Specialist for Claims & Compensation Related to Defined Benefit Pensions, Final Salary Transfers, and CARE Pensions.

Why are people making claims in relation to Defined Benefit, Final Salary and CARE Pensions?

If you work for the local government or have worked for any major corporations, certainly in the 1970s and 1980s, you were likely given the opportunity to enrol into a Final Salary or Defined Benefit Pension Scheme.
These EXCLUSIVE pension schemes are considered the GOLD STANDARD of pension schemes due to a number of benefits, the primary ones being:

  • A GUARANTEED INCOME FOR THE LIFETIME OF YOUR RETIREMENT
  • Index linked earning (your pension continues to rise inline with inflation)
  • Spousal benefits (Usually 50% of the income passed to the spouse upon death)

So, why don’t many companies offer Final Salary or Defined Benefit Schemes anymore?

Due to the demands placed on these schemes with increased life expectancy very few people besides the Government Pension Scheme and a select few employers offer Final Salary or Defined Benefit pensions anymore. This is because the schemes are on the most part under funded meaning the schemes are often quite keen for members (the pension savers and employees) to leave the scheme and will and have often heavily encouraged members to do so with larger than average cash values.

Why did people transfer out of these schemes?

Whilst these schemes are very desirable there are a number of valid reasons why people may have transferred out of Defined Benefit or Final Salary Pension Scheme such as:

  • Poor Health (The pension investor who is in poor health may, consider the cash value worth more than a long-term income)
  • Spousal Benefits (The pension investor may want more say in who their pension goes when they are deceased)
  • Investment Choice (The pension investor may want to invest in their pension into something of their own choosing such as commercial property)
  • Access to Capital (Defined Benefit and Final Salary Pension Schemes have a set age upon which man and women can take their income which used to be 60 years of age for women and 65 years of age for men).

What went wrong?

The UK pension freedoms were introduced on April 6, 2015, which allowed individuals aged 55 and over the rights access their pension pots. Before these changes, there were restrictions on how much pensioners could withdraw and what they could do with their pension savings upon retirement.

The 2015 pension freedoms allowed individuals to take a lump sum, with the first 25% being tax-free. This change aimed to give people more control over their retirement funds, but it also required individuals to make more complex financial decisions regarding their retirement planning.

Sadly, a number of Regulated Financial Advisers, Pension Companies and Opportunists began targeting former employees of companies known to have Defined Benefit Schemes such as The Royal Mail or British Steel.

Why did they target them?

The cash values on transferring a Defined Benefit Scheme are significant. It was not difficult to convince people to transfer away from these schemes even though in the majority of cases it was not in the client’s interests.

How do I know if you have a claim?

If you have transferred more than £30,000 out of a final salary of defined benefit pension scheme, then there is over a 65% chance that you have a valid claim.

It’s not always obvious, you don’t have to have lost money. The claims are based on what you have lost in terms of benefits and value and can often be significant.

Don’t worry, we do all the work for you in:

  1. Identifying your potential grounds for claim (what the claim is for)
  2. Identify it the parties responsible (who is the claim against)
  3. Quantifying your loss (how much is the claim for)

All you have to do is sign some forms and we do the, see our claim process here.

How much could I claim?

Claims vary but our largest Defined Benefit to date is £170,000 (accurate 1st May 2024).

If we identify that you have a potential claim, then generally you would expect between 6.5% and 15% per annum since the time of transfer.

Example:

£100,000 transferred 10 years ago would be a potential claim of approx £65,000 at 6.5%.

Who would the claim be against?

There are 3 parties who could be at fault in a Final Salary or Defined Benefit Scheme Pension Transfer.

  1. Regulated Financial Adviser

Financial Advisers have a fiduciary duty to act in the best interests of their clients.

If a Regulated Financial adviser was involved in the transfer, then there may be grounds for compensation or redress via the financial ombudsman service or the financial services compensation scheme.

  1. Receiving Scheme (New Pension Provider)

To transfer a Final Salary there needs to be a new scheme to transfer the cash to, this is called the receiving scheme. In some cases, these schemes have allowed investments which are not suitable for the pension holders attitude to risk. If this is the case, then we can seek redress or compensation either via the financial ombudsman service or the financial services compensation scheme.

  1. The Final Salary or Defined Benefit Scheme

Every Pension Scheme has Trustees and Administrators. As the title suggests these parties are “Trusted” to act in the best interests of the scheme’s members (the employees and former employees).

