FINAL SALARY PENSION TRANSFER: How It Works, Benefits and Risks


When you retire, you may be able to benefit from greater flexibility if you do a Final Salary Pension Transfer. For a long time, businesses issued Defined Benefits Pensions, commonly known as Final Salary Pensions or ‘DB Pensions.’ If you have a defined benefit (DB) pension, you may be able to transfer it to a more common type of pension (defined contribution). This is a significant and irrevocable decision, so it is critical that you understand what it entails and what the benefits and drawbacks may be for you. In this section, we will go over why you should choose final salary pension transfer advice, how it works, and the risks associated.

What is a Final Salary Pension Transfer?

A Final Salary Pension Transfer is the process of leaving a Defined Benefit Final Salary Pension Scheme and foregoing the guaranteed benefits in exchange for an agreed-upon cash lump sum. This lump sum must be transferred to another qualifying UK Pension Scheme, most commonly a Personal Pension.

By foregoing the scheme’s guaranteed benefits, you have more choice over your money, how you invest it, and how and when you collect pension benefits to finance your retirement. Depending on your financial situation, these additional flexibilities may be significant to you, even if you prefer the peace of mind and security of a predictable income in retirement. This is a complex area of financial planning, and it is critical that you understand the security you give up in exchange for this greater flexibility.

Why should you opt for a Final Salary Pension Transfer?

Many people consider a Final Salary Pension Transfer for a variety of reasons. Personal concerns that lead many people to consider relocating include:

#1. Flexibility

A pension is crucial to your long-term financial security and well-being. To encourage people to save and maximize their pensions, the UK government has implemented a number of flexibilities meant to offer you more choice over your money. These alterations, known as ‘Pension Freedoms,’ empower you to accept your retirement benefits as you see proper. This means you can switch on and off your retirement income, take a lump payment, or let your pension grow. Defined Benefit Plans, on the other hand, have predetermined retirement ages and do not allow you to modify your income or choose how you receive your benefits.

#2. Tax Preparation

Final Salary Pensions do not allow you to change the amount of income you get. Depending on your financial situation and other sources of income, you may only need to tap into your pension on occasion. Many people now prefer to work flexibly or part-time, retiring gradually rather than retiring entirely. Because of Pension Freedoms, you can utilize your pension to supplement your income as needed and arrange your income so that you don’t pay unnecessary Income Taxes.

Defined Benefit Schemes, on the other hand, will give you a defined amount on a monthly basis, which may result in you paying tax on income you don’t have to receive.

#3. Planning an Estate

When you die, a Defined Benefit Scheme will pay a reduced benefit to your spouse or a dependant child under the age of 23 until their death. The qualifying rules must be followed in order for these payments to be made. Aside from that, the value of your pension is permanently destroyed.

Death benefits are quite strict, and if you are not married and do not have financially dependent children, your pension will most likely die with you. Depending on your financial, family, and personal circumstances, as well as your state of health, a Final Salary Pension Transfer may allow you to save a cash sum that can later be handed on to loved ones.

What you give up when you Transfer your Final Salary Pension

You are making a serious and irrevocable financial decision when you transfer your Company Pension to a Private Pension arrangement. As a result, you should seek the advice of a highly experienced Financial Advisor with specialized qualifications and knowledge, who will conduct a complete examination of your situation.

The following benefits of Company Pension Schemes are lost upon transfer:

  • Lifetime income guarantee: Your pension income will last as long as you do.
  • Spouse/civil partner/children: Although schemes differ, when you die, your pension will continue to pay an income to your spouse. More information can be found in your scheme paperwork.
  • Inflation protection: Your pension’s spending power is safeguarded to some extent.
  • Reduced risk: Your pension income is not dependent on stock market success.
  • There is no decision-making: You will not be required to do anything after your pension begins, and it will be provided in the same manner as a salary.

Should I Transfer My Final Salary Pension?

