FINAL SALARY PENSION TRANSFER ADVICE

The definitive guide to Final Salary Pension Transfer

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TABLE OF CONTENTS

If you’re considering a final salary pension transfer, it’s important to get the basics covered first. So that you understand what it is that you’re dealing with.

We are qualified pension transfer specialists with over 17 years experience with Defined Benefit pensions and we also hold the Pension Transfer Gold Standard which holds us to a higher standard, ensuring you get the best advice available.

This guide is designed to give you basic, generic information, it shouldn't replace tailored financial advice If you'd like to talk about your pension get in touch today and our pension transfer specialists can help you decide what's right for you.

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What is a final salary pension?

Also known as a Defined Benefit Pension, these are the ‘gold-plated’ pensions you often hear about in the news.

A Defined Benefit Pension or Final Salary Pension guarantees its members a fixed retirement income for life (protected against inflation).

The amount you’ll get is normally calculated on your salary, how long you’ve worked for your employer and a calculation made under the rules of your pension scheme. This amount was often based on your salary at the end of your employment, hence the name ‘final salary’.

Final Salary pension schemes are generally far more generous than their Defined Contribution (Personal Pension) counterparts. In fact, they are often referred to as ‘gold-plated’ pension schemes for this very reason.

The Pension and benefits you will receive are pre-defined by your pension scheme administrators. Whilst each scheme is different in the full range of benefits it offers, members will receive:

A guaranteed amount of Pension income for life
Protection against inflation – the amount of money you receive goes up each year, normally in line with inflation. This protects the value of your pension over time.

Other benefits may include

a protected retirement age,
a survivor's pension for your Spouse/dependent children if you die (the amount varies by scheme)
the option to take a cash lump sum on retirement.

Historically you could find Final Salary pension schemes in both the public and private sector, but they have been rapidly disappearing from the private sector with few remaining open to new members.

The rarity and value of these schemes should not be underestimated.

How is a final salary pension calculated?

Each scheme has its own rules that set out the basis of accrual and benefits, but most schemes provide benefits based on 4 key elements:

The length of the pensionable service you were credited with as being an active member of the scheme i.e. how long you were working for your employer as an active member of your Final Salary pension scheme.
Your pensionable salary
The circumstances under which benefits are taken from the scheme (retirement, early payment, early leaver, ill-health, death etc.)
The formula or rate of ‘accrual’ set by the scheme administrators, which uses service and salary to work out your pension.

Accrual Rates: How do they work?

Your accrual rate will depend on the scheme you are in – could be 1/60, 1/80 or some less generous schemes could use 1/125. The example below shows how your accrual rate could affect how much money you get in retirement.

accrual rate example final salary pension

Working out your Cash Equivalent Transfer Value

The amount being offered for Final Salary Pension Transfers varies hugely from scheme to scheme with some schemes offering as much as forty times your pensionable income.

Factors that can affect your CETV include

1) Your age at the time of transfer request
2) Your scheme retirement age
3) You pension scheme's funding position
4) The performance of the scheme’s investments
5) Cost of living and inflation rates
6) Life expectancy of the ‘average’ scheme member

It is worth remembering that Pension scheme administrators have the right to adjust pension transfer values to protect the remaining members of the scheme. If too many people are transferring out and it’s threatening the financial health or future of the scheme, they can reduce transfer values accordingly.

If you're trying to work out your Cash Equivalent Transfer Value, some pension schemes will automatically update your CETV on your annual pension statement, in other schemes you will need to request it.

We have developed a Transfer Value calculator that you can use to give you a rough guide of what you could be offered but it is always best to request an estimate from your pensions scheme administrator.

Try our CETV Calculator

Use our simple CETV calculator to see what your transfer value could be

Get A CETV ESTIMATE

Should I transfer my Final Salary Pension?

For the vast majority or people, the answer to this question is generally, no. Final Salary Pensions provide valuable benefits that will be lost if you transfer out. And these benefits usually cannot be replaced on a like-for-like basis. For most people a Defined Benefit pension transfer is not in their best interests.

That said, whether or not you should transfer is entirely dependent on your individual circumstances and goals. It’s not possible to give you an answer to this question without doing a full analysis of your situation.

As general guidance though there are factors that will make it more or less likely that a transfer would be suitable for you, which you can consider before you explore further.

Questions to ask yourself before you transfer your DB Pension

Are you married or do you have dependent children?
Do you have relevant investment experience?
Are you comfortable with investment risk?
Is your DB pension a supplementary income source that you could comfortably live without?
Is your DB pension protected by the PPF?
Can you achieve your stated goals staying within your existing DB scheme?

Find out why these questions matter below:

Are you married or do you have dependent children?

Defined benefit pensions don’t just provide a guaranteed income for life for you, DB schemes usually provide a survivor’s pension for your spouse or dependent children.

If you’re not married and you don’t have any dependent children any money you’ve accumulated in your pension gets absorbed back into the pension scheme if you die, regardless of how long you have been taking your pension for.

Do you have relevant investment experience?

A pension is generally the largest asset most of us own.

In fact, for over half of married couples, the value of their pensions is worth more than the equity in their home.

Because of this, it's important to understand the gravity of taking on the decisions and risk associated with this kind of investment.

