April 2024
Final Salary Pension Transfer in April 2024
In this article, we look at the issues behind taking a final salary pension transfer.
Topics that you will find covered on this page
You can listen to an audio recording of this page below.
What is a final salary pension?
A final salary pension is a type of workplace pension that pays out a retirement income based on your earnings at the end of your career – this is known as your ‘final’ or ‘normal’ pension age.
These pensions are also known as ‘defined benefit’ pensions (or a db pension), because they provide a guaranteed level of retirement income.
This means that the amount you receive will never decrease.
It’s calculated by multiplying your pensionable pay at retirement by a factor set out in your company’s pension scheme rules. It may depend on things like the length of service and age when you come to take your pension.
In many cases, benefits are based on final salary levels – plus an accrual rate (normally expressed as a percentage) which is applied to each year of service in the years of pension service leading up to retirement.
What is a final salary pension transfer value?
In a final salary pension scheme, there is a value placed on the pension that you have built up. This is known as the ‘pension transfer value’.
You can take this as a lump sum to use as you wish, or move it to an existing arrangement – such as a defined contribution pension scheme (known as a DC scheme).
What is a final salary pension cash equivalent transfer value?
A cash equivalent transfer value is an amount of money equal to the benefits you could buy with your benefits.
The amount of money will depend on interest rates and other factors that affect how much your benefits are worth now.
Why consider a Final Salary Pension Transfer?
Reasons why you might consider a defined benefit pension transfer are to:
- take a tax-free cash lump sum from your defined benefit pension plan
- release the investment growth potential of the pension funds by having them in a defined contribution scheme, such as a self-invested personal pension or a SIPP – this means you have more control over how the money is invested and can access it from age 55
- have the ability to pass on your pension wealth to your loved one’s if you were to pass away
- have full flexibility and freedom with your pension pot and what to do with the value of the pension contributions
- Take advantage of the pension freedoms and use the pension pot to take pension drawdown and take money directly from your pension savings.
Before transferring all or part of your benefits into another option, including an annuity, you need to consider that the value of the benefits might reduce when they’re converted into other types of investments like a new scheme or an annuity.
When you transfer a final salary pension, the scheme administrator makes an estimate of the value of your benefits using interest rates and other assumptions from what’s known as a ‘valuation date’.
How do I transfer a final salary pension?
To approach a defined benefit pension transfer, contact a financial adviser who specialises in pensions (a pension transfer specialist) and ask them for financial advice on how to proceed. They will ask you questions about your retirement plans and the benefit arrangements of the pension scheme you’re leaving.
The first thing that happens is that your adviser does a detailed review of your benefits and explains what you can do with them. They can either provide advice on the whole of your plan including all types of benefits from different employers, or just certain parts depending on what’s available.
You can then decide whether it’s appropriate to transfer some or all of your benefits, and if so how you’d like to take them. If you’ve set up a new defined contribution arrangement such as a SIPP, they’ll help with this too
It’s important to remember that transferring out is irrevocable, so be sure about any decision before proceeding.
What does a final salary pension transfer cost?
When moving money from an existing final salary pension into an alternative arrangement (including buying an annuity), there may be fees or pension transfer charges payable by either yourself or your financial adviser.
Admin, advice and transfer charges – These are the initial adviser’s costs for helping you decide what to do with your pension pot and completing any paperwork involved in your move from one arrangement to another. They’re usually paid by you and could be either a fixed percentage, ranging from 0.5% to 3% or a fixed fee, ranging from £1,000 to £10,000.
A final salary pension is a type of workplace pension that pays out a retirement income based on your earnings at the end of your career - this is known as your 'final' or 'normal' pension age.
What are the benefits of final salary pensions?
The advantages of a defined benefit pension scheme are that:
1) Guaranteed income
You and your loved ones will receive a guaranteed pension income in retirement
2) Increasing benefits
Your pension benefits increase each year by inflation or pay increases, depending on the scheme rules. Some schemes also offer protection if you’re ill while actively employed – check with your employer for details
3 ) Early retirement benefits
In some cases, they might include an early retirement benefit that allows you to retire before your normal pension age. Benefits can be payable from age 55, or sometimes earlier in cases of ill-health.
4) Tax-free cash
In many cases, it is possible to take a tax-free cash lump sum of up to 25% of your pension transfer value.