Sadly, in many cases schemes have allowed people to transfer their life savings without carrying out enough due diligence on why the individual is transferring.

The schemes are governed by The Pensions Regulator and we are considering group litigation against various schemes currently.

Often there is more than one party at fault. Over experts will put together a strategy to obtain the maximum redress or compensation, from the people responsible in the quickest possible time.

Other Pension Claims

It doesn’t have to be a Final Salary or Defined Benefit Pension that you transferred.

We specialise in pension compensation claims, including SIPP Compensation, Pension Switching (Churn), Pension Review Scams, SSAS, Defined Benefit, Final Salary Pension and Career Average Revalued Pension (CARE) Compensation. Our expertise extends to addressing issues with Platforms, Overcharging, and Defined Benefit, Final Salary and CARE Transfer Claims. Trust us to guide you through the process of securing the compensation you deserve for mismanaged pension investments.

Defined benefit pensions, also known as DB pensions, are a type of retirement plan where the benefits that an employee receives upon retirement are predefined and based on factors such as salary history and duration of employment. These plans promise to pay a specific benefit to retirees for life, providing a secure and predictable income in retirement. Here’s a closer look at how defined benefit pensions work and their key characteristics:

A final salary pension, also known as a defined benefit pension scheme, is a type of retirement plan in which the benefits an employee receives upon retirement are determined by the employee’s salary at the end of their career and the number of years they have worked for the employer. This type of pension plan is considered highly beneficial for employees because it provides a predictable and stable income in retirement, typically linked to their highest earning years.

The Career Average Revalued Earnings (CARE) is a type of defined benefit pension scheme commonly used in the UK. Unlike traditional final salary schemes that base your pension income on your salary at the end of your career or the highest salary you earned, CARE schemes calculate your pension benefits on the average of your earnings throughout your career. Each year, your earnings are added to your pension account and then revalued to keep up with inflation or a fixed rate to maintain purchasing power over time.

An occupational pension scheme is a retirement savings plan established by an employer to provide pension benefits to its employees upon retirement. These schemes are typically funded through contributions from both the employer and the employees, and the funds are managed either by the employer or an external pension provider.

SSAS (Small Self-Administered Scheme) pensions are a type of UK-based employer-sponsored pension scheme primarily designed for small businesses. Typically set up to provide retirement benefits for a small number of a company’s directors and senior or key staff, a SSAS is distinguished by the level of control it offers participants over investment decisions. Members of an SSAS can choose to invest in a wide range of assets, including stocks, bonds, and commercial property. They can also loan money back to their business, subject to certain restrictions, which can be a useful feature for company cash flow. Furthermore, SSAS pensions offer tax advantages such as tax-free growth on investments and the ability to pass on assets to heirs with potential tax benefits. This makes SSAS an attractive option for business owners who wish to combine their pension planning with their business and estate planning strategies.

However, SSAS lacks FCA regulation, exposing individuals to potential abuse from unscrupulous entities offering high-return, unregulated investments. Claims against regulated Financial Advisers may aid in recovering lost pension funds.

Case Studies

Defined benefit pension transfer case study

Case Study: John’s Pension Transfer

Background:

  • Name: John Doe
  • Age at time of transfer: 50
  • Original Pension Scheme: Defined Benefit Pension Scheme of a large manufacturing company
  • Transfer Decision Year: 2015
  • Pension Value at Transfer: £500,000

Situation: John was approached by a financial adviser who recommended that he transfer out of his company’s defined benefit pension scheme into a personal defined contribution pension. The adviser suggested that this would give John more control over his investments and potentially higher returns. John, not fully understanding the guarantees he was giving up, agreed to the transfer.

Outcome: By 2020, it was evident that the performance of the defined contribution scheme was significantly below the stable returns that would have been provided by the original defined benefit scheme. Furthermore, the new scheme had higher management fees and did not offer the same level of income security as his previous pension. John’s pension at the age of 65 was projected to be approximately 30% less than what it would have been under the defined benefit scheme.

Compensation Claim: John sought advice and pursued a claim for compensation on the grounds of unsuitable financial advice. He argued that he was not made fully aware of the risks and that the advice was not in line with his financial needs and understanding.