It's not the same as buying some premium bonds or "having a few grand" in a cash ISA.

You'll need to have an investment strategy that is designed to meet your retirement goals that also respects your appetite for risk.

It's a careful balancing act and not for the inexperienced investor

Are you comfortable with investment risk?

Some people are extremely risk adverse.

This is great if you have a Defined Beneft pension which pays you a guaranteed amount for life in retirement. But not so if you are trying to manage a long-term investment designed to pay you an income through retirement.

Investment risk is par for the course with a defined contribution pension (which is what you'll be moving to if you transfer). You invest your pension pot and it provides you with an income in retirement.

If you're not comfortable with risk then it's unlikely you'll be able to invest in a way that will provide a high enough return to cover your investments fees and beat inflation.

If investment risk is not something you're comfortable with then a DB pension transfer is not for you.

Is your DB pension a supplementary income source that you could comfortably live without?

Is your DB pension protected by the PPF?

Defined Benefit pension schemes in the UK are usually covered by the pension protection fund PPF, which protects Defined Benefit pension members if their pension fund becomes insolvent. It currently protects 90% of the value of members pensions (caps apply) and rises in line with inflation each year. The amount you can receive is capped but the majority of scheme members (99.5%) are not affected by this cap.

If your sole motivation for transferring your Defined Benefit Pension is a concern over the future of your scheme, it’s important to understand if your scheme is covered or not, because if it is, then a transfer for this reason alone is not justifiable.

Find out more about the Pension Protection Fund

Can you achieve your stated goals staying within your existing DB scheme?

This year alone we’ve spoken to several individuals whose sole reason for seeking a transfer was because they were worried that their spouse would not be able to survive on a reduced spouse’s pension (usually 50% of a member’s DB pension).

All were still in the 40s or early 50s with no ill health or reason to believe that they wouldn’t outlive their spouse.

We were able to solve their problem whilst keeping them within the safety and security of their DB pension scheme by simply recommending an appropriate life insurance policy that would cover any shortfall in their spouses income in the event of their untimely death.

This was a relatively low cost solution given the long-term cost and risk of transfer.

Other examples of this include individuals who want to access tax-free cash at 55, who were able to find the money they needed through other investments and cash savings.

Sometimes, all it takes is a quick call with an expert to realise that there are alternative actions available to you.

Reasons you might want to transfer

Whilst Defined Benefit pensions are highly valued (and valuable) due to their guaranteed benefits, they are, by their nature, inflexible, especially when compared to the flexibility offered by Defined Contribution pensions.

There are 6 main reasons you might consider transferring your Final Salary Pension

A high transfer value
Potential to access a larger tax-free lump sum
Flexibility to access drawdown from 55
Early retirement
Passing on wealth when you die*
Ill health
Tax-planning

*It’s worth noting that Defined Contribution Pensions and SIPPs can usually be passed on free of Inheritance tax to named beneficiaries. find out what happens to Defined Benefit Pensions when you die

Final salary transfer benefits explained

Wondering Is it worth transferring a final salary pension? We've explained the main benefits below:

A high transfer value

A high transfer value on its own isn’t a good enough reason to transfer, but transfer values have soared to such a rate that what may not have been possible previously is now made possible by the increase in value.

July 2020 saw transfer values reach their highest recorded level and the lure of a high transfer value is too great for some.

Graph of Defined benefit transfer value Index 2020 - transfer values reach highest level July 2020

Most people we’ve spoken to are in the enviable position that their Defined Benefit pension is surplus to their retirement income requirements, so they’d rather transfer it and have access to it as a lump sum.

Further reading_ Why are pension transfer values so high?

Potential to access a larger tax-free sum

April 2021 will mark 5 years since changes to pension legislation allowed private pension holders to access a 25% tax-free cash lump sum from their pension from 55.

It’s easy to work out 25% from a defined contribution pension, it’s just 25% of the value of your pot. Defined benefit pensions are different, because the ‘pot’ is a theoretical amount (since they’re guaranteed to pay out until you die).

For a selected few schemes, the lump sum is automatically offered in addition to your guaranteed pension income. More commonly this lump sum is offered at the cost of receiving a smaller starting pension, this is known as commutation. The bigger the lump sum you withdraw, the more future pension you sacrifice – and the reductions can be significant.

As with pension benefits, the commutation factor will vary from scheme to scheme. For example, a 12:1 commutation factor will mean a £1 reduction in pension for every £12 of tax-free cash.

Lump Sum Commutation Example:

Jude has a Final Salary Pension worth £16,000 a year.
Her scheme uses a commutation factor of 12:1 to calculate her cash lump sum.
She opts to take a £42,000 cash lump sum and a lower starting pension of £12,500 (a reduction of £3,500 per year), reasoning that she wants to pay off the remainder of her mortgage early.

Commutation example _ taking a tax free lump sum from a db pension

Using a 12:1 commutaion factor to work out a tax-free cash lump sum: 42,000 / 12 = £3,500

Commutation example _ what commutation means for your retirement income

If she retires at 65 and has an average 20 year retirement, she’ll have given up £70,000 of pensionable income (20 years of receiving £3,500 less) for her initial £42,000 lump sum (in today’s money).