  • If you are or have the opportunity to be an active member of a final salary scheme, you should only contemplate leaving (or not joining) the scheme in exceptional circumstances (or if you have lifetime allowance protection).
  • If you are enrolled in or are offered a seat in a final salary plan and have accrued deferred benefits in other schemes, you should check to see if your program allows you to transfer those deferred benefits into the scheme.

The decision to transfer your final salary pension is based on your unique needs and circumstances. Many various factors must align in your favour before a transfer is the best option for you. We’ll consider the following factors while deciding whether or not to make a positive transfer recommendation for you:

#1. Your requirements and goals

If you don’t have any needs that your final salary scheme can’t provide, there’s no incentive to transfer and risk being worse off in retirement. However, if you have any needs that a money purchase program would meet but that the scheme cannot meet, we can assess whether a transfer would benefit you.

#2. Your Pensions and Assets

Assuming you do have demands that your defined benefit pension cannot meet, the second decision is whether you can afford the risks. That is why we will look at your other assets as well as your pension arrangements.

If you and your spouse have a lot of other assets – like real estate, other pension plans, cash in the bank, and so on – this could be one of the reasons we advocate a transfer. This is assuming you are willing to rely on these assets if the benefits of a transfer turn out to be less than anticipated.

On the other hand, if you don’t have many other assets, a transfer is unlikely to be suitable for you, especially if you rely completely or primarily on your final salary scheme.

#3. Your Cash Equivalent Transfer Value

A high transfer value may be a cause to consider abandoning your final salary pension, but it is by no means the only factor, and it does not imply that you should transfer.

#4. Your Risk-Taking Attitude

As previously stated, there are risks associated with a defined benefit pension transfer, not the least of which is that the value of your investments and the income they provide may fall as well as rise. If you are especially risk-averse, it is unlikely to be for you because there is no investment risk to you if you remain in the scheme.

#5. Your Investing Adventure

A novice investor with little to no present exposure to investment risk or experience in investing is unlikely to benefit from a final salary transfer. In the event of a transfer, you’ll need to manage your money purchasing pot to some amount and have the knowledge to do so.

#6. How Long Will You Live?

A shorter life expectancy, possibly as a result of a medical condition, may play a role in the choice to transfer. Transferring your pension may provide you with more value than drawing it for a short period of time.

However, this requires a prediction of your life expectancy, which, save for the most serious illnesses, cannot be guaranteed. You may live a long time and discover that the certainty of a lifetime income would have been more valuable.

If you transfer a final salary pension, you won’t be able to modify your mind. You’ll be leaving a program that provides financial security for the remainder of your (and your spouse’s) lives.

The Risks of Final Salary Pension Transfer

The loss of a guaranteed income for life is perhaps the most significant danger of a final salary pension transfer.

Because of poor investment results, your retirement benefits may be fewer than they would have been in the program, and ensuring an income may be more expensive than you anticipated.

#1. There are no income assurances.

A final salary pension guarantees a fixed, usually index-linked income for the rest of your life. Most plans also include a provision for continuing to provide at least a portion of that income to a surviving spouse for the rest of their life – often 50%.

When you switch to a defined contribution pension system, you lose those guarantees unless you utilize the cash to purchase an annuity with spouse benefits and/or a minimum guarantee duration. However, whether or not you can recreate what you and your spouse would have been entitled to under the program will be determined by current investment performance and annuity prices.

#2. You might be worse off after retirement.

You may find that your pension income in retirement is less than you would have received if you had stayed in the final salary scheme due to the risk involved with investing and the absence of certainty of a retirement income. Historically, participants have found it difficult to match the retirement benefits granted by the scheme after transferring out.

#3. You will be affected by market swings.

The new pension freedoms made income drawdown available to everyone, regardless of the size of their pension portfolio. You leave your pension pot invested and extract lump amounts and/or income from it using income drawdown.

However, because your pension fund remains invested, it is vulnerable to market ups and downs. Investments and the revenue they generate can fall as well as rise, which means you may get back less than you put in.

#4. The transfers are final.

