Questions to ask before transferring out of your final salary pension

Final salary pensions are what is known as defined benefit pensions. They are different from personal pensions (and many other workplace pensions) in that they promise a guaranteed income in retirement, for as long as the scheme member lives.

It is the responsibility of the scheme operators to make sure they have enough money to pay scheme members, not the members’ responsibility.

Of course, it is possible for the scheme to go bust, however these instances are fairly uncommon and in that event, they are covered by the PPF (Pension Protection Fund) up to 90% of their value.

Transferring a final salary pension almost always means moving it to a Defined Contribution scheme – a pension that does NOT always offer a guaranteed income in retirement, but rather one based on how much money is paid into the pension and how well the investments perform. It may be possible to use a DC pension to purchase an annuity that offers a guaranteed income in retirement, however the rate may not be as beneficial as a defined benefit scheme payout.

Investments don’t always increase in value, and in fact, some investments collapse, losing pension savers tens, even hundreds-of-thousands of pounds for their retirement.

Sadly, not everyone makes it to retirement. However, members of defined benefit pension schemes should know that their family may be better protected by the scheme.

Final salary pensions usually come with fairly generous Death benefits, which means a spouse may be entitled to a large portion of the pension benefits if the scheme member dies before retirement, and dependent children may also benefit substantially. Typically, this is around 50%, although in other cases it could be much more or much less depending on the scheme.

These benefits are not often replicated to the same levels with personal pensions.

Many people are persuaded to transfer final salary pensions because they are told they can have more money in retirement if they pull out their pension and invest it through a personal one.

But the financial markets aren’t always as predictable as that, nor as forgiving as we would like to think.

When leaving a final salary pension scheme, many people are given a critical yield calculation. This is the percentage by which the new pension has to grow in order to be worth as much as the old final salary pension, based on figures set by the regulator.

In many cases, due to investments underperforming, economic fluctuations (and even crashes), many new pensions fail to keep pace or exceed the critical yield, meaning they could be worth less than the final salary pension would have been by the time retirement comes around.

Final salary pensions promise to keep paying out until the scheme member dies, whether that’s 5 or 25 years or more into retirement.

The same cannot always be said of a personal pension. In many cases, once it is gone, it’s gone. Even buying an annuity with the personal pension may not match the pension benefits of a final salary pension scheme.

For those who were in good health and could expect to live a long-life, giving up that guaranteed, never-ending income may have been a mistake down to negligent pension advice.

It’s not just the amount of income in retirement that is in question when it comes to a final salary pension transfer, but whether there will be any income at all.

Transferring a final salary pension nearly always implies taking a risk as the money is then invested into the stock market.

As any honest adviser would tell you, investment values can go down as well as up, and in some cases they can become illiquid (the investment needs to be sold before you can draw your money, eg property) or even collapse completely.

It is not unheard of for people to transfer a pension worth hundred’s of thousands of pounds, only to have it reduced to nothing a few years later.

Many investments available through personal pensions such as SIPPs may not be protected by the FCA or FSCS and therefore compensation for an investment collapsing may not always be available.

The points we’ve made above outline some of the more crucial thinking points about the suitability of final salary pension transfers, and the answers to each one will be different for almost everyone.

But of course, there are other things to consider, including some potential benefits!

• Have you received a CETV or an ETV?
  A cash equivalent transfer value is the calculated vale of how much the benefits of a final salary pension are if they are transferred. An enhanced transfer value is like a CETV, but one that has been inflated in value, possible to incentivise transfer.
  The last decade has seen some very high transfer values to incentivise transfer, however it is often still beneficial for the pension firm to do this than actually pay what they promised in retirement.
• Are you dealing with a regulated financial adviser?
  Ever hear the phrase ‘follow the money’? If somebody is telling you that transferring your final salary pension is beneficial to you, also ask yourself if it is beneficial to them.
  Some financial advisers earn big Fees and Charges for telling people to transfer their pensions, companies, even if the advice they give is not in their clients’ best interests.
  The same goes for cold-callers and marketing companies. If you have been cold-called about your pension since Feb 2019, the chances are the caller was acting illegally, as cold-calling about pensions was banned.
• What age do you want to retire?
  The age you are able to retire may be influenced by your pension scheme. Normally, a pensionable age date is calculated when you join a scheme. This may be flexible at the discretion of the pension scheme operators, but it may be possible to obtain a more desirable pensionable age by transferring in some cases.