Commutation example _ the real cost of your lump sum

It’s important to remember that once you have selected your choice of pension benefits, you cannot change your mind in later years. It’s crucial to get the right advice before you make a decision.

This is where you really need advice from a Pension specialist to decide if you might be better taking more as income and less as tax-free cash or leaving it in your Pension Fund.

Flexibility to access drawdown from 55

Pension drawdown enables you to use your pension pot as you wish from the age of55.

Unlike a defined benefit pension or annuity with a flexi-access drawdown you can, as the name suggests, access it flexibly. Which means you can take as much or as little as you want as often as you like, or not at all.

Pension drawdown isn’t for everyone; it’s crucial that you have the plans in place and the know-how to ensure your money actually lasts.

Because once it’s gone, it’s gone. Unlike an annuity or a Defined Benefit Pension, a drawdown pension is not guaranteed for life. So, you will need to manage your money meticulously to make sure it doesn’t disappear.

However, get it right and pension drawdown has some pretty impressive benefits:

It’s flexible - you can take more when you need it and less when you don’t
It allows you to manage your withdrawals tax-efficiently
You may be able to defer paying Life Allowance tax until you are 75
You can pass any leftover money onto beneficiaries, fully free of inheritance tax

When planning for pension drawdown, you will want to consider the impact on your income if you:

Live longer than you have planned for
Withdraw too much money in the early years of retirement
Invest in funds that don’t perform as well as you had anticipated

Early retirement

Final Salary Schemes normally have a fixed retirement age, so if you’re planning on retiring early this might throw a spanner in the works.

Early retirement might be possible but you’ll need to check whether there are penalties for doing so.

You will normally have to sacrifice a certain amount for every year you are below the fixed retirement age and you’ll also need permission from the Pension Trustees/your employer to retire early.

Some schemes (not all) have a Protected Pension Age, which may allow you to retire early. It’s best to check with the Pension Scheme Administrator to find out exactly what benefits you have attached to your Pension.

Defined Benefit pensions and ill health

Once you start taking your defined benefit pension you’ll receive the same guaranteed amount every year, even if ill health reduces your life expectancy .

If you die early your Spouse will continue to receive a guaranteed income but at a reduced rate (depending on the scheme rules). Any pension income is taxable and your spouse cannot pass on that benefit when they die.

If you were to transfer to a defined contribution scheme then you have a couple of options: you could take advantage of an enhanced annuity which could provide an increased guaranteed income for those with ill health

Alternatively, if you want to prioritise leaving money to your beneficiaries on death, you could transfer your pension to a defined contribution arrangement and take advantage of the inheritance rules surrounding personal pensions.

Whatever the reason, your health could have a bearing on whether or not a transfer is in your best interests.

Passing on wealth when you die

Defined benefit pensions are guaranteed for life, but what happens when you die?

They usually continue to pay a reduced survivor's pension to your spouse or dependent children, usually 50%.

If you’d rather leave your pension to someone else; grown up children, a family member or a charity, you’re stuck. The rules don’t allow for that. So you’re left with 2 options;

purchase a life insurance policy or
transfer your pension to a defined contribution pension where the rules are different and you can leave your pension to whomever you choose.

Defined Benefit pensions and ill health

Once you start taking your defined benefit pension you’ll receive the same guaranteed amount every year, even if ill health reduces your life expectancy.

Whatever the reason, your health could have a bearing on whether or not a transfer is in your best interests.

Tax Planning

Having a guaranteed amount of money land in your bank account every month isn't normally considered a bad thing, but if you are trying to balance your tax liabilities, you don’t have the flexibility to take less (or more) at any given time.

You may especially find this a restriction if you find yourself over the Lifetime Allowance amount.

If your Pension is over the Lifetime Allowance (LTA) your Pension Scheme Administrators will deduct the additional tax at source from your pensionable income, they’ll adjust the amount as soon as your pension becomes payable.

Under defined contribution arrangements, current tax rules allow wealthy individuals using Flexible Drawdown to defer the Lifetime Allowance Tax until they are 75.

By keeping income drawings within the LTA limits up to age 75 (and gaining the benefit of a largely tax-exempt investment account until that date), you can defer paying the lifetime tax surcharge on the value of your pension fund until you are 75.

More on this here…Lifetime allowance and Final Salary Pensions

If you have no need for the funds in excess of the LTA then you could consider leaving these invested in your pension. Although you will eventually have to pay the LTA charge at age 75, the funds will remain outside of your estate and won’t be subject to Inheritance tax.

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Final Salary pension transfer risks

The general advice for transferring your Final Salary Pension is – don’t, and for good reason.

Choosing to move a Final Salary Pension is an irrevocable decision, so even if the benefits of a Final Salary Pension Transfer appeal to you, you must also seriously consider the risks involved before making your decision:

The risks of pension transfer include:

Running out of money in retirement
Investment risk
Stress of managing your money
Triggering the Lifetime Allowance Tax
Loss of spouse's pension
Loss of inflation protection

Running out of money in retirement

With a final salary pension scheme you are paid a guaranteed, fixed amount, every year until your death (or the death of a qualifying financial dependent (if later).

