How much do you know about final salary pension transfers?
The decision to transfer a final salary (defined benefit) pension is a big decision and one that shouldn’t be taken likely. It is a subject that received considerable media coverage in 2017 due to the unusually high transfer values on offer to holders of defined benefit (DB) pensions.
What are final salary pensions?
More often called defined benefit pensions a final salary pension is a workplace pension that pays you a guaranteed annual income for life. This is in contrast with an ordinary workplace pension where your returns will be the amount saved plus the returns on your investment, less the scheme charges. It is possible to transfer a final salary pension into a defined contribution pension pot creating a lump sum of money known as the ‘transfer value’, this will normally be many times that of the annual pension given up. However in transferring out you are giving up significant benefits which can be expensive to replicate, so careful consideration is required.
Frequently described as a ‘gold plated’ pension, defined benefit pensions are increasingly rare as fewer employers offer them, and those schemes that remain are often shut to new members. Despite being so highly sought after, many holders of DB pensions have been tempted to transfer their final salary scheme into a defined contribution pension scheme. This decision isn’t only due to a high transfer value but also so a pension holder can benefit from pension freedom which isn’t available to DB holders. This means that funds can be invested or withdrawn as desired after the age of 55.
What should I consider?
Whilst almost all defined benefit schemes provide an excellent way of saving for retirement, it worth considering if the scheme is the most suitable way of saving for your retirement. For examples does your DB scheme:
- Increase in line with inflation and if so for how long?
- Include your spouse or partner in your scheme?
- Include your children in your scheme?
Will I need advice?
If the pension transfer value is over £30,000 then the law requires you to seek financial advice before the transfer can be made. However it can be worth getting advice even on smaller transfer values as the decision will have a big impact on your future. Research from Royal London in 2017 found the number of transfers out of final salary pension schemes on the rise. Transfer values were substantial with an average transfer value lying between £250,000 and £500,000.
Get advice from an adviser
Considering all of your options is essential, if you are interested in finding out more we can arrange a free initial review of your final salary pension with an FCA registered financial adviser.