Financial Ombudsman’s Decision:

  • The Financial Ombudsman Service found in John’s favour, concluding that the financial advice was indeed unsuitable and that the adviser had failed in their duty of care.
  • Compensation Awarded: £150,000, aiming to put John back into a financial position close to where he would have been if he had not transferred his pension.

Calculation: The compensation was calculated based on the difference in the pension value at retirement age, taking into account the projected shortfall and the emotional distress caused by financial insecurity.

Conclusion: John received compensation that significantly mitigated the impact of the poor advice, though it did not fully replace the stability and security of his original defined benefit pension.

This fictional case highlights the importance of understanding the full implications of transferring out from a defined benefit to a defined contribution pension scheme, especially considering the long-term financial security associated with such decisions.

emma- defined benefit pension - case study 2

Case Study: Misadvised Transfer from a Defined Benefit Pension Scheme

Background: “Emma” was a member of a defined benefit pension scheme offered by her longtime employer. Nearing retirement, she was approached by a financial adviser who recommended that she transfer her pension benefits (approximately £250,000 to a SIPP to take advantage of potential investment growth and flexibility. Emma was told that on her death the return from the new SIPP would be better than a payment her estate would receive from her defined benefit scheme. She felt that too much emphasis was placed on this and so she was not fully aware of the guaranteed benefits she would be giving up by transferring out of her defined benefit scheme, nor was she informed adequately about the risks associated with the investments in the SIPP.

Complaint: After the transfer, the investments underperformed significantly, and the charges associated with the SIPP eroded further the value of her pension. Emma filed a complaint claiming that she was not made aware of the significant risks and that her financial adviser had not adequately assessed her capacity for loss and she had lost all the valuable guaranteed benefits of her previous pension scheme.

Investigation: It was found that the adviser had indeed failed to:

  • Conduct a detailed risk assessment that considered Emma’s age, financial situation, and understanding of investment risks.
  • Clearly explain the benefits Emma was forfeiting by leaving her employer’s defined benefit scheme, including the loss of a guaranteed income for life.
  • Inform Emma about the fees and charges associated with the new pension arrangement and how these could impact her retirement funds.

Outcome: The FSCS ruled in favour of Emma, noting that the advice to transfer was highly unsuitable given her needs and the high level of risk involved, and she was awarded the current maximum payout from the FSCS of £85,000

Conclusion: This case underlines the critical need for financial advisers to provide clear, comprehensive advice and to act in the best interest of their clients, especially when dealing with complex products like pensions. The decision to transfer out of a defined benefit pension scheme should only be made after thorough consideration of the client’s financial needs, understanding of risk, and long-term goals.

Transferring from a final salary scheme, also known as a defined benefit (DB) pension scheme, to a defined contribution (DC) scheme like a personal or self-invested personal pension (SIPP) can be a high-stakes decision given the guaranteed benefits and security typically offered by final salary

Frequently Asked Questions

  1. Benefit Formula: The retirement benefits under a defined benefit plan are calculated based on a set formula. This formula typically considers factors like the employee’s years of service, age at retirement, and salary (either at the end of their career or an average of several years). Common formulas might provide a benefit calculated as a percentage of final average salary multiplied by the number of years worked.
  2. Employer Responsibility: The employer primarily funds the pension and is responsible for managing the pension fund’s investments. Actuarial calculations are regularly performed to ensure the fund can meet its future obligations. Employers must make up any shortfalls if the investments do not perform as expected.
  3. Guaranteed Payouts: The defining characteristic of a defined benefit plan is that it provides guaranteed payouts, which are not directly affected by the performance of the investment market. This provides retirees with a stable, predictable income.
  4. Inflation Adjustment: Many defined benefit plans include provisions for post-retirement increases, often indexed to inflation, to help maintain the purchasing power of the pensions over time.
  5. Survivor Benefits: Defined benefit plans typically offer options for survivor benefits, allowing pension benefits to continue for a spouse or other beneficiaries after the retiree’s death.
  • Security: Defined benefit plans offer financial security in retirement as they provide a known and predictable income.
  • Inflation Protection: These plans often include cost-of-living adjustments, which can help protect retirees against inflation.
  • Simplicity for Retirees: Since the employer manages investment decisions and plan funding, the retiree does not need to make complex investment decisions or bear individual investment risks.

