Final Salary & Defined Benefit DB pension transfers guide (2019)
- This Guide was written by James Ford 18th March 2019
Transferring out of a final salary pension is unlikely to be in the best interests of most people.
Final salary pension schemes offer a guaranteed level of income during your retirement for the remainder of your life. A final salary pension is a type of Defined Benefit (DB) pension. There are two main forms:
- Final salary pension – a retirement benefit that is based upon your salary at the time of retirement.
- Career average pension – a retirement benefit, which is based upon the average of your salary throughout your career with your employer.
Both types of pension provide valuable benefits, the biggest of which is something called ‘index-linking’. This means that your pension income is guaranteed to rise each year so it can keep up with rising prices in the future. This protection is usually capped at 2.5% a year, although, in some cases, it’s linked to the Retail Prices Index measure of inflation.
Other benefits of final salary pension schemes include:
- death-in-service payments to spouses, partners or dependants if you die before reaching pensionable age
- full pension if you have to retire early through ill health
- reduced pension if you retire early, although this can’t be done before the age of 55.
What is a Final Salary Pension Transfer?
A pension transfer from a defined benefit (salary-related) pension scheme means giving up your scheme benefits in return for a cash value which is invested in another pension scheme. By transferring, you give up a guaranteed income for life and any other benefits you would have been entitled to under the scheme.
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.
Defined Benefit DB pension transfer advantages
The high Cash Equivalent Transfer Values (CETV) values being offered have continued to be unchanged since the height in 2016.
Increased transfer values are in part due to employers wishing to reduce the level of risk on their accounts that final salary pension schemes represent. The factors that have contributed to the rising cost of providing final salary scheme benefits include the low Rate of Return received from government bonds, the cumulative growth in life expectancy rates and historic low Annuity rates.
By transferring your final salary scheme, it will allow you to capitalise on the current high CETV’s in addition to the favourable benefits afforded by new Pension Freedoms Legislation including being able to tax efficiently pass on the benefits as part of your estate.
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. You will lose these advantages as a result of a final salary pension transfer and it is irreversible. You must seek advice from a qualified financial adviser before you can determine if transferring to a money purchase scheme is right for you.
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.
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 our 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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