Final Salary Pension Transfer Advice From Expert
Final salary pensions are considered as the gold standard of retirement savings as they offer guaranteed income for the rest of your life once you retire.
However, transferring your final salary involves giving up your right to a pension in exchange for a lump sum invested in a defined contribution or money purchase pension.
Therefore, it is better to understand the whole concept of final salary pension transfer before you proceed.
This guide will help you understand What is a final salary pension transfer? and should you transfer your defined benefit pension for life?
Let’s read the advice from a final salary pension transfer specialist!
What is a Final Salary Pension Transfer?
Final salary pension or defined pension, as the name suggests, provides a guaranteed retirement income for life. Thus, it offers certainty to retirees that they will not run out of money at retirement.
The amount of income you will receive will depend on factors, such as the salary at your retirement or average salary during your career, and the number of years you were a member of the scheme.
As final salary pensions are expensive and complicated to run, the government has made changes to scheme rules so that some retirees can consider final salary pension transfer.
In final salary pension transfer, the retirees can give away all the benefits of a defined pension in return of an agreed cash value or transfer a lump sum amount into another pension scheme, normally a personal pension scheme.
How Does a Final Salary Pension Work?
A final salary pension scheme is funded by the contribution made by your employer on your behalf.
The income you will get from a final salary pension are based on three factors:
Number of years you have been contributing to the pension scheme
Your personable earnings
Your pension scheme’s accurate rate
For example, the number of years in the scheme is 30 years, pensionable earnings is £50,000 final salary, and scheme accrual rate is 1/80th.
In this case, your annual income will be:
30 years * £50,000 * 1/80th = £18,750
Normally, such a scheme has a retirement age of 65 and from this point, you start to get the pension income.
It not only provides guaranteed income after retirement to you but also to your financial dependents like your spouse, after you die. Although, depending on the scheme rule, the amount will be halved or one-third of the pension income you were receiving before you died.
In addition, the pension income will also consider the inflation part. Thus, the income will increase with time. However, the rate of increase will depend on the scheme rule.
The pension income is not affected by the ups and downs of the stock market, which means it does not rely on stock market performance and you will get the guaranteed full income.
If ill health forces you to retire earlier than your pension age, you may still get your full pension. You can also retire early on a reduced pension if you want to give up work before your retirement age. Finally, when your pension starts, you don’t have to do anything, it will keep on coming like a salary.
When Should You Consider A Final Salary Pension Transfer?
Factors that must considered before opting for a final salary pension transfer are:
State of health should be considered before opting for a final salary pension transfer. If your health is poor and you know you will not be able to work as long as you have planned, taking out the final salary pension earlier is better as you will receive the income higher than they originally forecasted.
If you are planning to retire in some other country where transferring the final salary pension fund will be more tax-efficient or even in some cases almost no tax on the withdrawal, then final salary pension transfer will be a better option.
Buying an annuity will be a better idea than the final salary pension scheme. When you are in poor health, you will get an impaired life annuity which gives better rates than the normal annuity. When you do not have dependents such as spouse and children, then you will not be able to get the spouse benefit from the final salary pension scheme.
You can think of transferring your pension If you have a positive attitude in taking risks. You can invest the lump sum cash from final salary pension transfer into alternative financial arrangements such as personal pension where higher income can be achieved.
Defined benefit pension income will stop when you and any financial dependants die. The fund will not be able to get transferred to your other relatives or loved ones. But if you invest in a defined contribution pension, then it can be inherited by whoever you choose.
What Are The Benefits of Final Salary Pension Transfer?
Here are the benefits of a final salary pension transfer:
1- Better Flexibility
Transferring a final salary pension can provide flexibility to the pensioner. You can better plan your future by using the funds from an early age.
A defined pension can only guarantee a fixed pension amount at the time of retirement. However, by transferring it to some other schemes you may end up getting more as you can vary your income or make choices about how you take your benefits. These benefits give you greater control over your money leading to ‘Pension freedom’.
You can also withdraw your money as and when you need it or take a lump sum amount if needed. You can invest in the annuity for a guaranteed income. Thus, there is flexibility in the use of funds according to your will.
2- Tax Planning
You can plan your income depending upon your financial circumstance and incomes which you received from your other sources. You can decide whether you need your pension income or not as it can make your income taxable.
In a defined pension scheme you will get a defined regular payment that means you may pay income tax you do not necessarily need to take.
3- Benefits to Your Dependent
In a defined benefit scheme, if you die, your spouse will get reduced benefit. Thus, the value of your benefit is lost for good. On top of it, if you are not married and have no financially dependent children, your pension will probably die with you.
But if you opt for a final salary pension transfer, your loved one can enjoy the full benefit of the scheme or cash.
4- Worries about the Financial Health of Your Employer
Recent collapses of companies such as British Steel and British Home Stores and the impact on these firms' final salary scheme is worth noting.
