PENSION PROTECTION FUND (PPF)
Just suppose your company goes out of business or
through a ‘restructuring’. And the PPF takes over the
fund. Don’t relax because you may not get the pension
you are expecting!
If you have not yet retired, you will only get a maximum
of 90% of the planned pension, but with another
limitation which could affect you if you are reasonably
well paid. There is a cap on the total pension you can
receive which varies depending on your age when the
employer goes bust, and the age that you start taking
However, most cap’s are between £25,000 and £30,000 pa.
Suppose you are age 60, and have a pension due of
£75,000 a year as a retiring director. Under the PPF rules
this would be capped at circa £25,000 pa. So you would
lose two thirds or £50,000 a year of your pension.
People with higher paid jobs and therefore significant
pensions could find themselves adversely impacted by
Pilot’s pension cut from £47,000 to £26,500
The pension scheme of Monarch Airlines is currently
being taken over by the PPF following a restructuring
of the company. There was not enough money in the
fund to meet all the pension promises made in earlier
years. While most staff’s pension will fall below the cap,
meaning they will get 90pc of their entitlements, some
high-earning pilots will see drastic cuts.
“…planned to use his generous
promised pension of £47,000 per year
to help his children and pay off his
mortgage. But he and his wife have
been forced to rethink their plans
because under the PPF they will get a
maximum of £26,500”
One Monarch pilot, 51, who did not want to be named,
planned to use his generous promised pension of
£47,000 per year to help his children and pay off his
mortgage. But he and his wife have been forced to
rethink their plans because under the PPF they will get
a maximum of £26,500. “I’m still in a state of shock,” he
said. “It’s like a grieving process. There’s this sense of
injustice. My pension is something I’ve paid into over the
years and it’s something I was promised. I was paying
around £1,000 a month from my salary, excluding the
company contribution, and I’ve always regarded my
pension as deferred pay. It wouldn’t be so bad if I was in
a position to do something about it, but for me the time
available is short.”
Will the PPF cut benefits even more?
Let’s say you have 10 years to retirement. And potentially
25 years to live after that. Your pension fund has to grow
for 10 years and then provide for a further 25. Do you
really think the PPF can sustain payments at the current
As deficits grow and the remaining pension funds can
no longer increase payments of the ‘levy’ that the PPF
demands it will fall to Government to pay the shortfall.
I expect that over years to come we will see reductions in
the percentage of pension that is guaranteed – from 90%,
to 80%, maybe as low as 50%. And also a reduction in the
cap, perhaps to £20,000 or less.
Nothing is for certain, except that as deficits rise the
ability of the Government to fund ‘bust’ private pensions
will reach the point where further reductions have to be
Those already retired will be protected to a greater
degree, leaving those in their forties and fifties, who will
claim benefits in future years, most at risk.
HOW MUCH WILL YOUR FINAL SALARY SCHEME GROW BETWEEN
NOW AND RETIREMENT?
If your pension is ‘frozen’ because you have left the
company, there is probably a contractual right for it to
grow annually according to some definition of inflation.
Older schemes might not include this.
The definition of ‘increase with inflation’ is very variable.
I’ve seen all these possible choices in different schemes:
• Increase with RPI
• Increase with CPI
• Increase at RPI but max 5%
• Increase at CPI but max 2.5%
• And many more…
For your information the average inflation over the last
25 years is 2.73% with the Government target for inflation
at 2.0%. We’ve just hit the lowest inflation rate since
records began at 0.0%!
The bottom line is that your final salary pension, between
now and retirement, is not going to grow in real terms at
all. At best it will keep pace with inflation.
“The bottom line is that your final
salary pension, between now and
retirement, is not going to grow in real
terms at all. At best it will keep pace
The longer you have before you retire, the more this
matters. Suppose you have the opportunity to place your
fund elsewhere with investments that can do far better?
(Talk to Avantis Wealth about this).
Existing fund growth – 2.5% annually
Alternative fund growth – 8% annually
Value of fund now - £100,000
Years to retirement – 15 years
Existing fund would be worth - £144,800
Alternative fund would be worth £317,216 (more than
twice as much)
The benefit is through moving your pension to a place that
performs far better. No advantage in just moving your final
salary scheme if the new scheme only matches inflation!
WHY LEAVE YOUR SPOUSE 50% WHEN IT COULD BE 100%?