Risks in transferring a final salary pension
The risks in transferring your defined benefit are that :
1) Transfer value
By waiting you might have found that your transfer value would have gone up, which is likely if gilt and bond yields change.
2 ) Market conditions
Your investment option might not perform well during a down market, while others will do better during more favourable times. You won’t suffer any losses while still in the final salary scheme, as your pension is not linked to how the stock market performs.
3) Charges and costs
Transferring your benefits could incur pension transfer cost or fees from a pension transfer specialist, although these should be made clear to you before you decide whether to move.
4) Loss of guaranteed pension income
Whilst retaining your defined benefit at least you have some comfort as to the level of pension you will receive in retirement. By transferring this you potentially lose that guarantee, unless of course, you are able to transfer it to another defined benefit scheme.
What is a final salary transfer specialist?
A pension transfer specialist is a financial adviser is somebody who works for a firm that specialises in transferring final salary pensions out of the company scheme. They will provide you with all the information necessary to make an informed decision based on your circumstances and aims.
By undertaking a pension review they will let you know what the best options are for you and look at things like how kuch investment risk you can afford to takem
They specialise in advising on how to access the possibilities of moving a final salary pension. They can offer independent advice, and help you with completing all the appropriate forms.
The main types of specialists are:
1) Independent financial advisers
These may be self-employed or work for an organisation such as a bank or building society. They have more freedom to choose which schemes they’re willing to work with, so tend to have more flexibility over their charges and fees
2) Organisations’ own pension transfer specialists
Some organisations have their own staff dedicated to helping members understand what options there are available, including transferring benefits elsewhere if appropriate for them. This might mean using a specialist dealing on your existing scheme’s behalf, or another scheme’s adviser.
Can I Transfer My Final Salary Pension to a SIPP?
Yes, Final Salary Schemes can transfer into a SIPP.
The FCA and the Pensions Regulator require all Defined Benefit transfers, with a transfer value greater than £30,000, to be completed by a Financial Adviser, usually a pension transfer specialist. If your transfer value is less than £30,000 you can complete the forms yourself. If it is above £30,000 you MUST get a Financial Adviser to complete them for you or the receiving scheme may not accept the transfer.
Beware of pension scams
A pension scam is when somebody tries to get you to part with your pension savings by lying about how much pension income they can provide in retirement.
There are a number of signs that could help you identify a scam
1) They guarantee income or return on investments, which is not usually possible when gambling against stock market returns
2) They offer high returns that outpace the stock market, without explaining how this is achieved
3) They ask you to transfer money directly into their bank account, and don’t show any evidence of being regulated therefore legitimate
4) You have no paperwork from them showing who they are or what firm they work for etc. Such documentation may include registration certificates, business letters and proof of address. If it looks suspicious ask for this to be sent to you in the post.
How can I protect myself from pension scams?
If you’re offered a scam, don’t panic. Don’t hand over any of your money straight away
There are three things you should do if you think you’ve been approached by a scam
1) Check the FCA register to see if they are authorised and regulated
Remember not all firms on the register will be legitimate though, so it doesn’t mean they definitely aren’t a scam. TheFCA Register is available at www.fca.org.uk/register .
Search using company name or registration number OR use the ScamSmart search tool which narrows down results based on what type of scam you suspect it is (i.e cold calling).
2) Find out who they really are.
Get them to send a letter or e-mail with full contact details and a signature. If they refuse ask them where their office is and how you could visit them there.
They should give you a mobile phone number so you can call to make an appointment. If this is not possible do NOT meet them in person to talk about transferring your pension
3) Beware of pressure tactics
Scammers will sometimes claim that time is running out for you to transfer your money, or that they need access to your bank account now in order to provide advice. This isn’t true – there is no time limit to transfer your money. If you’re not sure – ask them to send you written advice.
Frequently Asked Questions
What is a final salary pension?
A final salary pension is a type of workplace pension that pays out a retirement income based on your earnings at the end of your career – this is known as your ‘final’ or ‘normal’ pension age.
What is a final salary pension transfer value?
In a final salary pension scheme, there is a value placed on the pension that you have built up. This is known as the ‘pension transfer value’.
What is a final salary pension cash equivalent transfer value?
A cash equivalent transfer value is an amount of money equal to the benefits you could buy with your benefits.
How do I transfer a final salary pension?
To approach a defined benefit pension transfer, contact a financial adviser who specializes in pensions (a pension transfer specialist) and ask them for financial advice on how to proceed.
