All You Need To Know About Final Salary Transfers

As more and more people are transferring what were once regarded as gold-plated final salary company pensions to more flexible personal pensions, we're in conversation with a well-known pensions expert, William Burrows, to help make sense of this complex area.

final salary transfer

William Burrows is Retirement Director at one of the UK’s top retirement advisers, Better Retirement, and has advised clients on all aspects of pensions at retirement for over 25 years.  As William says...

I don't know all the answers, but I know the right questions to ask.

About William Burrows

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Just remind us, exactly what is a defined benefit, or final salary pension?

A final salary company pension pays the member (the person who has worked for the company) a guaranteed lifetime pension starting at their retirement date. 

The pension is calculated with reference to their salary and how long they worked for the company. 

The pension is paid directly out of the pension scheme which has been funded by the employer, and the member may have also paid into the pension scheme as well.

Why are final salary pensions sometimes called gold-plated pensions?

There are two reasons for this.

First, the pension is often very generous compared to how much the member has paid into the scheme.  Some people didn’t have to pay at all, but remember, the final salary pension was part of the salary package for their work, so it’s their money just saved up for them.

Secondly, the amount of pension someone will get is guaranteed, unlike personal pensions where the amount of pension income depends on investment returns and how much has been saved.

So why are so many people transferring out?

There are three main reasons why some people are transferring out of their final salary pension.

1. They are being offered a large lump – the multiple of pension to lump sum is very high.

2. They don’t trust their pension scheme.

3. They want to take advantage of pension freedoms, especially the better death benefits.

Hang on, there's a lot of jargon here.  What do you mean by the ‘multiple of pension to lump sum’?

One of the rough and ready ways of looking at final salary transfers is to look how big the transfer value is compared to the pension promise. 

For example, if someone was promised an inflation proofed pension of £10,000 and were offered a transfer value of £220,000, this is a multiple of 22.

Some people are getting multiples of 30 plus, and some as high as 50.  So it seems to be a lot of money.  However, you should remember that the reason transfer values are so high is that interest rates and annuity rates are very low, which means you need a lot of money to secure a guaranteed income.

Why don’t people trust their pension schemes?

You only have to read the papers to see how some big companies are struggling to keep their final salary pension promises.  Although members are protected by the pension lifeboat, if a scheme can’t pay its pensions, it is a very big worry to people.

What about pension freedoms?

In the past, most people were happy to get a regular secure income without having to make complicated financial decisions when they retired.  But today, many people have more complicated circumstances and they want to have more flexibility and control over their pensions.  After the age of 55 (under current rules), people can access their pension as a lump sum, as a guaranteed lifetime income, for example an annuity, or through pension drawdown.

With the pension freedoms, not only can people decide how much income to take and when to take it, but also on death, their pension pot can be left to the family.  If death is before age 75, there is no tax to pay and after 75, tax is due on any money paid out to beneficiaries.

What are the risks of transferring out?

In simple terms, the risk is that people will lose out by managing their own pensions compared to being paid a company pension.

It is very hard to compare the benefits of a regular income compared with the benefits of the flexibility of drawdown.  But essentially, there is trade-off between the security and peace of mind of a guaranteed income, the flexibility to control the investment strategy, the ability to decide how much and when income is taken, and the option to leave money to the family.

When I discuss final salary transfers with people, I make sure all the risks are discussed and they weigh up the benefits of staying with the company pension compared with the benefits of transferring to a personal pension.

So what are your top tips for anybody considering a final salary transfer?

My top tips are as follows:

  • Start speaking to a specialist pension adviser as soon as possible: they will explain the advice process and how to go about weighing up the advantages and disadvantages of a final salary pension transfer.
  • Agree with your adviser what services they are providing and their fees, bearing in mind there are two aspects to their advice:
  • i. The technical analysis of the transfer value: does it make sense in light of your circumstances and your risk profile.

    ii. The features of the new personal pension: the investment options and income options.

  • Make sure you understand all of your options as you will probably have more than you realise.
  • Don’t under-estimate the benefits of your existing pension scheme, because they might be more valuable than you appreciate.
  • Discuss your plans with your family, because any decisions about your pensions may affect them.
  • Separate the facts from the fiction.  There is a lot of loose talk about pensions, so make sure you don’t act on the wrong information or facts.

Finally, if someone is thinking about transferring out of their of final salary pension, what should they do?

The quick and only answer is to speak to a specialist pension adviser.

In fact, if the value of the pension transfer is more than £30,000, regulated financial advice is mandatory.

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