Within your final salary scheme there is probably a
provision to pay your spouse a ‘widow’s pension after
your death. That’s been, in the past, another big benefit
of a final salary scheme.
However, if you were to enter a drawdown arrangement,
possible with a defined contribution pension and some
other occupational pensions, then you could ensure that
all your pension was passed to the surviving spouse.
Oh, and when your spouse dies, the pension isn’t lost but
passes again to further beneficiaries (children perhaps?).
So is a final salary scheme better in this aspect of
provision? I don’t think so.
WHY NOT OWN YOUR OWN FUND?
When you move into drawdown, through a defined
contribution scheme, you own your own pension fund.
This is critical to understand.
“When you move into drawdown,
through a defined contribution scheme,
you own your own pension fund.”
Let’s say that by the time you retire your final salary
scheme promises a pension of £10,000, and has a
notional fund value of £300,000. I say ‘notional’, because
if you stay with the scheme you’ll never be entitled to it.
Maybe a tax free cash sum up to 25% of the value, but
that would be the maximum.
Within a drawdown scheme, you own your fund. That
£300,000, assuming you transfer to another scheme, is
yours. And with the new pension freedoms that means
lots of choices:
• You can withdraw 25% tax free
• You can withdraw as much of the remaining balance
as you wish, either in one go or across the years,
subject to tax at your marginal rate
• You can live from the income of your investments,
never taking the capital sum, and leave it as a legacy
to your family or other beneficiaries
• You can keep it as ‘rainy day’ money, knowing you
have reserves to fall back on should the need arise
• You can keep it as ‘luxury expenditure’ money, ready
to use for the things you always wanted to do but
never could afford
• You can use it as supplementary income, adding to
the income generated by your capital should the
• You can use your pension as a tax planning tool,
leaving your fund as a legacy that is not subject to
inheritance tax. (but income and capital withdrawals
will be subject to tax in the hands of your
Or you can stay with a final salary scheme and after the
potential 25% cash lump sum, never have access to any
of these things!
TAKE CONTROL AND MAKE BETTER INVESTMENT DECISIONS
In your final salary scheme, almost all companies make
the investment choices for you. No options at all. Why?
Because they have contracted to provide certain benefits.
How they get there is up to them.
“..history over the last 15 years shows
that current investment strategies are
All well and good, but history over the last 15 years shows
that current investment strategies are not delivering. This
is a very big topic, dealt with in detail in my Special Report
‘Property As Your Pension’, available for download by
Gold Members (free registration) on the Avantis Wealth
website at www.avantiswealth.com.
The key point is this. I have a favourite saying: If you
keep doing the same things, you’ll keep getting the same
result. And the results of your final salary scheme are
You might not be an expert at investment, but there are
strategies and asset classes which can make a significant
difference to the growth of your pension fund before
retirement, and to the level of income you can draw
after retirement. Investments offered by Avantis Wealth
generally offer returns of 7% to 15% net annually.
Of course with control comes responsibility, so a willingness
to get involved in investment decisions is a pre-requisite
for even considering an alternative option for your final
salary pension. As is a willingness to take a higher level of
investment risk in return for a higher level of reward.
It’s worth pointing out that from what you’ve already
read, having a final salary pension could be considered
hugely risky given the enormous deficits and the
potential loss of income if the company goes bust and the
PPF takes over!
What difference might better investment
Let’s continue our exploration of alternative investment
options started in the section called ‘How much will your
final salary scheme grow between now and retirement’…
In that example we discussed how improving the rate
of growth could potentially, dramatically, change the
outcome for a fund valued at £100,000 with another 15
years to retirement.
We showed that by increasing the rate of growth from
2.5% a year (assumed inflationary rises) to 8% (achievable
with a different investment strategy) then the fund value
on retirement could be around £317,000 instead of £145,000.
A dramatic improvement,
but that’s only part of the story.
Assume that you retire now. And your existing final
salary scheme is actually able to pay the scheme pension
calculated by the actuary (this is a big question mark in
That pension is likely to be in the order of £4,350 a year,
or £362 a month. This is based on a comparison with an
annuity purchase for a 65 year old man, inflation proofed,
50% spouse pension and increasing with inflation.
Note that there are sometimes special provisions and
guarantees in your final salary scheme which entitle
you to more than this, it’s a matter for your professional
advisor to consider and discuss. However, for the
moment this is the best assumption we can make.
