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How to mimic the income from a final salary pension

We take a look at how your personal pension could impersonate a final salary scheme in retirement.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Final salary or defined benefit pensions used to be the norm, today they’re like gold-dust.

Over recent years many of these schemes have shut the door to new and, in some cases, existing members. In fact, between 2000 and 2018, active membership of private sector defined benefit pension schemes has fallen by 76%.

Final salary schemes are the ‘gold-plated’ pension because of their perks. They offer a secure guaranteed income, which in most cases can continue to a spouse on death, they’re normally inflation-proofed too.

The good news is there are ways to mimic some of these key perks using your personal pension.

A secure lifetime income

One way of getting a guaranteed income is to use some, or all, of your personal pension to buy a lifetime annuity.

The amount of income your annuity pays will depend on the value of your pension, your circumstances and the options you choose.

It’s easy to find out how much secure income you could get from an annuity. All you have to do is answer a few questions about you and your pension by requesting a quote. Make sure you add your health and lifestyle details – you could qualify for a higher income.

Find out more about annuities

Get an annuity quote

Just remember annuity rates change regularly, and may go up or down in the future. When you get a quote, it is guaranteed for a limited time only. Take time to think through your options before accepting - you can’t usually change or cancel your annuity after you’ve set it up even if your circumstances change.

Inflation proofing your income

Another benefit of a final salary scheme is that each year your income normally goes up in line with inflation. However you can decide to inflation proof your annuity income too.

But why does inflation matter?

Over the past 30 years the price of goods and services has roughly doubled. In 1990 a pint of milk typically cost 25p, today it’s close to 45p. Over the long term increasing prices has a huge impact on how far your retirement income will go, if you don’t inflation proof it.

When it comes to buying an annuity you have a number of options to choose from.

One option is to fix your income or have it increase each year. If you opt for an increasing income you’ll start off with a lower income, but it will be better sheltered against inflation. This is important as you could be receiving an income for 30 years or more.

You normally have the option to increase your income by a set amount each year. Typically 3% or 5%. Or you could link your income to the Retail Prices Index (RPI) so your income will retain its buying power by tracking inflation.

Passing on your pension

If you have a final salary pension when you die, your spouse and/or dependants can usually continue to receive around 50% of the income it would have paid you.

With an annuity you can choose to build in similar guarantees. And, in some cases, they could receive the income completely tax free. The options include:

  • Joint life annuities - This is where you decide what proportion of your annuity income will continue to be paid to your loved ones after you’re gone.
  • Guarantee period - You can choose for your annuity to continue to pay for a minimum number of years. Guarantee periods of 5 or 10 years usually cost relatively little. Longer guarantee periods up to 30 years are also available.
  • Value protection - This is essentially a lump sum option. Value-protected annuities return the original amount you used to buy the annuity to your loved ones, less any income paid.

Tax rules change and benefits depend on individual circumstances. The tax treatment of payments after death will also depend on how old you are when you die.

When is the right time to buy an annuity?

If you’re happy to keep your pension invested, you might not benefit from buying an annuity straight away, particularly if you plan to semi-retire. We believe a good time to look at buying an annuity is when you give up work altogether.

You’re unlikely to have a steady income stream from any earnings to cover your essential bills, and an annuity can help cover these. Rates also have tended to be higher for older people, so you could get more income if you wait. But there are no guarantees.

It’s a good idea to keep an eye on rates by getting quotes throughout your retirement. That way you’ll know what your options are, and how much income you could get, every step of the way.

Get an annuity quote

Learn more about annuities

What help is available?

If you have any questions about your pension or retirement options our helpdesk is always happy to help and is available six days a week on 0117 980 9926. Monday to Thursday 8am - 7pm, Friday 8am - 6pm and Saturday 9:30am - 12:30pm.

What you do with your pension is an important decision. We strongly recommend you understand all your options and check that the option you choose is right for your circumstances. Take advice or seek guidance if you’re unsure.

The government provides a free and impartial guidance service to help you understand your retirement options – more on Pension Wise.

This article isn’t personal advice. We offer a range of information and support to help you plan your own finances. We also have an award-winning advisory service that can help you achieve your goals.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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