According to the Office for National Statistics, a 65-year-old man has an average life expectancy of 86 (21 years), while a 65-year-old woman could expect to live to 89 (24 years). With one in four 65-year-olds today expected to live to 94 (men) and 96 (women), this makes a final salary pension a reassuring financial prospect.

A personal pension may offer flexibility, allowing you to take out varying amounts from your pension year on year, but once that money has run out, it’s gone.

It is therefore imperative with a personal pension to make a long-term financial plan and manage your money wisely.

You will need to consider such things as life expectancy, your lifestyle, and any financial dependents you may have.

Your plan should be one that will support you for as long as you need, most likely the rest of your life. So, it is reasonable to expect this to last 30+ years.

You may also need to make allowances for the fact you might live longer than you thought!

Couples also need to remember that an income will be required throughout both of your lives.

Find out what your average life expectancy is based on your age and sex using the ONS life expectancy calculator. You’ll also be able to see what are the chances of you reaching 100.

Our Pension Specialists use decumulation calculators to show individuals how long their pension will last at a proposed rate of withdrawal, so you can see, based on your average life expectancy how much you can afford to withdraw from a personal pension.

Of course, you could always outlive your average expectancy.

Remember, a Final Salary Pension pays out a guaranteed amount for life, regardless of what age you live to.

Investment risk

If you choose to transfer your final salary pension you will be responsible for investing your pension to provide you with an income for life.

Any investment carries risk. Investments can down as well as up and you may not get back the full amount that you invested. Which is why it is important to understand the level of risk you are going to be comfortable with.

With a Final Salary Pension scheme you are protected from market changes, and the amount you receive stays the same regardless* but one of the biggest risks of Final Salary Pension Transfer is giving up the certainty and safety found within the scheme.

With a personal pension, the amount of pension you receive will be dependent on the growth yet to be earned. It will be calculated by the size of your pension pot, when you plan to retire, how much money you plan to withdraw, and when you plan to withdraw it.

Things to consider before transferring out of your final salary pension are:

Your attitude to risk– if uncertainty causes you anxiety and sleepless nights you may be better off remaining in the safety of the scheme.
Your capacity for loss – if your final salary pension makes up a large proportion of your retirement income you need to consider how you’d cope if your investment went down? Could you still live comfortably if you had to survive on less?

It is always a good idea to run through your options with an Independent Financial Advisor/ Pension Specialist to ensure you are making the best decisions for your future.

* unless your scheme falls into the Pension Protection Fund, in which case 90% of your pension is guaranteed.

Stress of managing your money

Stress is not something you'd expect a financial advisor to talk about with you but it's important to discuss when considering if a pension transfer is in your best interests.

There's lots of talk of multiples, high transfer values, return on investment and other financial talk but the fact remains, even if the figures adds up, if the idea of managing your own pension through retirement and dealing with investment risk causes you stress, you probably shouldn't be considering a transfer.

Triggering the lifetime allowance

The Lifetime Allowance (LTA) is a limit on the value of payouts from your pension schemes that can be made without triggering an extra tax charge.

Under current tax rules, you can build up a pension fund worth £1,073,100 million over your lifetime, for both final salary and private pension owners. If the Lifetime Allowance is exceeded, an additional tax bill is payable from your pension pot.

It was reduced in 2016 and is currently set at £1,073,100. The Government has indicated that it will increase each year in line with inflation. Once you exceed this amount, you’ll pay 55% tax if you take your money as a lump sum or 25% tax if you take it as income.

How is Lifetime Allowance Calculated for Final Salary Pensions?

Lifetime allowance is calculated by your pension provider and is usually worked out on 20 times your first year’s pension plus your lump sum. This means someone with a £50,000-a-year pension income would still fall within the new £1,073,100 limit and could avoid the tax.

However, if they opt out of their pension and are offered a CETV greater than £1,073,100, they will trigger the LTA on anything paid out over that amount.

If you do exceed the LTA, your Pension Scheme Administrator will take the tax from your pension as soon as you start drawing it. The amount you receive will be reduced accordingly.

How is it worked out and payable for Defined Contribution Pensions?

For savers with defined contribution pensions, the lifetime limit is simply compared with the overall fund value.

Current tax rules allow for wealthy individuals to use Flexible Drawdown to defer the Lifetime Allowance Tax until they are 75. This can be achieved by keeping drawings within the LTA limits up to age 75 and gaining the benefit of a largely tax-exempt investment account until that date when the surcharge tax will become due on the excess value of the fund.

If you have no need for the funds in excess of the LTA then you could consider leaving these invested in your pension. Although you have to pay the LTA charge at age 75, the funds will remain outside of your estate.

You can find more information on the government website but we also recommend speaking to a Financial Adviser

Loss of spouse's pension

Final Salary pensions come with a provision to provide a guaranteed pension for life for your surviving spouse or dependent child when you die.

This taxable pension is payable immediately after your death and is adjusted for inflation for the rest of their life or a one-off payment may be made.

If you transfer your pension then any provision for your spouse or dependent children becomes your responsibility.

If you've run your pension pot down, either through taking too much money or through poor investment performace, they'll have less money to live on, and in the worst case, may not receive anything.

Plus, they then take on the responsibility of managing their pension through retirement.

