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Final Salary Pension Transfer Advice

Leaf Financial Advisers Ltd. - Trusted Pension Advisors

What is a final salary pension?

A final salary pension, also known as a defined benefit pension, is a type of pension scheme where the pension payments in retirement are based on the employee’s final salary at the end of their career, and the number of years they have been a member of the pension scheme.  Many schemes have switched to using an employee’s annual salary when calculating the pension pay out, although they are still often referred to as “Final Salary” schemes and the same principles apply in transferring.

Under a final salary pension scheme, the employer guarantees to pay a specific amount of retirement income to the employee, which is calculated based on a formula that takes into account the employee’s years of service and their final salary (or average, or combination). The employee often make a nominal contributions to the plan, but this tends to have no impact on the amount that is received upon retirement.  The employer bears all the investment risk and is responsible for funding the plan to ensure that there are sufficient funds to pay the promised benefits to the pension member, as per the agreed pension rules.

Recently most Final Salary schemes have switched to using an average of the employee’s salary over their employment, which can lead to a lower level of payment and also has the benefit to the employer of a more easy to forecast pension pay out (as the final pay out cannot be skewed by a large increase in salary in the final few years).

These types of pension are called “Defined Benefit” pensions as the amount received (the “benefit”) are defined by the amount of time worked and salary and not on the level of contributions and performance (as it is with a “Defined Contribution” style pension).

Final salary pension plans have become less common in recent years, as many employers have shifted to defined contribution plans, where the employee bears the investment risk and the retirement income is based on the amount of money contributed and the performance of the investment funds.  However, for those who are still eligible, a final salary pension can provide a secure retirement income stream, particularly for those who work for an employer for many years.  It is mainly government or council pension schemes that still offer Defined benefit style pensions in the UK these days.  You can read our article on the topic to find out more about if you have a Final Salary pension scheme.

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What is a final salary pension transfer?

A final salary pension transfer, also known as a defined benefit pension transfer, is the process of moving the value of your pension benefits from a final salary / defined benefit pension scheme to a defined contribution pension scheme.  A defined contribution pension scheme (sometimes called money purchase pension scheme) is one where you have a pot of money, which is often invested, that you use to provide yourself an income in retirement.

When transferring out of a Final Salary scheme, the pension administrators will place a value on the pension benefits that you have built up (as there is no actual “pot of money”, just a guarantee to pay you a certain income for life) and will pay this cash amount into a personal pension of your choosing.  This will extinguish all of the benefits of the current final salary scheme.  So in effect you “cash out” your final salary pension for a lump sum into a defined contribution (money purchase) scheme.  This money is often then invested to provide growth over time until there comes a point at which you need to draw the money out to provide a pension income.

Transferring from a final salary pension plan to a defined contribution pension plan can be a complex decision, as there are many factors to consider, such as the size of the transfer value, the potential investment returns, and the risks involved. It is important to seek professional advice before making any decisions, as transferring out of a defined benefit pension plan can have significant financial implications for your retirement income.  Most notably you are giving up a valuable guarantee (a guaranteed pension income) in return for uncertain investment returns in a defined contribution pension.

What is important to consider when thinking about a final salary pension transfer?

A defined benefit pension transfer, also known as a final salary pension transfer, is the process of transferring the value of your pension benefits from a defined benefit pension scheme, such as a final salary pension, to a defined contribution pension scheme, such as a personal pension or a Self-Invested Personal Pension (SIPP).

In a defined benefit pension scheme, the retirement income is guaranteed and is usually based on a formula that takes into account the employee’s salary and years of service. By contrast, in a defined contribution pension scheme, the retirement income is based on the amount of money contributed and the performance of the investment funds.

Transferring from a defined benefit pension scheme to a defined contribution pension scheme can give you more control over your retirement income, as you can decide how to invest the transfer value and how much income to withdraw in retirement. However, it also involves giving up the guaranteed income provided by the defined benefit pension scheme, which can be a significant risk if you outlive your retirement savings or if the investment returns are lower than expected.

The most important point to note regarding final salary pension transfers is that in the majority of cases you are usually better off not transferring.  The benefits of a final salary scheme are often under valued by members, and even a large pension transfer value may not mean it’s worth giving up a lifetime of regular, guaranteed and often inflation linked pension income.

