Final Salary & Defined Benefit DB pension transfers guide (2019)

- This Guide was written by James Ford 18th March 2019

Final salary pension schemes offer a guaranteed level of income during your retirement for the remainder of your life. Typically a widower spouse’s pension subsequently. A final salary pension is a type of Defined Benefit (DB) pension. There are two main forms.

  • Final salary pension – a post-retirement benefit that is based upon your salary at the time of retirement.
  • Career average pension – this is a post-retirement benefit, which is based upon the average of your salary throughout your career with your employer.

The amount of income you will usually from receive a defined benefit pension is based upon several factors. The amount of years that you have been with that employer & contributing to the DB scheme. Your pensionable salaries.  With final salary schemes it is your salary at when you retire. Career average schemes are based on your mean salary through your career. The pension schemes accrual rate. This the proportion of your earnings. Which you will receive for each year that you have been a member of the scheme. This is commonly represented as a fraction, 1/60th.

What is a Final Salary Pension Transfer?

It when you transfer out of a defined benefit scheme and you agree to leave your employer’s workplace plan in exchange for a cash lump sum. By transferring out, you will give up a guaranteed income for life. Also, any other or enhanced benefits entitlement within the plan.

This cash lump sum is commonly known as the plans Cash Equivalent Transfer value (CETV). The CETV represents the projected cost of providing the benefits in the scheme. Thus it requires assumptions to be made in relation to the benefits and the members future.

Areas that are considered for assumptions when your scheme calculates a CETV will include the following:

  • Your stated retirement date.
  • Interest rates.
  • Mortality rates.
  • Long-term investment bond yields.
  • Running costs and charges.
  • The rate of the fund investment returns.
  • Rate of inflation.

If you decide to go ahead with a final salary transfer then you need understand the risk that occurs with the above. If any additional factors are not inline line with the factors used for the assumptions made.

Things to consider are the cost of securing an income is more than expected or if the scheme fund performance is poor. This would mean that you would not be able to equal the benefits that the DB scheme would have provided.

If you decide to go ahead with a final salary transfer then you need understand the risk that occurs with the above. If any additional factors are not inline line with the factors used for the assumptions made.

Things to consider are the cost of securing an income is more than expected. Also if the scheme fund performance is poor. This would mean that you would not be able to equal the benefits that the DB scheme would have provided.

Since the government and Financial Conduct authority (FCA) implementing Pension Freedoms in April 2015. Also then by transferring to a new money purchase. You will then have all the benefits of the newer schemes such as Flexi-access drawdown.

The high CETV is a reflection of the high costs that are occurred by providing a final salary pension. Although the access to the benefits through the Pension Freedoms might on face value appear tempting. However, in reality a final salary pension transfer would only be suitable for a minority of members.

Frequently asked questions (FAQs)

You might be offered a CETV by your current pension provider. This sets out what they will they offer you and the terms if you were to leave the pensions scheme. If you have not received a CETV. Then you can request a Cash Equivalent Transfer Value from your provider.

If you have received a CETV then this information can be used to evaluate. How good the offer is for the level of guaranteed pension income that you would receive in retirement. This can be done using a final salary pension calculator.

PLEASE NOTE: That the CETV once received is only valid for three months. To request an additional CETV your pension provider may charge you a few hundred pounds.

Frequently public sector workers are members of final salary schemes. This include NHS employees, armed forces, firemen, teachers and police. These are known as ‘unfunded’ schemes. The pensions provided are guaranteed by the government as opposed to using by an underlying investment fund. It is not currently possible to leave the scheme. An exception to this is the local government pension scheme, which is funded. Therefore, is typically possible to transfer from this plan.

Please note: That the same rule of thumb applies here: whilst a transfer is still possible, it is most likely only a viable option for a small numbers of scheme members. The main question with a final salary pension, is should I leave my final salary scheme. As opposed to can I transfer my final salary scheme. Although there are benefits to such transfers, this would again be only in small percentage . An example is that if your anticipated pension scheme is the majority or if not all of your pension assets then it most that transferring out with not be suitable for you.

If you currently are or have the option to become an active member of a final salary scheme. Then it would only be in exceptional cases (or if you have enhanced benefits such as a protected lifetime allowance). That you should consider not joining or leaving the final salary scheme.

If you are currently a member or have been offered to join a final salary scheme and you have accrued deferred benefits in other schemes. Then you should if you are able to transfer the deferred into your final salary scheme. To assess if you should transfer your final salary pension would depend on your individual requirements and personal and financial circumstances.

Other factors that would need to be considered before a transfer could be recommended.

These would include:

  • Your needs and objectives
  • Your assets and pensions
  • Your Cash Equivalent
  • Transfer Value (CETV)
  • Your Attitude To Risk (ATR)
  • Your investment experience
  • Your life expectancy

PLEASE NOTE: Transferring out of a final salary scheme is irreversible. Also, you need have first to have received advice from a qualified financial adviser before you can transfer into a money purchase scheme.

Since the introduction of Pension Freedoms legislation, there have been significant changes. These have arguably made it more favourable in relation to the tax regime. The 55% death tax has been removed from a deceased’s pension. In addition to this pensions are not including in your estate for Inheritance Tax IHT.

With a money purchase pension If you died before 75 then the beneficiaries will not have to pay income tax on the benefits drawn, after 75 then they will have to pay income tax at their highest rate.

The tax treatment differs according to individual situations and is subject to change.

Advantages and disadvantages of transferring a final salary pension

Without a doubt the main advantage of a defined benefit scheme. Is that you will receive a guaranteed income for the remainder of your lifetime. This is usually inflation linked and provides a widower’s pension for the surviving partner. You will lose these advantages as a result of a final salary pension transfer.

Defined Benefit DB pension transfer advantages

The high CETV values been offered have continued to be unchanged since the height in 2016.

Factors that have contribute to the rising cost of providing final salary scheme benefits include. The low Rate of Returns (ROR) received from government bonds and the cumulative growth in life expectancy rates. Historic low Annuity rates.

Increased transfer values are also due to employers wishing to reduce the level of risk on their accounts. That final salary pension schemes represent.

By transferring your final salary scheme, it will allow you to capitalise on the current high CETV’s. However you should note that this is due to the increasing costs of providing a pension income.

Defined Benefit Pension Transfer Value Calculator​

If you’re curious and looking to do some rough sums to see if a pension transfer could be right for you then you can use this Final Salary Pension Transfer Calculator to give you a better idea of what you might be offered as a transfer value.

Across the market there is a wide range of transfer values on offer – normally between 20-25 times your pensionable income, although some schemes provide transfer values more than double other schemes, reflecting the wide range of methods used by pension scheme administrators to calculate transfer values. Your pension scheme administrator may print your CETV amount on your annual statement or you may have to request it.

Our Final Salary Pension Transfer Calculator offers you a realistic high and low range CETV estimate, based on current industry averages, on which to base your calculations.

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