If your former employer becomes insolvent, your pension will be at risk. Even though it might be protected by the Pension Protection Fund, how much you will be guaranteed is uncertain.
In addition, PPF puts a cap on the amount you can receive from the fund if you are yet to reach retirement. It implies that you will miss out on your full entitlement if your employer goes under and their pension fund winds up in the PPF.
How To Calculate The Final Amount You Will Get After a Successful Final Salary Pension Transfer?
The final amount depends on the ‘Cash Equivalent Transfer Value’ (CETV) which is offered by your pension provider.
CETV is the amount of money your pension provider needs today to make sure it can cover the cost of the benefits you were guaranteed to receive in the future, were you not to cash them in.
Traditionally, transfer values have been calculated as a multiple of around 20 times the projected annual income due at the time of retirement.
For example, a final salary pension worth £10,000 a year would produce a CETV lump sum amount of £200,000.
The factors that affect your final amount are:
The age that your final salary scheme lets you start drawing your pension
The worth of your final salary pension in terms of annual income
You can get the above information from your pension scheme provider.
Pension Scheme Benefits that Are Lost
After the final salary pension transfer, the pension scheme benefits that are lost are:
A guaranteed income for life. The ups and downs of the stock market will affect the pension income. Your income from other defined contribution pension schemes will rely on stock market performance and you may not get the guaranteed full income.
Financial protection for your dependents like your spouse after you die. They will not get half or one-third of the pension income which you were receiving before you died.
Inflation protection to some degree for your pension income.
Don’t Fall In The Trap of Pension Scams And Frauds
Your financial security largely depends on your pension which you have been saving for a long time. This financial asset could make you the target for the scammers who are clever and know all the tricks to make you fall into their trap and make you hand over your pension savings to them.
Thus, you should be alert and cautious of them and make yourself prepared for them in advance.
Here are the actions that you must take to stay away from scammers:
It is illegal to offer pension advice through cold calls and if someone says they can help you in accessing your pension before the age of 55, it’s likely he is a fraud and trying to scam you. Thus, you should ignore them.
You should always seek advice from consultants who are registered and regulated by the Financial Conduct Authority. When searching online, you should check and verify the contact details of the advisor as these scammers could clone legitimate financial advisers’ websites to pass themselves off as the real thing.
These scammers often pressurize you to transfer your pension savings into a single investment leading you to lose all your money and face a tax charge of up to 55% of the amount taken out or transferred plus further charges from your pension provider. You should not blindly trust any advisor, first try to understand what he is suggesting, take more time to understand if needed, then decide the best possible step to take.
While investing overseas, where you do not have any consumer protection, these scammers could make false promises of a guaranteed high rate of return of 8% or more on the investments. But in reality, these investments either do not exist or are extremely high-risk with low returns.
Thus, be smart and always be alert to the above warning signs, so that you can protect your pension fund from these scammers.
Take The Help of a Financial Advisor
It is very important to take financial advice before considering your Final salary pension transfer. It is even a legal requirement to take personal financial advice when your defined benefit pension is over £30,000. Even if the amount is less than £30,000, you should take advice for your financial safety.
Even after taking regulated advice, things went wrong, you still have the opportunity to use the complaints and compensation schemes available.
It is mandatory for your employer to provide you free access to a regulated financial adviser while they approach you for an incentive exercise. But If they do not, as all may not, you should hire your own paid financial advisor.
You should also seek advice from firms that are registered and regulated by the Financial Conduct Authority and have specialist knowledge in the field of Defined benefit pension.
Final Salary Pension: FAQs
What is an ideal defined benefit (DB) pension?
Defined pension provides a guaranteed retirement income for life, thus offering certainty to retirees that they will not run out of money at retirement.
The amount of income you will receive will depend on factors, such as the salary at your retirement or at the average salary during your career, the number of years you were a member of the scheme, and the accrual rates of the scheme.
It should be a private-sector defined benefit scheme or a funded public sector pension scheme such as the Local Government Pension Scheme.
Who is eligible to transfer workplace final salary pension?
You can transfer the workplace final salary pension if it is a private-sector defined benefit scheme or a funded public sector pension scheme, such as the Local Government Pension Scheme.
You will not be able to transfer unfunded public sector pension schemes such as the Teachers’ Pension Scheme and the NHS Pension Scheme.
In addition, if you have already started drawing your pension, you would not be allowed to cash out.
What will happen if my company goes broke?
If the company sponsoring these schemes goes broke, then the continuation of the pension income is a question mark. Although most of these schemes are protected by Pension Protection Fund.
When the employers sponsoring these defined pension schemes become insolvent, the PPF will access the scheme. They will record all the employees who qualify for compensation. They have an assessment period of two years to decide whether to accept the scheme or more. If the scheme and its members qualify, it will enter the PPF assessment.
During this assessment period, no transfer of benefits out of the scheme would be allowed and neither further contributions can be paid nor can new members be admitted.
