Final Salary Pension Transfers – Advantages and Disadvantages. Can you transfer out and should you?

The Pension Freedoms introduced in April 2015 have created much interest in Final Salary Pension Schemes. The reason for this is that it is now possible for many people to transfer out of a final salary scheme into a defined contribution scheme.

Under the new pension rules savers are able to take advantage of full access to a pension fund. Allied with historic high Cash Equivalent Transfer Values and the decision to transfer seems obvious.

We look at seven advantages to transferring, and seven reasons why transferring may not be the best idea in your situation.

Final Salary Pension Transfer Advantages

1. It’s your money

Transferring from a defined benefit pension gives you flexible access to the transferred value of the fund.

2. Greater Tax Free Cash

Tax free draw down on a Defined Contribution Pension is greater than from a Defined Benefit Pension.

3. Inheritance for dependents

With a final salary pension, your spouse or partner is entitled to a percentage on your death, but children and other dependents get nothing. This is not the case with a defined contribution pension, which retains its full value and can be passed on at your death to spouse or children.

4. You choose how the benefits are taken

The freedoms associated with a defined contribution pension give you greater choice.

5. Use the proceeds to buy annuity

You could buy an annuity with the proceeds – taking advantage of the various options they give.

6. Age restriction lifted

A Defined Contribution pension can allow you to take benefits from any age after 55 (rather than restricted to the final salary scheme rules) or accepting early retirement factors.

7. Historic High transfer values

With some transfer values we have dealt with hitting the £1million mark, it would seem a waste not to make use of it. As one client said, “It’s like winning the lottery … except I’ve earned every penny!”

Are there disadvantages?

Of course! We wouldn’t be doing our job if we didn’t mention that there are some disadvantages to taking a transfer value.

1. Loss of guaranteed income

Transfer away from your final salary pension and you will lose all of the guarantees attached to the scheme.

2. Not risk free

If you take a transfer, and it is then invested, this becomes your risk. Although a reputable financial advisor will always try to make the safest investments for you, the risk is yours.

3. Loss of Pension Protection Benefit

After transferring you will lose any benefits under the Pension Protection Fund. This is a backup scheme that will support you if the final salary scheme fails.

4. No Management of Scheme

With a defined contribution pension, you have no real involvement in the managing of a final salary scheme.

5. Extra Costs

With a final salary scheme there are no explicit costs for you. Transferring out will include some cost. However, the current high value of transfers usually negates this.

6. No inflation Protection

It is probable that the final salary scheme provides inflation protection. Defined Contribution pensions do not have this protection.

7. No inflation Proofing

Talking of inflation, it is also probable that your final salary will have inflation proofing.

Can you transfer out?

It is possible to transfer out of most final salary schemes.  However, it is not possible to transfer out of a final salary scheme if it is being paid, or if it is an unfunded government schemes to schemes which offer flexible benefits, such as the pensions of the:

  • NHS
  • Teachers
  • Police
  • Armed forces
  • Civil service

However, local authority pensions can be transferred.

Talk to an expert

If you’re considering transferring out of a final salary pension scheme, talk to us at Haven. We are Chartered Financial Advisors with particular experience of helping people make the best decision for them and their family. For more impartial advice contact me at scampion@havenifa.co.uk