Are You A Deferred Member of a Final Salary Pension Scheme? If So, Read This!



Posted on: 30th May 2017

I’ve been a fully qualified financial adviser for well over 20 years now. For approximately 19 of these years, you wouldn’t touch a transfer away from a Deferred Final Salary Scheme with a barge poll.

However, things have changed dramatically over the past couple of years. Cash Equivalent Transfer Values (CETV’s) have increased hugely in value over recent years. Meaning that pension members could well be sitting on an enormous pot of potential, without realising it.

The CETV is a one-off lump sum offered by the trustee’s in return for giving up a ‘promise of income’ that was secured at the time a member left a Final Salary (or Defined benefit (DB)) scheme.

Real Life Final Salary Pension Transfer

The following is a real-life case study. A client had been a member of the Lloyds Bank final salary pension scheme for 15 years, leaving it in 2005. The scheme was a 60th scheme which means that he accrued a ‘promise of income’ of 1/60th of his final salary for each year he was a member of the scheme.

So, 15/60th equals 25% of his final salary. He was on about £30,000.00 therefore he’d accrued a ’promise of income’ of £7,500.00 at the time of leaving the scheme (this in turn revalued annually by a limited price index, with no investment risk, right up to Normal Retirement Date (NRD) of 62 years old). Not a bad part of his retirement planning?

Requesting a CETV

Our client first applied for his Cash Equivalent Transfer Value (CETV) in August 2009. He said that he remembered thinking at the time that it was an insult! and stood at £57,000.00. Historically this was typical and as such we almost NEVER used to recommend giving up valuable deferred Final Salary schemes in return for a CETV in the past. Frankly he would have been bonkers to have considered moving away at that time. So, he didn’t.

He made a point of requesting an up to date CETV every year thereafter and watched it rise gradually as he got nearer to his NRD and as annuity rates, interest rates and inflation kept falling.

Huge Rise in Cash Value of Pension

The CETV then started to rise quite dramatically around 2014 and by August 2015 it had reached £254,000.00 you might think that he might have transferred it at that point, but as all the factors that increase CETV’s didn’t seem to be going anywhere to his detriment he held firm.

In August 2016 the 10 year gilt yield hit an all-time 300 year low point of 0.57% (as sad as it seems he’d been tracking it for years!) and that was very good news for CETV’s. It was time for the August 2016 CETV! It came out at £324,900.00….. that’s a 570% increase in 11years.

Now, assuming as 2.5% annual revaluation of his £7,500.00 gpa (up to 62 years old) he’d be due a risk free, annually increasing, income with a 50% spouses pension of approx. £14,500.00 (A) He’s not married and has no dependent children. Therefore, if he’d died as a deferred member his estate would only receive 5 x his deferred pension at date of death, at that time approx. £50,000.00.

Real life Consequences for Final Salary Pension Transfer

Had he taken the CETV his beneficiaries would have received £324,900.00. Quite a significant difference I think you’ll agree?  It was time to take the CETV. US interest rates were starting to move upwards and inflation starting to move in the wrong direction.

If we can make just 5% growth pa on average on the CETV it will be worth £710,000.00 (B) @ 62 year’s old. I emphasise IF, all the investment risk is on his shoulders (well, mine really as his advisor), anything could go wrong. That’s why it is fundamental to have a fully qualified IFA in your corner to look after the investment if you’re considering taking a CETV.

Summary of Final Salary Pension Choices

In Summary, and all being well, the choices between sticking with the HBOS scheme or taking the CETV at 62 years old looked like this:

A: An increasing income of approx. £14,500.00 with a 50% dependent pension (that he doesn’t need)

B: A pension fund of approx. £710,000.00 (given 5% growth pa and assuming no further contributions).

If he were to take £14,500.00 from said pension fund he’d only be taking 2% from the fund. With no growth it would last over 40 years (I’d be 102!!).

Make no mistake, giving up a final salary pension scheme is a big decision and should only be considered together with proper qualified advice.

Making Informed Decisions

If you have read this article and are currently a deferred member of the HBOS or any Final Salary pension scheme and would like to ensure you’re making a fully informed decision regarding your Financial future please get in contact and a member of the team would be happy to advice you of your option. Visit or call 0161 495 9340 to speak to the team today.