During this assessment, if enough assets of the scheme are found, then the insurance company can buy it and payout to resume the pension benefits.
But if there are not enough assets, then the scheme would be admitted into the PPF. The PPF would continue to pay the pension incomes to members at the relevant compensation levels depending on how old the members were when their employer became insolvent.
Members who were over their normal pension age or already receiving their pension due to ill health will continue to get their full pension and members who are under their normal pension age will get 90% of their built-up pension benefits. Survivors’ pension to their dependents such as widows, widowers, children will continue to get their full pension.
What will happen to my final salary pension if I leave the company?
When you leave the company, your final salary pension will be referred to as being ‘frozen’ or dormant. You will become a ‘deferred member’ of the pension scheme, thus no further contribution could be made by you or your employer.
Now, you can request cash equivalent transfer value and then transfer this into the active pension you are currently paying into or set up a new fund to pay into.
Can I take my final salary at age 55?
You can take your complete final salary pension as a cash lump sum if you satisfy the below conditions:
If you are at least 55 years of age.
If you are seriously ill, then you can take it before 55 years of age also.
If the value of all your personal and workplace pensions, excluding the State Pension, is less than £30,000
If defined benefit pension is worth less than £10,000, regardless of how much other pension savings are.
The lump sum must cancel all your pension rights under that scheme. 25% of the lump sum cash will be tax-free but the remaining 75% is tax paid as earnings.
Is it better to have a guaranteed income for life or choose a lump sum as final salary pension?
Well, both scenarios have some advantages and disadvantages of their own.
If you choose a lump sum, then you have the flexibility to invest in another financial arrangement where you could get more return. It can also be transferred to your loved one in the event of early death.
But you risk running out of money if not invested correctly. On the other hand, guaranteed income for life is a safer option if the amount is not trivial.
When should I go for a final salary pension transfer?
The state of your health will decide your life expectancy. If you will not be able to work longer due to ill health, then you can consider taking benefits from the final salary pension transfer early.
In addition, if you want to pass on some of the cash from the final salary pension transfer to your inheritance, you can think of final salary pension transfer as this is not possible with the final pension scheme.
If you are going to get a trivial amount as monthly income from your final pension scheme, then you can transfer your pension. In this condition, you will find the lump sum cash from the final salary pension transfer more appealing.
How long does the final salary pension transfer take?
Here are the steps involved in the final salary pension transfer, determining the time it may take:
First you should ask for the’ Statement of Entitlement’ from your pension provider. ‘Statement of Entitlement’ is a written document that sets out your transfer value, details of the benefits you have built up under the scheme, and information that your new scheme will need if you decide to proceed with the transfer.
After one month, notification will be sent by your pension provider for taking professional advice.
After three months from asking, the pension provider will give you the ‘Statement of Entitlement’ stating your transfer value and will send the paperwork with a deadline of the next three months to take financial advice.
After six months from when you ask for the ‘Statement of Entitlement’, you have to confirm that you want to transfer your pension and provide proof that you have taken financial advice.
After nine months from when you ask for the ‘Statement of Entitlement’, your pension provider has to complete the transfer.
When should I not opt for a workplace final salary pension transfer?
Benefits from personal pension plans or state pension will provide you the necessary financial flexibility needed for not opting for the final salary pension transfer. Pension plan arrangements of your spouse should also be taken into consideration.
If your motive is to only access the lump sum cash provided from the final salary pension transfer, then you can also consider your other financial assets such as bank savings. They will also help you in saving tax that you may have to pay for the final salary pension transfer. On the other hand, taking money from your individual savings account will be more tax-efficient.
You will end up with an unexpected tax bill if you are exceeding your lifetime allowance by moving forward with the final salary pension transfer.
If you want a guaranteed retirement income as it is a PPF protected scheme.
What should I do with the money?
Some of the common alternative arrangements advised at the time of proceeding with final salary pension transfer are:
Investing in an annuity. Although the annual rate will be lower than the final salary pension scheme.
Investing the money in other financial institutes, such as stock markets, where you may get capital growth and income for it.
You can also consider investing in buy-to-let property.
When should I take the help of a pension transfer specialist?
It is mandatory to take personal financial advice when your defined benefit pension is over £30,000. A transfer specialist will help you understand the following points:
The potential risks and benefits of keeping or transferring the final salary pension.
Review other alternative financial arrangements whose benefits could outweigh your final salary pension transfer.
Aligning your pension transfer benefits with your financial goals and how it will help in achieving them.
Explaining the fee structure for advising and the fees you have to pay if you switch.
The transfer from a final salary pension scheme is a highly complex process and is an irreversible action. Usually, it is advisable not to transfer the final salary pension as it may have a detrimental effect on your retirement planning.
However, if you still want to transfer your pension, it is better to think about taking advice on your pension options and think about your retirement lifestyle. Knowing what you will be doing helps answer whether you should transfer your pension or not.