On the other hand, if you had achieved greater growth
through moving to a defined contribution scheme and
investing in high performance assets, your fund is now
worth £317,000. The benefit doesn’t stop when you retire,
because now you can take the income instead of leaving
it behind for the fund to grow.
So you have 8% a year income to ‘play with’. Let’s assume
you leave 2.5% behind in the fund, therefore allowing it to
grow with inflation. You can draw 5.5%.
On your new fund of £317,000 this is an annual income of
£17,435, or a monthly income of £1,452.
Let’s summarize the position
At the risk of being boring, on the basis of the
assumptions we have made, you have the option of:
A) Staying with your existing scheme – having a pension
of £362 monthly and NIL fund
B) Move to a high performing Defined Contribution
scheme – having a pension of £1,452 and a fund of
I couldn’t make it more clearly than this. Just looking at
the financial impact of owning your fund and improving
investment performance makes a dramatic, even life
Option Stay with final
Move to defined
Starting fund size £100,000 £100,000
Years to retirement 15 15
Growth 2.5% 8%
Fund at retirement £145,000 £317,000
Monthly income £362 £1,452
Fund you ‘own’ NIL £317,000
MAKING A PENSION TRANSFER TO A DEFINED CONTRIBUTION SCHEME
BRINGS PENSION FREEDOMS, THE RIGHT INVESTMENT STRATEGY CAN
RESULT IN A HIGHER FUND VALUE AND INCOME IN RETIREMENT
I’ve covered a lot of ground about the challenges facing
final salary schemes and the new pension freedoms
available to people with defined contribution schemes.
Moving your pension from one to the other may resolve
many of the issues and provide new options and benefits
not available to you within your final salary pension.
That’s only half the story.
If you do switch, you will be faced with making the right
investment choices going forward. By ‘right’, I mean those
that match your current age and planned retirement
date, attitude to risk and expectation of return and more.
This report is not the place for a detailed discussion
about investment options. My views are expressed
clearly in my Special Report “Property As You Pension”,
which not surprisingly champions property (within strict
guidelines) as a key component of a long term investment
“We expect investments available
within our portfolio to deliver 6%
to 12% net annual income/growth –
consistently year after year”
We expect investments available within our portfolio
to deliver 6% to 12% net annual income/growth –
consistently year after year. Compared to the historic
uncertainty of returns from shares and the exceptionally
low income from fixed interest securities using property
as an investment strategy can be transformational.
The key element in this report is to understand that if you
want to make the very best of your retirement, and you
are in a final salary scheme, there are two elements to
a) Transfer of fund, and
b) Selection of the right investment strategy
To learn more, please request ‘Property As Your Pension’.
Register at www.avantiswealth.com as an ‘Access All
Areas’ Member (free of charge) and you will have access
to all our Special Reports and more.
REASONS TO KEEP YOUR FINAL SALARY SCHEME
1. You are ‘rock solid’ certain that the company will
be able to contribute to and then pay your pension
maybe 20, 30 or 40 years in the future. You are
confident that it provides a level of certainty above
that of defined contribution schemes.
2. You don’t have beneficiaries who you wish to provide
for, but are solely focused on your own income.
3. You don’t want to take any interest in, or
responsibility for, your pension investments.
4. You don’t believe you can beat inflation with a
different investment strategy, then one of the
biggest benefits of a defined contribution scheme is
5. You have such a large pension fund that achieving
better growth is simply not important.
6. It’s not important to you that you have access to your
pension fund above the tax free cash lump sum.
7. You are close to retirement and there aren’t many
years left to improve the investment performance
of the fund (but you would still benefit from owning
the fund within a defined contribution scheme and
maybe improving your pension with what you have).
8. You consider that the risk of choosing a more
adventurous investment strategy outweighs the
possible benefits of improved income.
9. You have been told by your employer there is a
substantial reduction in fund value by transferring
out and the benefits of doing so are not strong
enough to outweigh this.
One client works for an airline as a highly paid
pilot. The airline pension scheme was hugely in
deficit (more than 50% shortfall) and there was
serious potential for it to go out of business.
The pension protection fund would not have
paid anything like the actual pension that was
due, because of the ‘cap’ on total payments. The
shortfall could have been more than half the
The pilot was offered a pension transfer fund
value of 60% below the calculated value. But the
transfer was still considered worthwhile because
it secured the future of at least part of the fund.
