Cash Balance Schemes
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Cash Balance schemes are a variant of Final Salary and Career
Average schemes with one important difference. Instead of accruing pension,
cash is accrued instead. This cash must then be used at retirement
to buy a pension. Therefore for a 'final salary' style Cash Balance scheme
Cash
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=
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Salary * Years
in scheme * Accrual percentage
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Accrual percentage - This is the percentage of your salary the
company is giving you for each year of service. The accrual
percentage can be almost anything but 10% to 25% may be considered typical.
A 'career average' style Cash Balance scheme might works by
accruing the following each year
Years Cash Accrual
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=
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Salary * Accrual percentage
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These amounts will then get added together at retirement to
provide a lump sum with which to purchase a pension. These amounts
may then get increased each year in line with inflation (prices or
salaries dependent upon the scheme) or by some other amount. As for
career average schemes there is no requirements for schemes to do
so.
Conversion of lump sum to pension
The terms on which you convert your cash at retirement to pension
at retirement will be dependent upon the scheme. Some schemes will
allow you to convert the cash into a pension through their own fund
(in many instances the terms will be more generous than an insurance
company would offer), in other schemes the only option is to take
your fund to an insurance company for conversion.
This is an area where seeking Independent Financial Advice is a
very good idea.
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