What is a Final Salary Pension?

A final salary pension is a type of defined benefit pension (DB), offered by employers. This workplace pension provides retired employees with a guaranteed income for life. Employees can access their pension when they reach the State Pension age, which is currently 66 years in the UK. In certain situations, an employee may be able to access their pension earlier.

The amount paid out is based on the employee’s final salary and the number of years they’ve been a member of the employer’s pension scheme. The amount also increases each year in line with inflation. This type of pension scheme is valued by employees because it offers a stable and predictable income during retirement. In the event of a pensioner’s death, the employer continues to pay the pension to support their spouse, partner or dependents. [1]

What is a Final Salary Pension Transfer?

A final salary pension transfer involves moving the value of your defined benefit pension into a defined contribution (DC) scheme. Unlike a final salary pension, which guarantees a lifelong income based on your salary and years of service, a defined contribution scheme’s value is based on the amount you and your employer contribute to the pension, plus investment returns and tax relief.

Is It Worth Transferring My Final Salary Pension?

Deciding whether you should transfer your final salary pension depends on various factors including your financial goals, risk tolerance and personal circumstances. Here are some pros and cons of a final salary pension transfer:

Pros:

• Greater Flexibility - A defined contribution scheme offers more control over how and when you access your money. You can draw down funds as needed, which can be beneficial if you want to retire early or have varying income needs during retirement.
• Potential For Growth - If the investments perform well, your pension pot could grow beyond the value of the guaranteed income you would have received from your final salary.
• Inheritance Benefits - Defined contribution pensions allow you to pass on any remaining funds to your beneficiaries when you die, potentially making it a better option for those who want to leave an inheritance.

Cons:

• Loss of Guaranteed Income - By transferring your final salary pension, you give up a guaranteed income for life. The value of your new pension pot can fluctuate based on market performance, making it less predictable.
• Investment Risk - The transferred funds are exposed to market risks, meaning the value of your pension could decrease if investments underperform.
• Transfer Fees - Transferring a final salary pension involves significant fees, including advice charges and fund management charges, which can reduce the overall value of your pension.

Before you decide to transfer your final salary pension, understand the pros and cons of your situation carefully. If you are unsure about whether you should go ahead with the transfer, seek advice from a financial adviser or a pension adviser. While you may thank yourself in the future for making the transfer, it is not suitable for everyone.

Can All Final Salary Pensions Be Transferred?

Not all final salary pensions can be transferred. If you are part of an unfunded public sector pension scheme such as an NHS Pension Scheme or the Teacher’s Pension Scheme (TPS), these pensions can not be transferred. Meanwhile, if you’re in a private sector pension scheme or a funded public sector pension scheme, such as the Local Government Pension Scheme, these pensions can usually be transferred. [2]

How Does A Final Salary Pension Transfer Work?

To transfer a final salary pension, you must obtain a Cash Equivalent Transfer Value (CETV) from your pension provider. The CETV is a lump sum amount that you would receive if you transferred your pension. You can withdraw up to 25% of its cash value free from tax. This lump sum can be used to fund your defined contribution scheme.

A CETV is calculated by the pension provider based on many factors including age, personal circumstances, life expectancy and inflation. Typically, the value is calculated by multiplying the guaranteed pension income by 20. For example, if you have a guaranteed pension income of £15,000 per year, your CETV will be £300,000. Your employee may offer an incentive for the transfer, which can increase the CETV.

How To Transfer a Final Salary Pension?

Transferring a final salary pension can be a lengthy and complex process. A CETV is only guaranteed for 3 months. You will need to fill in paperwork to complete the transfer process, leave your old scheme for it to apply and set up a new defined contributed scheme. Once the transfer is completed, you will be responsible for managing your investments.

For pensions valued at over £30,000, it is a legal requirement to seek advice from a financial adviser before making a transfer. Make sure that your financial adviser is FCA (Financial Authority Conduct) authorised. You can search for a financial adviser using the database on FinanaicalAdviser.co.uk. Our database has a listing of over 15,000 FCA-approved firms across the UK.

Even if your pension is less than £30,000, you should still consider speaking with a financial adviser. A final salary pension transfer is no small task. If something goes wrong during the transfer, it may affect your pension pot and cause unnecessary stress. A financial adviser is a trained professional who has the knowledge and experience for successful final salary pension transfers.

What Can I Expect From a Financial Adviser?

When you start working with a financial adviser to transfer your final salary pension, you can expect the following [3]:

1. Comprehensive Financial Analysis - A financial adviser will conduct a comprehensive financial analysis of your pension scheme, other retirement savings and your financial goals. They may ask you what the reason for the transfer is.
2. Risk Assessment - A financial adviser will evaluate your risk tolerance and help you understand how transferring your pension could expose you to potential risks.
3. Personalised Advice - Based on their analysis and risk assessment, a financial adviser will give you personalised advice and recommendations to help you achieve your financial goals, whether that is to complete the transfer or stay with your current pension scheme.
4. Ongoing Support - Once the transfer process is in motion, a financial adviser will provide ongoing support such as assisting with paperwork, making adjustments, transferring funds and answering any concerns.