Pensions - Articles - PPF ask true or false on 10 defined benefit pension beliefs

 To help clear things up, we’re looking at 10 of the most common things people believe – to see if they’re true or false.

 But first of all, what exactly is a defined benefit pension?

 What is a defined benefit pension scheme?
 A defined benefit pension scheme, sometimes known as a final salary scheme, is a fixed sum of money that is paid out from your former employer’s pension scheme when you retire. It’ll give you a guaranteed income for the rest of your life, however long you live for.

 At the Pension Protection Fund, we help protect your money if you have an eligible defined benefit (DB) pension. DB pensions are most common in the public sector or with big private employers. Over 18 million people in the UK have one.

 10 pension beliefs – true or false?
 From speaking with people about pensions, we’ve identified 10 common beliefs people hold about their DB scheme. Some are true, others are false, but which is which? Test your knowledge by reading the statements below.

 1. A defined benefit pension will give me a guaranteed income for life
 TRUE

 If you’ve ever had a DB pension, you’ll receive a fixed sum of money for the rest of your life. You’ll normally need to reach retirement age to receive the pension. You can start claiming if you retire early,your payments will be less.

 2. My defined benefit pension will pay me the same as my annual salary
 FALSE

 Defined benefit pensions are sometimes known as ‘final salary’ schemes. This can cause some confusion, since it sounds like you’ll receive the same amount you earned in your final year of work for the rest of your life. Unfortunately, it doesn’t quite work like that.

 There are several factors that determine how much you’ll receive each month, including:

 The scheme’s ‘accrual rate’ – the percentage of your salary used to calculate your pension each year
 Rules of the pension - some are calculated by your final salary, others by your average salary
 How long you worked for your employer
 How many pension schemes you had, and what type they were

 Some of the factors used to calculate your pension can change over time. So it’s important to stay up-to-date and get regular calculations, so you know where you are when you come to retire.

 How accrual rates work
 Many DB schemes have an ‘accrual rate’ of 1/80, which means you will receive a pension equivalent to 1/80th of your salary, multiplied by the number of years you worked for the employer.

 Example: Kelly has worked as a teacher at the same school for the last 20 years and is on a DB pension with a 1/80 accrual rate. In her final year, she is earning £40,000. To calculate the pension from this job:

 She divides £40,000 by 80 = 500
 She multiplies 500 by her 20 years’ service = 10,000
 This means Kelly will receive a pension of £10,000 per year from that pension scheme.

 3. I’ll lose all my pension if my employer goes bust
 FALSE

 One of the many benefits of defined benefit schemes is that you’re protected if your employer goes out of business. Most DB schemes are run by a pension fund, which is different to your employer, so your pension won’t be affected.

 There’s a small chance the pension fund could also go bust, but we are here to protect the vast majority of DB pension savers. If your scheme transfer to us, you’ll get 100% of your expected pension if you’ve already reached your scheme’s pension age, or 90% if you’re below that age.

 Worried about your pension? Learn more about which schemes we protect.

 4. My state pension will be enough to support me in retirement
 UNLIKELY

 The state pension can be thought of as a safety net. But it’s unlikely to be enough for most people to live on in the UK.

 For example, in 2021, someone on a full state pension could potentially receive £179.60 per week. This amount may not be enough to live on between housing, bills, food, and care costs.

 This is why most people take out some sort of pension – either through their employer or privately.

 To see how much state pension you will receive, you can check your forecast on the GOV.UK site.

 
 5. I can only take my defined benefit pension once I stop working
 FALSE

 Many DB pension schemes are set to begin at your normal retirement age, which is either 65 or the state pension age. But you can usually start taking them earlier, as young as 55 in some cases and for our members. This will, however, reduce the amount you receive to reflect the fact that it’s paid over a longer time.

 You can also keep working past your retirement age while still claiming your DB pension. Whether you keep working for your former employer, take on occasional jobs or work somewhere new, you’ll still receive your pension.

 6. I won’t get taxed on my pension
 FALSE

 Many people assume they won’t get taxed on their pension, but this isn’t the case. Your DB pension gets taxed in the same way as any other income. The exact amount you pay depends on which income tax band you fall into. For the 2021/22 tax year the bands are:

 Personal allowance: You don’t pay any tax on income up to £12,750
 Basic rate: You’ll pay 20% on income from £12,571 to £50,270
 Higher rate: You’ll then pay 40% on income between £50,271 - £150,000
 Additional rate: For any earnings over £150,000, you’ll pay 45%

 You won’t, however, have to pay National Insurance, which is a kind of tax people pay from the age of 16 up to retirement. Depending on your pension provider, you might also receive a tax-free lump sum when you retire.

 Example: All of Terry’s pensions combined – including state pension, his DB pension and a personal private pension – amount to £20,000 per year. The first £12,570 is tax free, but he then pays 20% on the remaining £7,430.

 7. I have to be working for my employer to receive my defined benefit pension when I retire
 FALSE

 If you’ve had a defined benefit pension at any point in your career, you’re entitled to claim it.

 There’s £19.4 billion sitting in unclaimed pensions in the UK, with the average pot at £13,000. If you think you might have money in a pension from a former employer, you can get in touch with them or use the government’s pension tracing service.

 8. To protect my pension, I should transfer out of my scheme before my employer goes bust
 UNLIKELY

 If your current or former employer is going through difficult financial straits, it’s understandable that you’d want to get your money out. But remember, the employer themselves can’t access your pension money – it’s usually managed by an independent pension fund.

 Even if your company does go bust, the pension fund will still look after your money. If the pension fund goes under and the scheme transfer to us, you’ll still receive an income for life.

 Learn more about how we protect your pension.

 9. If I get divorced, my partner can lay claim to my pension
 TRUE

 If you go through a divorce, your pension will be viewed just like any other asset and will be considered as part of the proceedings.

 Each case is unique, but it tends to work out in one of two ways:

 Your DB pension is transferred to a direct contribution pension scheme and is divided up between you and your former partner
 You keep the DB pension, but the court divides the payment between both parties
 Typically, payment is split 50:50, but this might change depending on how other assets are divided up.

 10. If I die, my pension dies with me
 FALSE

 If you have a defined benefit pension, you can rest assured knowing that when you pass away, your dependents will still be financially supported.

 There are lots of different factors that affect exactly what and how much your ‘beneficiary’ – the person you choose to receive the money – will get. It depends on the rules of your scheme, but to give you an idea:

 If you die before you retire, your pension will pay your beneficiaries a lump sum. It’s typically two to four times the value of your salary. Any payments will be tax free if you are under 75 when you die.

 Defined benefit schemes also pay what is called a survivor’s pension to the beneficiary, which is taxed at a marginal rate

 If you’ve already retired when you die, your pension will continue paying a reduced amount to your beneficiary

 Make sure you have named beneficiaries and let them know your plans so they know how to apply for the money.