And with the years to go to retirement, an
aggressive growth strategy for the fund meant
there was a good chance of rebuilding the ‘lost’
fund value in coming years.
This is an exceptional story, but played out in
less extreme circumstances every day as people
consider what are relatively complex options,
where nothing may be perfect.
REASONS TO MOVE YOUR FINAL SALARY SCHEME TO A DEFINED
1. You want to take control of your pension and have a
say in investment choices and how your pension is
2. You are concerned that with the increasing deficits in
final salary schemes, your employer may not be able
to support the pension scheme perhaps for the next
3. You are concerned that if the employer defaults and
the pension protection fund takes over the scheme,
the benefits due to you may be further restricted in
4. You want to withdraw a greater part of your fund, or
even all of it, above the tax free lump sum.
5. You believe you can achieve better than inflation
growth through different investment strategies (for
example, with property-backed assets that typically
return 7%-15% pa).
6. You want to provide a legacy for your children, family
or other beneficiaries. If you die before the age of 75
this would be tax free!
7. You want your spouse to receive the full benefit
of the pension on your death, rather than the 50%
‘widows’ pension sometimes offered by final salary
8. You want to take ownership of the pension fund for the
future, whether you choose to withdraw it, use it for
luxury items, keep it as a rainy day fund, use it to ‘top
up’ income from time to time or leave it as a legacy.
9. You like the idea of protecting part of your estate
from inheritance tax.
10. You want more flexibility of when and how much
income you choose to take.
11. In the future you may consider moving abroad,
and an offshore pension may be appropriate for
12. You have a lifestyle or medical condition that may
mean you have a shorter life expectancy than
average. If this is the case it may be very beneficial to
move because your beneficiaries would inherit your
total fund. Within a defined benefit scheme the full
value will be lost on your death.
13. You haven’t retired yet, your pension is ‘frozen’. And
you understand the laws which means that in a
failure the pensions in payment (for people already
retired) get first call on ALL the money in the fund,
including that allocated to you. Wow! Scary stuff.
More about this in the next section.
14. You live with a partner but are not married. Your
partner will not benefit from a spouse’s pension
which is payable under the final salary scheme,
but could be made a beneficiary under the defined
15. You may be offered an ‘enhanced value’ by your
employer to move. Many employers are desperate to
get existing members moved out of the final salary
scheme and will provide fund transfer values in
excess of the actuarial calculation.
16. Of all the times to consider moving, now is excellent.
Why? Excuse me if this explanation is a bit technical
but it is important.
a. The value of your final salary lump sum is
theoretical. It is calculated as the capital sum
needed to provide the assumed pension you
are entitled to receive at the point of leaving the
b. Because interest rates are so low and investment
performance so poor in the mainstream pension
sector, the capital sum needed to provide your
benefits is at an all-time high!
c. The capital sum is calculated as a multiple of the
pension it has to provide. Everyone calculates it
differently, but it wouldn’t be surprising for the
multiple to be 30X, or even 40X on occasions.
In ‘real life’ that means if you are entitled to a
pension of (say) £5,000 a year, your fund value
could be as much as £150,000 or even £200,000.
d. And with this fund, invested in high performance
assets, you could be achieving an immediate
higher income of double or more what your final
salary scheme will offer!
e. One word of warning. Schemes in deficit (most of
them!) often have the right to reduce the value
of your fund on transfer. So it is possible you
may face a penalty if you did decide to transfer.
Depending on the level of penalty, it may still be
RISK AND REWARD
If you are going to consider transferring a final salary
scheme the issue of risk will be one of the critical factors.
If you consider risk in the established sense, then for
clients not willing to consider any risk at all, the return in
recent years has been… wait for it.. below zero!
Why so bad? Because the only investments that are
considered to be approaching ‘risk free’ are fixed
interest deposits guaranteed by the Government, and
Government Bonds, both of which have returned an
income of below inflation.
So the inflation adjusted return for risk free investments
has been less than zero.
I don’t know about you, but in saving for retirement this is
simply not an acceptable solution. The reality is that you
will have to go up the risk ladder, if you expect to achieve
a positive return.
“The reality is that you will have to
go up the risk ladder, if you expect to
achieve a positive return.”
