pension pot

Final Salary Pensions: what you need to know?



Posted on: 27th June 2018

The Government introduced a number of pension changes in the Budget in April, 2015. One of the most significant changes related to pension freedoms. As a direct consequence of pension freedom, there has been an increased interest in final salary pensions transfers, or defined benefit transfers. Because of the 2015 changes it is now possible for many people to take advantage of the new pension rules which allow full access to a pension fund, by transferring out of a final salary pensions scheme into a defined contribution scheme.

What are the advantages of transferring out of defined benefit schemes?

There are a number of beneficial advantages when transferring out of DB schemes, not least of which is the potential for taking a greater tax-free cash lump sum. Other benefits include:

  • benefits can be taken from any age after 55
  • complete access to the transferred value of the fund
  • the opportunity to pass on the value and assets in your pension or investment as inheritance
  • the option to choose how benefits are taken
  • the opportunity to buy an annuity with the proceeds
  • potential transfer values can be high due to low gilt yields

What risks and dangers might you face if you transfer out of a defined benefit scheme?

Although transferring out of a final salary pensions might look attractive at first, there are certain dangers and risks involved if you do decide to go down that route. A final salary pensions scheme mitigates many of the risks you might face in retirement, and puts the onus for any risk on the scheme, your former employer and the Pension Protection Fund.  If you decide to transfer out of a final salary scheme, then you alone will have to shoulder all the risks and responsibilities, and that could prove costly. Other than risk, transferring out of a defined benefit scheme also could lead to a number of other potential problems, such as:

  • losing the guarantees attached to the DB scheme
  • losing any benefits under the Pension Protection Fund
  • losing the inflation protection and inflation-proofing which final salary pension schemes provide

Who can take advantage of the new DB pension freedoms?

It is possible for most people to transfer out of the majority of final salary pensions schemes, although transferring out of a final salary scheme is not an option if it is already being paid. It is also not possible to transfer out unfunded government schemes. However, local authority and civil service pensions can be transferred due to changes introduced on May 14th this year.

It isn’t possible to transfer out of the following pension schemes:

  • NHS
  • Teachers
  • Police
  • Armed Forces
  • Civil Forces

So, is it wise to transfer out of a defined benefit scheme?

That is a decision only the pension holder can make after seeking expert financial counsel. However, evidence would suggest that it would be ill-advised to transfer out of a final salary pensions scheme unless there are some very sound reasons for doing so. 

So what should you bear in mind if you are considering transferring out of a final salary scheme?

  • be sure you understand what you are giving up, including your guaranteed income
  • be aware of scam schemes
  • ensure you understand the risks you are taking on with a new scheme
  • consider all your options, and finally
  • take transfer advice from an appropriately qualified firm of Financial Advisers that specialise in cash flow modelling software.  Haven IFA believes this is an essential part of the transfer advice.

The transfer value calculation

The transfer value from a final salary scheme is technically called a Cash Equivalent Transfer Value (CETV). The CETV bears no relationship to the values quoted for the Lifetime Allowance, an amount quoted in retirement quotes. The CETV is a value that is supposed to represent the ‘true’ value of the benefits given up.

Always get a free CETV 

In Haven IFA’s view, everyone is entitled to a free CETV every year, so everyone should ask for one from a pension scheme to see what the value is. Haven IFA’s advice is that everyone who is looking to take benefits from a final salary scheme should get the CETV and assess what the scheme can offer, and what can be arranged with the transfer.