It's important to understand the true value of these associated benefits when giving up a Defined Benefit Pension.

Loss of inflation protection

Inflation erodes the value of money over time.

As prices for goods and services goes up, your buying power goes down. Which is fine if your income is keeping up with inflation and not so if you have a fixed income that isn't.

Final Salary Pensions have inflation protection built in. They go up in value every year to protect your money from being eroded by inflation. So the value of your pension is protected.

Personal pensions don’t have this. With a personal pension, you will be reliant on your investments outperforming inflation to protect the value of your pension.

If your investments don't keep up with inflation you could find yourself spread thinly, unable to afford the same things you once could.

Download our definitive guide to pension transfers

Discover everything you need to know about Defined Benefit Pension transfer in our expert guide

Is a pension transfer right for me?

When you transfer your Final Salary Pension you go from an investment that is guaranteed for life and protected against inflation to one that is subject to all of the risks of a standard investment. There are a number of factors that affect whether or not it might be suitable for you to transfer your final salary pension including (but not limited to):

Your attitude to risk
Your aptitude for risk (i.e. can you cope if your pension value goes down)
Your age
Your short & long-term goals
Your investment experience
The value of other assets/pension/wealth you hold

Can I take my final salary pension at 55?

The rules around whether you can take your Final Salary pension at 55 will be different for each scheme so you’ll need to check with your pension scheme provider first.

All final salary pension schemes have a fixed retirement age at which they will pay out but the specific age is different for each scheme. Some schemes have a protected early retirement age below 55, but most are around the 60-66 mark.

If your scheme retirement age isn’t set at 55 you’ll need to look into your options for early retirement.

Whilst some DB pension schemes allow members to take early retirement, it normally comes with stipulations:

1) Firstly, You’ll need to apply for early retirement
2) Your estimated pension income will be discounted for the fact you are retiring early
3) If you’re eligible for a cash lump sum, that will also be discounted.

Your scheme rules will depict how much your pension might be discounted by in order to reflect your early retirement. It’s important to take proper financial advice, because once you opt for early retirement, your income will be fixed at that level.

Unlike defined contribution pensions where you can access 25% of your cash as a tax-free lump sum from age 55. Final Salary pensions, normally only give you the option to take a tax-free lump sum at the same time as you take your pension.

Because of the way Final Salary Pensions work, you don’t have a specific pot of money to take 25% from, so your scheme administrators will calculate how much you’ll get based on their own workings.

What you are offered may not be equal to the 25% you might receive if your pension was in a defined contribution arrangement.

Early retirement is calculated differently for each pension scheme, so it’s important to contact your scheme administrator to find out what rules apply to you. More importantly, you should seek expert guidance to see if it’s in your best interests.

Specialist pension transfer advice

Our Independent pension transfer advice is designed to help you meet your goals in the best way for you, whether that’s exploring your options within your scheme or moving your pension to a defined contribution arrangement.

TRANSFER ANALYSIS

First we start with understanding you and where you want to be.

We’ll discuss your goals, talk about the risks and benefits of pension transfer and carry out a detailed fact-find and analysis to see if transferring is really in your best interests.

REPORT & RECOMMENDATIONS

You'll receive an in-depth report that assesses your suitability to transfer based on your goals, risk assessment and your personal and financial situation.

You'll receive suggestions for alternative courses of action & our expert recommendation.

MANAGE & REVIEW

If appropriate and if you decide to go ahead with transferring your pension, we will seamlessly manage your transfer to your recommended arrangement, offer regular portfolio rebalancing and provide ongoing advice & support to ensure you stay on track.

BOOK A FREE INITIAL CALL

Frequently Asked Questions

How long does it take to transfer a final salary pension? (Timescales)

Once you receive your CETV (cash equivalent transfer value, you have 3 months in which to decide whether you will transfer or not before that offer expires. It’s important that you factor in the time it will take to receive the advice you need. Ideally before or as soon you receive your CETV.

Across the industry it’s not uncommon to hear of defined benefit pension transfers taking up to 6 months, sometimes longer.

Our streamlined process is far quicker than that and we can usually turn around your report and transfer recommendation in around 3-4 weeks as long as we have all of the information we need.

It’s an in-depth process, but since you’ll always deal directly with our Qualified Pension Transfer Specialist, there won’t be any unexpected delays from our end.

However, you should be aware that we may need to request additional information from your pension trustees in order to provide you with the advice you need and this may cause delays which are beyond our control.

Delays in the pension transfer advice process could cause you to miss your CETV transfer deadline and will result in you having to request a new transfer value. Transfer values are subject to change so this could work for or against you.

There are a number of other factors that can affect how long a pension transfer might take including:

How quickly you can obtain your CETV
Whether you provide all of the required information to your financial advisor at the start
How quickly your pension scheme provides all of the required information to your financial advisor
How fast your financial advisor is able to work
How long it takes you to set up a new pension
How fast your new pension provider works to set up your pension once transferred.

In terms of our client’s experience, we work quickly to ensure that all the information is requested early on so we don’t have unnecessary delays later.

