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Should I transfer my final salary pension?

Deciding whether to transfer your final salary pension, also known as a defined benefit pension, is a big decision and one that you should consider carefully.

While there can be benefits to transferring your final salary pension, there are also risks involved that are important to be aware of and consider.

Read on to find out more about the benefits and pitfalls of transferring your final salary pension.

What is a final salary pension?

Final salary pensions are common amongst the public sector and guarantee an annual income for life based on an individual’s final or average salary.

Employers pay into a central fund on the behalf of the employee. A retirement age is assigned and your pension is paid from this date.

The amount you’re entitled to is determined by the scheme accrual rate and the number of years you’ve worked.

For example, if the NPA (Normal Pension Age) is 60, the accrual rate is 1/80th of your salary. If the NPA is 65, the rate is 1/60th.

Here’s a working example of what this could mean to your finances if the NPA assigned is 60:

Your final salary will be divided by 80 and multiplied by years of service. So if you have a final average salary of £40,000 and have worked for 25 years, the sum will be: 40,000/80 x 25 = £12,500. You will receive this yearly when you reach the pensionable age, you may also be entitled to a lump sum depending on the scheme.

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What are the benefits of a final salary pension?

Finally salary/defined benefit pensions are one of the most secure, if not most secure, pension schemes around.

This is because they give you a guaranteed income when you retire, which is something that’s difficult to retain upon transferring away from a final salary pension.

A final salary pension is also managed on your behalf, which can save people a lot of time and stress.

And because of the guaranteed nature of a final salary pension, your money is more secure than other alternatives, which may include high-risk and volatile investments.

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Why do people transfer their final salary pension?

There are some benefits to transferring your final salary pension, but these are largely outweighed by the risks and disadvantages.

One benefit is that transferring your pension will give you more flexibility and greater access to cash.

Since 2015, individuals have been allowed to transfer from a final salary pension scheme to a defined contribution pension. This means people can withdraw a lump sum or their entire savings from their pension pot from the age of 55 to give them greater control over their money.

Further to that, if you die under the age of 75 your savings will be free of inheritance tax. However, if you die aged 75 or over, these funds will be subject to inheritance tax, so your heir will receive less inheritance as a consequence.

What are the risks involved with transferring a final salary pension?

There are a number of risks involved with transferring a final salary pension that are important to be aware of.

For one, you will be transferring away from a guaranteed income. Final salary pensions are among the safest and most secure pension schemes available, so there will always be a financial risk in leaving one.

When transferring a pension into a scheme, you are open to volatile markets, hidden fees and charges and even mis-leading advice. This can end up costing you large sums of money when you’d have otherwise been better off remaining part of a final salary scheme.

Final salary pensions are also managed on your behalf. By transferring from your scheme, you may have to invest time in managing your pension pot yourself.


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What is a mis-sold final salary pension transfer?

Unfortunately, when someone is encouraged or decides to transfer their final salary pension, they can be open to unscrupulous financial advisers who offer mis-leading or negligible advice.

The FCA (Financial Conduct Authority) found in 2018 that 50% of final salary transfers were unsuitable for the client.

For example, if you were advised to transfer your pension on the promise you were guaranteed a positive financial return, you may have been mis-sold.

Other examples of pension mis-selling occur when a financial adviser advises inexperienced investors to transfer into high risk schemes or weren’t completely transparent about additional fees and hidden costs.

You can find out more about mis-sold final salary transfers here.

Should I transfer my final salary pension?

It’s little wonder that regulators such as the FCA are tightening the screw on financial advisers who are advising clients to transfer from their final salary pension.

While it may be tempting to transfer with some of the cash involved,often promises of handsome returns are mis-leading and don’t come into fruition. Many people have ended up losing large sums of money as a result.

There are some benefits to transferring your final salary pensions, but it’s really important to be diligent throughout the process. When considering transferring your pension, make sure you:

  • Get full disclosure on hidden costs and fees
  • Make sure the investment you’re transferring is suitable for the risk you are want to take
  • Be wary of pushy financial advisors pressuring you to transfer
  • Be absolutely confident transferring is in your best interests
  • Get independent pension advice before committing


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