Challenges and Decline

  • Cost and Risk for Employers: The guarantee of a defined benefit means that employers bear most of the financial risks, including longevity risk (the risk of retirees living longer than expected) and investment risk. These factors can make DB plans expensive and financially volatile for employers.
  • Decline in Popularity: Due to these high costs and risks, many employers, particularly in the private sector, have shifted away from defined benefit plans toward defined contribution plans, where the risk is borne more by employees. Defined contribution plans are less costly for employers and have become more common.

Defined benefit pensions are more commonly found today in public sector employment, such as government jobs, where they continue to be a significant employee benefit, attracting and retaining workers in public service roles.

  1. Benefit Calculation: The retirement benefit is calculated based on a formula that considers the employee’s final salary and their length of service with the employer. Commonly, the formula is expressed as a fraction (such as 1/60th) of the final salary for each year of service. For example, if an employee retires after 30 years with a final salary of £60,000 and their pension accrues at 1/60th per year of service, their annual pension would be 30/60th of £60,000, which equals £30,000.
  2. Final Salary Definition: The “final salary” in these schemes is typically defined as the highest average salary over a certain number of consecutive years at the end of an employee’s career, often the last three or five years.
  3. Inflation Protection: These pensions often include some form of inflation protection, such as annual increases based on inflation indices like the Consumer Price Index (CPI), to help preserve the buying power of the pension throughout retirement.
  4. Employer Contribution: Employers bear the investment risk and are responsible for ensuring that there is enough money in the pension fund to pay for the future benefits of all members. This requires careful management and actuarial planning.
  5. Guaranteed Income: The key advantage of a final salary pension is that it offers a guaranteed income in retirement, which is not directly dependent on the performance of the investment market, unlike defined contribution plans where pension income depends on how much has been contributed and how well the investments have performed.

Final salary pensions have become less common in recent years, especially in the private sector, due to their high cost and financial risk to employers. Many organizations have shifted to less costly alternatives, such as defined contribution plans or career average plans, where the investment risk shifts from the employer to the employee.

  1. Earnings Calculation: Each year, a percentage of your salary is allocated to your pension account. This percentage is predetermined by the pension scheme.
  2. Revaluation: The sums accrued each year are then increased annually by a revaluation rate, which could be linked to inflation measures like the Consumer Price Index (CPI), or a fixed percentage set by the pension provider.
  3. Pension Accumulation: These revalued earnings accumulate throughout your career. The total at the time of your retirement represents the pension pot that will be used to provide your retirement benefits.
  4. Retirement Benefits: Upon retirement, the total accrued and revalued pension pot is used to determine your pension income. This can be provided as a regular annuity payment or sometimes in other forms depending on the specific rules of the pension scheme.

CARE schemes are designed to be fairer across the board, as they reward long-term service while reflecting the earnings across the entirety of a career rather than focusing on the possibly higher earnings years at the end. This can be particularly beneficial for employees whose salaries do not necessarily peak towards the end of their careers.

There are two main types of occupational pension schemes:

  1. Defined Benefit (DB) schemes: These provide a predetermined pension benefit, often based on the employee’s final salary and the number of years they have worked for the company. The employer essentially promises to pay a specific income to the retiree, making the employer responsible for ensuring there are sufficient funds in the scheme to meet the future liabilities.
  2. Defined Contribution (DC) schemes: In these schemes, both the employer and the employee contribute a fixed amount or a percentage of the employee’s salary into an individual pension fund. The final pension value depends on the contributions made and the performance of the investment fund chosen by the employee. Upon retirement, the employee can use this accumulated fund to purchase an annuity, draw down income, or take a lump sum, depending on the rules of the scheme and local regulations.

Occupational pension schemes are a key component of employee benefits in many countries and are subject to regulatory oversight to ensure proper management and protection of retirement benefits. They play a crucial role in providing financial security to employees in their retirement years.