Simon Garber, 2020 Financial’s Pension Transfer Specialist says:

“In terms of getting the advice you need, I would say 3- 5 weeks is a realistic timescale, if you have your CETV available and are able to respond to our information requests quickly. But we have spoken to clients who have engaged financial advisors whose timescales are 3-6 months.

Following our initial checks on the information provided and our subsequent fact finding conversations, clients receive a Comprehensive Final Salary Pension Transfer Report.

If you’re able to provide all of the information we need, you could expect to be in a position to decide whether a transfer is in your best interests within 3 weeks.

At that point if you decide to go ahead we will then take you to the next stage of setting up your pension and doing the paperwork for the transfer.”

Our pension transfer specialist says:

“We find many people procrastinate when they receive their transfer value. They’ll come to us with only 2-3 weeks until their transfer values expires (CETVs are only valid for 3 months from date of issue).

It’s simply not possible to request and receive all the information we need from the pensions trustees and the client within these timescales.

There’s a misconception that Final Salary Transfer Advice is effectively a ‘box-ticking’ exercise which simply requires a pension transfer specialist to sign a declaration based on the client’s desire to transfer. This is not the case.

I am required to provide detailed financial advice demonstrating a deep understanding of the client’s finances, goals, personal situation as well as analysing the pension benefits they are considering giving up.

I must be confident that the transfer would allow them to meet their objectives. I’m also required to

Correct any misconceptions they may have,
Suggest alternative ways to meet their objectives and also
Highlight any weaknesses in their retirement plans.

It’s a complete life strategy.”

What happens to your Final Salary Pension when you die?

Inheritance rules for a Final Salary Pension differ from scheme to scheme. Final Salary Pensions will normally pay a reduced pension of 50% to your spouse or dependent child when you die. Exactly how much, depends on when you die and the scheme you’re in.

Some schemes may also pay out a lump sum if you die in the early years of your retirement.

extract from What happens to my final salary pension when I die? Read the full article here.

Does a final salary pension payout on death?

If you die while you’re still paying into a final salary pension, you may get some form of life cover. Normally, if you die, it’s paid as a cash lump sum that is paid tax-free. The amount will depend on the type of scheme you belong to, but it is often based on a multiple of your salary or pensionable earnings.

What happens if I die as a deferred member?

A deferred member is someone who has stopped paying into the pension scheme. If you die after leaving the scheme but before taking your benefits i.e. you pay into the scheme but then move jobs, your Spouse may get a reduced amount. Depending on when you left they may work the benefits out differently, some may only pay a refund of your own contributions. You must check with your scheme to find out the exact rules for deferred members.

Some schemes may provide life cover, which could be a multiple of your pensionable earnings when you left the scheme, but this is not common and might be something to consider putting in place yourself.

Who gets your final salary pension after death?

If you are married or have a registered civil partner, your spouse or partner will normally automatically receive a reduced pension paid by your Final Salary scheme.

Can cohabiting and common law partners inherit Final Salary Pensions?

Historically, no. Final Salary Pensions only paid out to your surviving spouse or registered civil partner. However, a separate Supreme Court case in 2017 saw one long-term, cohabiting partner given automatic rights to her late partner’s pension.

This landmark case paves the way for other cohabiting partners to receive automatic rights to defined benefit pensions, experts warn against making assumptions about who will inherit your pension if you pass away.

The advice is still to always check your scheme’s provisions, as there may be qualifying conditions that apply to survivors pensions.

N.B. To avoid complications you may need to nominate your partner as your beneficiary whilst you are still alive.

Are children’s pensions payable?

Defined Benefit Pension Scheme’s may pay a survivor’s children’s allowance or a Spouse’s pension, but not normally both and will normally only pay a children’s allowance if there is no spouse.

Again, rules change depending on the scheme but normally to be eligible for a children’s allowance they must be under 18 (or under 23 if in full-time education) and they must be your own or adopted children or financially dependant on you.

The amount of children’s allowance payable is usually equal to the spouse’s pension and will be split equally between any qualifying children.

Children's pensions are not payable to non-dependent adult children. You will need to make other provisions.

Can a family member inherit a pension?

Some Final Salary Pension Schemes will make an allowance for dependent children i.e. a son or daughter who is under 18 or who is still in full-time education. But if you have a non-dependent adult child, a sibling or a parent that you support financially, it is unlikely that they will be eligible to inherit your Final Salary Pension.

Does CETV increase with age?

According to research by Royal London and LCP, CETV does increase the closer you are to your scheme's retirement age.

A joint research paper by Royal London and LCP showed that Transfer Values as a percentage of Transfer Value Comparator scores went up the closer members were to the scheme retirement age – which basically means the closer you are to retirement, the closer your transfer value is to the true value of your pension pot.

CETV DB Transfer values rise the closer you are to retirement

On average, If you opt to transfer your pension when you’re 10 years away from the scheme retirement age, you’ll be offered far less than if you were just 1 year away from retirement.

The reason being, scheme administrators will factor in that you have 10 years to invest your cash to make up the difference.

Depending on your investment strategy and market returns, this could work to your benefit or your detriment.

That being said, there are other factors that can affect transfer values which include:

Gilt yield values
The investment performance of your pension fund
The funding position of your pension fund
The way your pension scheme calculates inflation
The average life expectancy of scheme members.