Once you’ve made the decision to pursue a final salary pension transfer, there’s no turning back. You won’t be able to change your mind later.

Furthermore, with a defined benefit system, the employer would be compelled to make up any financing deficit if investment returns were lower than necessary. With a money purchase program, the retiree would either have to make up the difference or accept fewer benefits.

#5. You will be subject to the annual money purchase allowance.

For those who draw a defined contribution pension flexibly, the money purchase annual allowance (MPAA) kicks in. This limits the amount you can continue to contribute to pension schemes while receiving tax relief to £4,000 every tax year. This does not apply to people receiving final salary benefits, which means you can continue to contribute to a pension scheme in retirement up to your maximum annual pension allowance.

Although there are benefits to a final salary pension transfer, they will only be appropriate for a small number of members.

How long might it take to Transfer a Final Salary pension?

Our step-by-step guide will walk you through the entire process of transferring your pension.

#1. The initial stage

Your pension system sends you a statement of entitlement.’

#2. One month later

Your pension plan should tell you if you require professional financial advice.

#3. Three months later

Your pension scheme will confirm the “transfer value” of your pensions and provide you with documentation with a deadline to seek financial advice.

#4. Six months later

This is the deadline for you to confirm your desire to transfer your pension and provide proof that you have sought financial advice.

#5. Nine months later

This is the deadline for the trustee of your pension system to effectuate the transfer.

What have the issues been with Final Salary Pension Transfer Advice?

Unfortunately, there have been numerous cautionary pieces of advice highlighting the consequences of your final salary pension transfer.

Workers at Tata Steel (previously British Steel) had to decide whether to transfer their final salary pensions to a new scheme or take a lump sum at the end of 2017.

Untrustworthy advisers descended on Port Talbot, where the majority of Tata employees were based, and convinced them to cash out and invest their money in inappropriate high-risk, high-cost investment products.

Many steelworkers’ only source of retirement income was their final salary pension, and they were left destitute after having to make a difficult decision. In 2022, the National Audit Office will investigate the FCA’s handling of this affair.

The Financial Conduct Authority (FCA) has been attempting to enhance the quality of final salary pension transfer advice since 2018.

According to the regulation, advisers should begin with the presumption that most clients will be unsuitable for a transfer. All final salary pension transfer professionals must now hold a specialized certificate in order to provide financial advice under new guidelines.

The regulator fell short of outlawing ‘contingent billing,’ which is when a price for advice is only paid if the transfer is completed.

To make you reconsider transferring, the FCA now compels advisers to offer you what is known as a “transfer value comparator” (TVC).

Final Salary Pension Transfer FAQ’s

How much does it cost to transfer a final salary pension?

Fixed fee final salary pension transfer advice is typically charged at a maximum of 5% of the cash value of your fund for defined contribution schemes. You may also be required to pay an additional 1% as an ongoing cost for a regular review.

How are final salary pension transfer values calculated?

Transfer values have traditionally been computed as a multiple of roughly 20 times the annual income due at retirement. A final salary pension worth £10,000 per year, for example, would result in a lump payout of £200,000. Transfer values of 30-40 times the final salary benefits have recently been offered.

Can I get a lump sum from my final salary pension?

Commutation is the process of withdrawing a cash lump amount from your final salary pension. The maximum lump sum you can withdraw from your final salary pension is 25 percent of the total value of your crystallized pension benefits. It’s also known as a pension start-up lump amount.

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Transfer values have traditionally been computed as a multiple of roughly 20 times the annual income due at retirement. A final salary pension worth £10,000 per year, for example, would result in a lump payout of £200,000. Transfer values of 30-40 times the final salary benefits have recently been offered.

" } } , { "@type": "Question", "name": "Can I get a lump sum from my final salary pension?", "acceptedAnswer": { "@type": "Answer", "text": "

Commutation is the process of withdrawing a cash lump amount from your final salary pension. The maximum lump sum you can withdraw from your final salary pension is 25 percent of the total value of your crystallized pension benefits. It's also known as a pension start-up lump amount.

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