In fact the regulator of pensions in the UK, the Financial Conduct Authority (FCA)* insists that every final salary transfer over the value of £30,000 (as of 2023) must be signed off by a Financial Adviser that has special extra qualifications and permissions to authorise a transfer of this nature.

If you still believe that a transfer would be in your best interest then you need to weigh up the potential pros, cons and risks.  One of the biggest risks is that you transfer and the investments don’t perform as expected and you end up with not enough in retirement to live the life you want.  Remember that investing over a long period can deliver good returns, but it also carries with it risks that the value could fall, and you could end up with a lot less than you started with.  An important question to ask is if the investments fall in value, do you have enough guaranteed income elsewhere to support your retirement?

It can also be complex to manage your own personal pension, including selecting the right type of pension and the most suitable investments for you and your personal situation.

Beware of pension transfer scams

Unfortunately we live in a world where there are an increasing number of scams and this does include scams around your pensions.  Whilst there is no one guaranteed method to avoid a scam, it’s important to be vigilant, be very wary of pressure being applied to act quickly, always check any adviser or company on the FCA Register* of all registered individuals and Firms in the UK allowed to give financial advice and always be wary of offers that seem too good to be true; this includes the promise of seemingly spectacular and unachievable returns.

Defined Benefit transfers are particularity at risk due to both the large amounts of money often involved (transfer values are often in the hundreds of thousand of pounds) and the difficulty in easily comparing the value of a defined benefit pensions annual income with the lump sum of cash that may be available on a transfer.  Be extra vigilant for any suggestion or taking or transferring a pension before your retirement age.

Leaf Financial Advisers are fully regulated by the FCA and if you would like to chat through a particular situation with a regulated defined benefit transfer specialist then please give us a ring on 01173 823 823.  There is no charge for an initial chat and it may be helpful to have a second opinion on transfer advice or a suggested transfer that you may have been offered or advised upon.

Do I  need financial advice to transfer my pension?

Under current UK regulations* you require advice for any pension which has a value over £30,000 and has “Safeguarded Benefits”, which covers almost all Final Salary/Defined Benefit pensions in the UK.  The £30,000 value of the “Cash Equivalent Transfer Value” – the amount of cash lump sum you will transfer to a new pension pot.  The adviser will have to agree that the transfer is in your benefit if you are to be able to practically transfer (very few providers will allow you to without the agreement of a suitable financial adviser).

The financial adviser must have the required training and permissions from the regulator (the FCA) to be allowed to advise on defined benefit transfers.

Can I transfer my final salary pension against advice?

Transferring a final salary pension against the advice of a financial advisor is unlikely to be a wise decision.  A Financial Advisor will give your potential transfer a thorough and detailed review and assess a wide range of factors such as your age, health, financial goals, and risk tolerance. If the advice is against transferring your final salary pension, it is likely because it is not in your best interest considering your specific situation.

However, your adviser should also be able to explain why the advice is to not transfer, so that you are clear on what the reasons are.  

Final Thoughts about a final salary pension transfer

The decision to transfer from a defined benefit pension scheme to a defined contribution pension scheme can be complex, and it should not be taken lightly.  The transfer is often irreversible, and the consequences can impact the quality of your entire later life.  Both types of pensions are very different, and it’s important to understand both options to make the right decision.

It is perfectly possible that transferring your final salary / defined benefit pension is the right thing to do and doing so could enhance your retirement.  If for example you have no need for guaranteed income but want to make a large purchase, then a transfer might be the right option, but it’s important to be sure, and the adviser you work with may be able to advise on other ways of meeting your goals. 

There are many factors to consider and talking to a financial adviser who is knowledge about pension transfers is a good place to start.   They will be able to break down each option so that a comparison of the benefits and risks are easier to see and assess.  There is often no need to rush the decision to transfer (and indeed, be wary of anyone that does try to rush or pressure you) so it is worth taking the time to fully explore the options.  

In summary, the decision to transfer a defined benefit pension can be a serious one with major consequences and significant financial implications for your retirement income and so should not be taken lightly.