Transfer values can go down as well as up by both small and significant amounts (over £100K) and we have seen both happen.

How Much Does a Final Salary Pension Transfer Cost?

Transferring your Final Salary Pension to a personal pension arrangement may give you access to a large lump sum and offer you the freedom to invest and spend your pension pot as you see fit, but there can be significant costs and fees involved.

The full cost of a Final Salary pension transfer will depend on a number of factors:

How much your pension is worth
How much you pay for pension transfer advice,
The costs of ongoing investments post transfer including any ongoing advice fees.

The value of your pension will usually affect how much a transfer costs you, since most work of this kind operates on a percentage of the value of your fund.

The cost of Pension transfer advice can range from advisor to advisor, so it’s worth shopping around to find the best deal for you, taking into account future advice costs and the costs of recommended products and associated platform charges.

Changes made by the Financial Conduct Authority in 2020 mean that contingent charging has now been banned. This means that you must be charged the same amount for advice whether you are recommended to or choose to transfer or not.

Regardless of who manages your money post-transfer you’ll be subject to investment costs depending on which investment products you choose.

The types of investment costs you might encounter include:

What is my CETV?

Your Cash Equivalent Transfer Value (CETV) is the amount you’ll get if you transfer out of your Final Salary Scheme. It’s not the same as your Pension Fund amount.

A Final Salary Pension Transfer Cash Equivalent Transfer Value is the amount offered in exchange for you giving up your entitlement to an adjusted for inflation and guaranteed-for-life pension.

The amount you’re offered should be a fair representation of the value of the benefits you are giving up. In reality, it’s almost always impossible to provide a like for like match of benefits from a Final Salary Pension in a defined contribution environment.

Your cash equivalent transfer value is decided by your pension scheme administrators and when deciding on a figure they’ll consider Factors such as

Your Age
Scheme Retirement Age
Cost of Living
Life Expectancy of the average scheme member
Scheme investment costs & returns

Your Cash Equivalent Transfer Value can change and it may go up or down over time. You can read more about why transfer values change here.

You can also use our Final Salary Pension Calculator to get an estimate of your CETV

Can I transfer my Defined Benefit pension myself?

If your Final Salary pension is worth less than £30,000 you are free to transfer your pension yourself without seeking advice.

If your transfer value is higher than £30,000 then it is a regulatory requirement that you seek ‘appropriate’ advice from a qualified pension transfer specialist. This means they will need to provide you with an in-depth report exploring your suitability to transfer and a personal recommendation to transfer or not.

Things a pension transfer specialist will consider:

Your age
Your financial situation and obligations
Your long-term goals and motivations for transfer
Any retirement plans you have
Your general health and life expectancy
Previous Investment experience
Your understanding of and suitability for the risks involved in pension transfer
Future Investment strategy

Almost all of the big pension providers and platforms now require you to have a positive recommendation to transfer. Which means, if a pension transfer specialist has deemed it not in your best interests to transfer, you may find it difficult to transfer your pension yourself.

Whilst this might seem frustrating, these rules are designed to protect you and your pension in the long term.

Even if you are able to transfer your pension yourself you should be very careful about doing so.

Whilst some pension providers make pension transfer sound like the sort of thing you can do over a cup of tea, doing so could prove extremely costly to your future.

Protecting valuable pension benefits

Defined Benefit pensions have incredibly valuable benefits attached to them which will be lost if you transfer.

Pension Benefits could include (but are not limited to):

Protected pension age (for early retirement)
Guaranteed income for life
Tax-free cash
Life insurance
Spouse/survivor's pension provision

So it's important to have a Pension Transfer Specialist take a look at your old pensions and make sure that you haven't missed something that you might regret giving up.

Better safe than sorry.

The problem with self-management & pensions

In the age of robo-advice and easy ways to invest, it might seem like a good idea to manage your pension yourself but the research makes for grim reading.

Research by Insurance giant Zurich found that almost 41% of those in drawdown without financial advice will run out of money in retirement.

The research found that a large percentage of self-investors were unprepared and uneducated about the risks they were taking on. Despite that many were choosing to go it alone without consulting a financial adviser.

If your motivation for consolidating your pension yourself is to save money, you should consider the high cost of making a mistake and also look at the research published in 2019 showing that, even when you take fees into account, those who take Financial Advice end up on average nearly £50,000 better off over a decade.

What happens to a Final Salary Pension in Divorce?

If you have a Final Salary Pension and you’re getting divorced, it is possible to share part of your pension with your ex whilst you remain a member of the scheme.

For Defined Benefit schemes where a transfer is not possible, your ex can be made part of the scheme and receive the awarded proportion of your pension entirely separately from yours.

Of course all of this needs to be agreed by a solicitor and signed off by a court as part of a financial settlement.

If you choose to split your assets differently, you may wish to access your pension more flexibly, for instance to buy a property. In which case you may consider whether a pension transfer could be for you.

Regardless of whether you have a defined benefit pension or have transferred to a defined contribution arrangement, you won’t normally be able to access your cash before you are 55.

Should I Transfer My Final Salary Pension to a SIPP?

For the vast majority of those opting to transfer out of a DB pension scheme they seek to transfer their final salary pension into a SIPP.