When I talk to clients I find out, most of the time, that
their understanding of risk is rather sketchy. In many
cases their view is very black and white. Either something
is risky or it is not. This view just doesn’t reflect the
complexity of the real world.
For example, there is a widely held view that to achieve
great returns, you have to take great risks. At Avantis
Wealth we don’t necessarily agree with that. We think
that the risk-return relationship can be changed, in
the investor’s favour, by bringing into the equation
such factors as proper security over the investment,
contractual income returns and more.
In the special report ‘Property As You Pension’, I cover
the issue of risk and risk mitigation extensively and I
recommend you read the relevant chapter as it will
help inform you about the key issue related to risk
In the meantime, the starting point for risk assessment is
to consider your existing final salary scheme and consider
what risks you run by staying where you are.
These risks are of two kinds:
1. Intrinsic risks in the pension scheme itself, like a
future inability to pay the full pension, or in extremis,
nothing at all!
2. Risks of losing a better return or more flexibility
or a legacy for your loved ones, by not benefitting
from the possibilities within a defined contribution
Whatever you might want to happen, the reality is that
life itself is a risk, and pension schemes also contain risk.
How you understand and manage those risks is what
If you are like most of the population you have never
considered your pension scheme in much detail, and the
information in this Special Report may be shocking to
you. Equally shocking may be the fact that pensions are
a risky business! However, now you have the ability to
learn, understand and make good decisions about risk,
reward and the achievement of your goals.
WILL YOU BE ALLOWED TO TRANSFER EVEN IF YOU CHOOSE TO?
You may think this is a strange question. The Government
has introduced new freedoms that enable you to take
up to 100% of your fund from a defined contribution
pension. You have a statutory right to transfer your fund
from a final salary to a defined contribution pension.
“You have a statutory right to transfer
your fund from a final salary to a
defined contribution pension.”
Only it isn’t. And this is where I get extremely concerned
At the same time as allowing these new pension
freedoms, the Government is naturally concerned that
people – that’s you – make sensible decisions. And
because pensions can be complex, we can’t be trusted to
make decisions by ourselves.
So whilst providing these new pension freedoms it will
be a legal requirement from April 2015 that any pension
transfers from final salary to defined contributions, with a
fund value of more than £30,000 (almost all of them!) will
require fully regulated financial advice prior to transfer.
This is where the problems start.
Let’s consider the issues:
Taking fully regulated financial advice on the pension
transfer is likely to cost a minimum of £1,000 and most
probably more. Plus the advisor may wish to charge an
on-going annual fee for ‘advice’. You may not wish to incur
Willingness to act
Advising on a pension transfer requires a special level of
competence according to the Financial Conduct Authority.
There are about 20,000 regulated IFA’s in the UK but only
a small number are qualified to provide pension advice.
Just finding one isn’t easy.
It’s not just that there aren’t many. For years IFA’s have
been trained to believe that Final Salary pensions are the
‘gold standard’ and not to be touched. Even the analysis
tools they use to compare a final salary scheme with a
defined contribution scheme are skewed in favour of a
final salary scheme.
So many of the qualified advisors will simply not want to
get involved. They face big risks if they give advice which
years later turns out to be wrong, for what they see as a
relatively small reward.
Problems with investment strategy
I’ve discussed above the importance of not just
transferring to a defined contribution scheme but looking
at investment strategies that can deliver higher returns.
In my world this means property backed assets that meet
specific criteria. Hardly any IFA’s know, understand and
are willing to advise on property investments. In fact their
PI (professional indemnity) cover may preclude them
from doing so.
What happens when they say ‘no’?
Let’s assume you’ve overcome all the hurdles above,
found an IFA who is willing to advise on the pension
transfer and your investment strategy which now includes
property. They do a detailed fact-find, and present the
Their recommendation is not to move, and they will have
some very clever reasons why not. Based on their own
set of criteria for risk management, which you don’t agree
Now what happens? This is where the Government and
the financial services industry go head-to-head.
The Government says that you have the RIGHT to the
transfer. If you have taken financial advice and you
choose to ignore it, that’s your right.
But the pension schemes, by-and-large, won’t accept a
transfer where the advisor has said ‘no’. Stalemate!
In the past this situation has been dealt with by the clients
writing an ‘insistent client letter’ to the advisor thanking
them for their advice and insisting that they go ahead
with the transfer.
