What is the difference between ‘Active’ and ‘Deferred’ final salary pension members?

There are two types of final salary pension members ‘Active’ and ‘Deferred’. ‘Active’ is where you have benefits building up in the final salary pension scheme and ‘Deferred’ is where you have rights under the pension scheme but have left the company and or the scheme and you are not getting any more additional final salary pension benefits. As a very simple example:

Active Member

Mr Smith is in what is called a 60ths final salary pension and is an ‘Active Member’. This means, every year his pension will go up by one sixtieth of his salary when he retires.

So, if we ‘assume’ his ‘final salary’ is £30,000 then every year he is in the scheme his pension will go up by one sixtieth of £30,000 or £500 p.a. This is his final salary pension.

When he does retire, he will have a final salary pension of the number of years in the scheme divided by 60, times by his final salary (£30,000 final salary). So, if we ‘assume’ he does 30 years in the scheme his final salary pension will be:

30 years in the scheme / 60 (ths) which is the same as a half (30/60 is the same as ½ or a half) so his final salary pension will be half of £30,000 or £15,000 per year final salary pension.

Deferred Member

This is someone who has left their final salary pension scheme and are not now getting any more additional 60ths (if it’s a 60ths scheme).

Mr Jones worked for XYZ Limited and was in their final salary scheme and left after 10 years on a salary of £20,000. Therefore, his final salary pension will be fixed at 10 years (the number of years he was in the scheme) divided by 60 (so 10/60 or one sixth) multiplied by his salary of £20,000 when he left XYZ Limited:

10/60ths of his final salary of £20,000 will give him a pension of £3,333 per year (10/60 X £20,000). In the years between becoming a deferred member and drawing his benefits, his accrued pension will usually go up every year by a defined amount (often linked to inflation) but usually nothing like the additional 1/60 of his final salary per year if he was still an ‘Active’ member of the final salary pension scheme.

Deferred Member but still employed

Final salary pensions are very expensive for the employer, this is why final salary pensions are sometimes called ‘gold plated’ pensions. Because of this, very large numbers of employers are stopping their final salary pensions, even for their ‘Active’ members / current employees. It is therefore possible to still be employed and to be a ‘Deferred’ member of a final salary pension scheme.

It is usually only deferred members who should ever consider a final salary pension transfer.

Final Salary Scheme is not accurate. The correct ‘term’ is ‘Defined Benefit’ or DB scheme. A Final Salary Scheme is therefore a type of ‘Defined Benefit’ or DB scheme.

Some final salary pension schemes don’t use your ‘final salary’ but a career average salary and are sometimes called or referred to as a CARE scheme.

A final salary pension transfer is also referred to or called a DB transfer (DB transfer). DB stands for ‘Defined Benefit’ where the amount of ‘benefit’ i.e., the annual pension itself is pre-defined hence the term DB transfer.

When you leave a final salary pension scheme as a deferred member you can consider the possibility of doing a DB transfer. When you leave the DB or ‘Defined Benefit’ Scheme you are given by the DB / ‘Defined Benefit’ or Final Salary pension scheme a cash equivalent transfer value or CETV (CETV). The concept is difficult, like anything in pensions.

To explain, with a final salary pension your pension benefit is calculated (defined) as a per annum pension amount (£x per annum pension). An amount you will get every single year after retirement until you die. So, to put that into a ‘cash’ figure and not its current ‘per annum pension’ figure the final salary pension scheme Trustees converts that pension into a cash amount and calls it a cash equivalent transfer value or CETV (CETV).

So, who should do a final salary pension transfer? Well, a final salary pension transfer is certainly not for everyone.

With a final salary pension transfer you are taking all the investment risk yourself.

If you keep your final salary pension then it is up to your employer to make sure there is enough money to pay for that pension, and even if they (your employer or past employer) can no longer afford to pay for their DB pension scheme, then the ‘Pension Protection Fund (PPF)’ will take over and normally pay at least 90% (up to £41,461.07 p.a. at age 65 from April 2022) of your final salary DB pension. So, if you are not someone who wants to take any risk with your pension whatsoever then a transfer is probably not for you (unless you are in very bad health with possible inheritance tax issues if a transfer takes place when in ill health and death occurs within 2 years ). That said, this is such a complex area, you really do need an expert to help guide you through the Final Salary Pension transfer maze. In fact, anyone with a CETV of over £30,000 must now, by law, seek professional advice before they transfer.

So, to determine if a Final Salary Pension transfer is right for you or not is a difficult and expert job. What we do at Final-Salary- Pension-Transfer.uk is to put you in touch with some of the country’s leading experts in Final Salary Pension transfers. We ensure that the Final Salary Pension transfer specialist is not only FCA approved but preferably has The Pension Transfer Gold Standard to ensure you get the best possible Final Salary Pension transfer advice.

Many companies are changing their final salary/defined benefit schemes from final salary to average salary pension or closing their final salary scheme altogether. The reason for this is because a good final salary scheme is very expensive so to cut costs many employers are reducing benefits by changing the final salary scheme to a career average defined benefit pension. What this does is that instead of using your ‘final salary’ to calculate your pension the scheme will use an average of your salary either for a number of years or for your entire service. This is also sometimes called a career average scheme or CARE scheme. This is also sometimes referred to as a final average salary scheme. To find out more please contact us.

A scheme called a final average salary scheme is as detailed above and is the same as a career average or CARE scheme.

Sometimes a deferred pension is also referred to as a frozen final salary pension. This is because, many years ago, when you left a final salary scheme with a deferred pension the pension amount was ‘frozen’ hence frozen final salary pension. This is not now the case and almost all deferred final salary pensions do increase in both deferment and in payment, so the term frozen final salary pension is not accurate these days.