The main reasons for this being that a SIPP (self invested personal pension) offers flexibility not found in a DB arrangement.

Pros of a SIPP

The main pros of a SIPP are that they allow you to:

1) Access your pension from age 55
2) Flexibly access your money through flexi-access drawdown
3) Access up to 25% of your pension tax-free from age 55
4) Pass wealth to any beneficiary free of inheritance tax
5) Adjust your income for tax purposes
6) Defer lifetime allowance tax by keeping yourself below the threshold until age 75
7) Choose how and where you invest your money
8) Manage your own investments

Self-Invested Private Pensions offer a level of flexibility that Defined Benefit pensions cannot offer. However, they also come with risk and costs not encountered in DB schemes.

SIPP Risks and Costs

Investment Risk

All investment carries risk. Investments may fall as well as rise and that’s just something you need to be comfortable with as an investor. Managing investment risk is a delicate balance of making sure you balance potential returns with appropriate risk.

It’s important to make sure that your investments are diversified and that your portfolio is designed to meet your individual goals.

In an ideal world, our investments would always outperform the market, of course, this is rarely the case. It’s important to review your investment performance regularly to assess performance over time.

It’s important to make sure that your investments are performing at least in line with the market and to decide when it’s appropriate to switch out of investments that might have previously performed well, but are no longer doing so.

Investment Cost

Much has been written about the high cost of some investment products, with some so-called ‘experts’ claiming that you should always go for the cheapest investment options to maximise your returns. In our experience this simple isn’t true.

Whilst there are undoubtedly high-cost investment platforms and products that do not represent good value for money, some of the cheaper products simply don’t offer the same performance or breadth that their more expensive counterparts are able to.

What this means, as an investor, is that you need to do your homework and look beyond headline prices. This is where a trusted financial advisor can offer invaluable advice to help you make better investment decisions.

A low cost investment might sound great but if it continually underperforms the market, you could be making a costly decision.

Unregulated Investments & Scams

Some personal pensions are protected by The Financial Services Compensation Scheme. However, the flexibility of a SIPP means that you can hold all sorts of investments within your pension portfolio. Currently this means you can hold unregulated investments that are not protected should they fail.

Inexperienced investors can easily fall prey to scammers promising high returns with little to no risk. Rogue companies misrepresent the risk of their investments and will often claim that they have guarantees that in reality mean nothing and could leave you with nothing.

It’s important to remember that if it sounds too good to be true, it usually is. Only invest in regulated investments within your SIPP to avoid exposing yourself to this kind of risk when choosing to transfer a final salary pension to a SIPP.

When is the Best Time to Transfer a Final Salary Pension?

Deciding when is the right time to transfer a Final Salary Pension can be difficult, especially since the decision is irrevocable.

The fact is, if a pension transfer is appropriate, there’s no right or wrong time to transfer your pension. If you have a solid rationale and the numbers stack up there’s no reason not to do it earlier. That being said, there’s no rush to do it either.

Since you can’t access your money until you’re 55 anyway, common sense would suggest holding off until you’re older and have a clearer idea of what you want your retirement to look like, in fact, many firms will not offer a positive recommendation to transfer for those under 50 years old.

Research shows that the closer you are to your retirement age the higher the transfer value you’ll be offered, which could be another reason to delay transferring your pension.

On the flip side, if you transfer your pension into a SIPP earlier and experience favourable investment returns, it could be possible to offset a slightly lower transfer value with investment growth.

“Time in the market is better than timing the market.”

It’s important to focus on your goals and the facts in front of you rather than try and chase a higher transfer value or fixate on finding the best time to transfer your final salary pension.

We’ve seen potential clients get burned trying to chase higher transfer values, they’ve seen changes to the market and requested a new CETV thinking it would be higher and it’s come back several tens of thousands of pounds lower.

Equally, we’ve seen clients revisit a pension transfer a year down the road to be offered a transfer value that is several tens of thousands of pounds higher, it’s not something you can predict.

FCA Advice on Defined Benefit Pension Transfers

What is the Pension Transfer Gold Standard

The Pension Gold Standard is a voluntary code of good conduct for financial advisors. It was set up by the Pensions Advice Taskforce* to make sure people receive ethical and professional advice for Final Salary Pension Transfers.

Whilst it is a regulatory requirement that all financial advisors pay due regard to the interests of their clients, and treat them fairly, The Gold Standard defines 9 core principles that a financial advisor must stick to.

What this means is that The Gold Standard enables you to find an advisor with your best interests at heart, who operates in an ethical and professional way, above and beyond what is usually expected from them, when assessing your pension transfer options.

Read the full article here

The 9 Pension Transfer Gold Standard Principles

Help clients understand when advice is appropriate.
Ensure advice given supports the clients overall financial wellbeing in the context of their stated objectives.
Ensure client understanding and acceptance of all charges.
Ensure the most appropriate and updated technical skills are applied.
Transparent management of Conflicts of Interest.
Help clients understand the cost of transferring benefits.
Avoid unregulated investments and introducers.
Transparency in advice processes and outcomes.
Promote the Consumer Guide to the Pension Transfer Gold Standard.

Download the Pension Transfer Gold Standard guide for consumers here