Transferring out of a defined benefit pension, such as a final salary or Career Average Revalued Earnings (CARE) scheme, is a significant decision that involves many considerations. Here are some reasons why someone might choose to transfer their pension from these types of schemes to a different type of pension arrangement, typically a defined contribution or personal pension scheme:

  1. Flexibility in Accessing Funds
  • Drawdown Options: Defined contribution pensions offer more flexibility in how and when you can access your pension pot, such as through drawdown options where you can withdraw varying amounts to suit your financial needs while the remaining funds continue to be invested.
  • Timing: You can typically access your pension pot from age 55 (rising to 57 in 2028), which can be earlier than many defined benefit schemes allow.
  1. Control Over Investments
  • Investment Choices: Transferring to a defined contribution scheme allows individuals to make their own investment choices. This can appeal to those who want more control over where their pension funds are invested.
  • Potential for Higher Returns: Although it comes with greater risk, there is the potential for higher returns based on the performance of the chosen investments in a defined contribution scheme.
  1. Tax-Free Lump Sum
  • Larger Lump Sums: Some individuals might transfer to take advantage of the option to take up to 25% of their pension as a tax-free lump sum, which might be higher than what their defined benefit scheme offers.
  1. Estate Planning
  • Inheritance: Funds in a defined contribution scheme can usually be left to heirs more easily than those in a defined benefit scheme. In many cases, if the pension holder dies before age 75, the remaining fund can be passed on tax-free.
  1. High Transfer Values
  • Lump Sum Offers: Due to the way liabilities are calculated, some schemes offer high transfer values that can be particularly attractive. These values might be temporarily inflated due to economic and actuarial calculations, presenting a window of opportunity.
  1. Health and Lifestyle
  • Early Retirement Due to Health: If an individual has health issues that could shorten their life expectancy, they might consider it beneficial to transfer a pension to better manage and utilize their funds in the shorter term.

 

  1. Reduced Risk of Scheme Underfunding
  • Security: While defined benefit schemes offer supposed security, the reality can depend on the employer’s ongoing solvency and the scheme’s funding level. Transferring out might reduce the risk of losing out on expected benefits due to employer insolvency.

Transferring from a defined benefit pension scheme, such as a final salary or Career Average Revalued Earnings (CARE) plan, to a defined contribution scheme involves significant risks that should be carefully considered. Here are some of the primary risks associated with such a transfer:

  1. Loss of Guaranteed Income
  • Lifetime Income: Defined benefit pensions provide a guaranteed income for life, which adjusts with inflation in many cases. By transferring out, you lose this security, which can impact your financial stability in retirement.
  1. Investment Risks
  • Market Fluctuations: In a defined contribution scheme, the value of the pension fund depends on the performance of the investments. Poor investment returns can significantly reduce the retirement income you might otherwise have had.
  • Management Skill: The success of the investments often depends on choosing the right investment strategy and fund management. Poor decision-making or advice can lead to suboptimal outcomes.
  1. Longevity Risk
  • Outliving Your Savings: One of the biggest risks of moving to a defined contribution plan is the risk of outliving your money. Unlike defined benefit plans, there’s no guarantee your funds will last throughout your retirement, especially if you withdraw too much too early or live longer than expected.
  1. Inflation Risk
  • Purchasing Power: Defined benefit plans often provide protections against inflation, ensuring that the pension retains its purchasing power over time. Defined contribution plans typically do not have built-in inflation protection, meaning your savings could diminish in value in real terms as time goes on.
  1. Costs and Fees
  • Higher Fees: Defined contribution plans often involve higher management and investment fees. These fees can eat into your retirement savings, reducing the amount available for your retirement.
  1. Complexity and Responsibility
  • Decision-Making: Managing a defined contribution pension requires making ongoing decisions about investments and disbursements. This responsibility can be daunting and requires a level of financial literacy that not everyone possesses.
  1. Benefit Calculation
  • Reduction in Benefits: The transfer value you are offered may not fully reflect the value of the benefits you are giving up, especially the ancillary benefits like spouse’s pension, early retirement options, or disability benefits that come with many defined benefit plans.
  1. Economic and Actuarial Assumptions
  • Transfer Value Fluctuations: Economic conditions and changes in actuarial assumptions can affect the transfer value of your pension. You might receive a transfer value that seems attractive but doesn’t compensate adequately for the long-term benefits you forego.
  1. Tax Implications
  • Potential Tax Charges: Large transfers can sometimes result in tax charges, especially if the transfer value exceeds the lifetime allowance for tax-free pensions savings.

Given the complexity and long-term impact of transferring from a defined benefit pension scheme, it is crucial to seek advice from a qualified financial advisor who can provide a thorough analysis based on individual circumstances. This decision should be made with careful consideration of the potential risks and benefit and to ensure that you fully understand the implications of such a decision and that it aligns with your long-term financial goals.

Companies, We Assist with Claim-Related Services

Lloyds Bank Pension Scheme
Nat West Group Pension Fund