But the current professional press is full of feedback from
irate financial advisors who say they are simply going to
refuse to act on insistent client letters, and will refuse
to support your transfer case if their conclusions are
This is where I get very angry and upset. Financial
advisors are not omnipotent, applying their own
judgements about the situation to OUR lives. As a
Chartered Accountant I question many of the beliefs they
hold about risk and reward. For example, I believe that
investments backed by property as security is inherently
less risky than share investments. That view is not shared
by most financial advisors.
The bottom line is that you may find, after a lot of thought
and a decision to transfer your fund, that making it
happen is not at all easy. My company, Avantis Wealth,
can refer you to appropriate advisors who understand
the full range of investment options and can advise in a
“You are likely to need to be
determined, focused and single minded
to make a transfer happen in the
You are likely to need to be determined, focused and
single minded to make a transfer happen in the current
climate that has pitched the Government and our basic
rights against the established views of the financial
The whole issue of final salary schemes is hugely
problematic, relatively complicated and extremely
important to understand.
No longer are final salary schemes the ‘gold standard’
of old. They have numerous risks attached and the lack
of flexibility and choices means that most people in a
final salary scheme can’t benefit from the new pension
If you are in a final salary scheme it is in your interest to
consider what you should do. This report, as mentioned
at the beginning, is absolutely not advice to take any
specific course of action, which can only be decided in
consultation with a fully regulated advisor.
Hopefully I’ve covered all the major issues surrounding
final salary schemes, the problems and the opportunities.
So you are now better equipped to decide what is best
for your own future.
“For many people, a good starting point
is to request a pension review.”
For many people, a good starting point is to request
a pension review. You’ll find out all the essential
information about your pension, current values,
predicted outcome and much more. My company can
organise a complimentary review that will be carried out
by our preferred IFA. As always I’m welcome feedback
and/or your questions. Email email@example.com
and you’ll get a personal reply.
Thank you for reading this
Special Report. I hope you
have found it interesting
Gemini Business Centre
136-140 Old Shoreham Rd
Hove BN3 7BD
01273 447 299
0800 612 0880
If you have any questions about
your final salary pension
please email me: Rod Thomas,
I will always reply personally.
If you have understood and find
resonance with the concepts and ideas
shared in this Special Report, it’s time to
take action. This is what my company,
Avantis Wealth, can offer you:
Do you have a frozen or
underperforming final salary or
Then request a complimentary pension review.
This will show you:
• Value of your fund
• Performance over the last 5-8 years
• Fees and charges you are incurring
• Expected income in retirement
Armed with this information you can explore
options to do better.
CALL OR EMAIL US NOW!
Want to build your fund for the
future, achieving maximum
Whether you wish to invest directly or
through a pension scheme, our investment
portfolio offers a wide choice of investment
type, location and timescale:
• Investments typically from 1 to 5 years
• Returning up to 12% annually, or 60%
over 5 years
• Investment starts at £10,000
CALL OR EMAIL US NOW!
Want to invest for income now?
Do you have poorly performing investments
and need to generate the best possible
income right now? Then consider
investments within our portfolio which offer:
• Up to 12% annual income
• Payable quarterly, six monthly or
• Investment starts at £10,000
CALL OR EMAIL US NOW!
THE RICHER RETIREMENT SPECIALISTS
Avantis Wealth Ltd is not authorised or regulated by the Financial Conduct Authority (FCA).
Avantis Wealth Ltd does not provide any financial or investment advice. We provide a referral to a regulated advisor who will offer appropriate advice, or to the
company offering an investment who will determine your suitability for the investment prior to any offer being made. We strongly recommend that you seek
appropriate professional advice before entering into any contract. The value of any investments can go down as well as up and you might not get back what you put
in. You may have difficulty selling any investment at a reasonable price and in some circumstances it might be difficult to sell at any price.
Do not invest unless you have carefully thought about whether you can afford it and whether it is right for you and if necessary consult with a professional adviser
in accordance with the Financial Services and Markets Act 2000. These products are not regulated by the FCA or covered by the Financial Services Compensation
Scheme and you will not have access to the financial ombudsman service.
Information is provided as a guide only, is subject to change without prior notice and doesn’t constitute an offer of investment. Some investments may be restricted
to persons who are high net worth, sophisticated or professional investors or who take independent advice from an authorised independent financial advisor.