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Final Salary Pension

Looking for advice about final salary pension transfers (aka defined benefit pension transfer)
Giving up your guaranteed income will have implications for the rest of your life, therefore best advice is vital!

What is a Final Salary Pension Transfer?

A final salary pension transfer also known as defined benefit pension transfer is when you trade in your guaranteed pension income by transferring a Cash Equivalent Transfer Value (CETV) to a defined contribution pension scheme. Rather than taking a fixed, guaranteed and ever increasing (inflation-proofed) income for life, you would control the investment decisions and take full responsibility for not running out of money.

Final salary pensions are a type of workplace pension, perhaps from a previous employer and they tend to be extremely generous – hence most have now closed to accrual. Rather than having a fluctuating fund value (ie: an investment related pension), they provide accrual of a guaranteed income based on your salary at date of leaving or retirement. The risk for providing the income rests with the scheme and not you so if investment returns are poor or you live a long time, your scheme is responsible and you cannot run out of money.

Some people worry that if a final salary pension scheme goes “bust” then their money is at risk. Usually in these circumstances you would be covered by “The Pension Protection Fund” and more info can be found here: https://www.ppf.co.uk/

Understand how best to access your money, based on your personal needs.

Establish the best way to leave your pension to your loved ones on death.

Maximise your income whilst ensuring best tax-planning based on your situation.

Compare the pros & cons of a scheme pension, ensuring your complete financial security.

Someone may consider transferring out of a final salary pension as they:

  • Require more tax-free cash than the company scheme allows (to repay a mortgage for example)
  • Need just tax-free cash now and want to defer any taxable income to a later time (for tax planning purposes)
  • Would prefer taking their tax-free cash as a series of lump sums (as opposed to one large sum at outset)
  • Require income as lump sums or perhaps variable income payments (as opposed to a fixed monthly amount)
  • Want to retire earlier (than the scheme will allow)
  • Want to increase lump sum death benefits to family members such as children or grand-children (if they die too soon)
  • Want to cash in the entire pension in one go (from age 55) – although they could pay huge amounts of tax
  • Prefer privacy from an ex-employer and removing any trust issues
  • Generally therefore, want to obtain more flexibility with their pensions (known as entering drawdown)

Pension Transfer Risks

Losing guaranteed income – A guaranteed income for life is regarded as gold standard for pensions. Giving up your guaranteed income for life with very little risk may be madness! Releasing your pension earlier or making withdrawals at an unsustainable rate could leave you with reduced (or even no) income later in retirement.

Investment risks – Your pension pot (post transfer) can go down as well as up dependent where the money is invested and how the stock market is performing. The risk of investment planning moves from your scheme to you!

Management – You will be responsible for managing your own pension and meeting any pension provider charges, transfer & adviser fees meaning it could be quite expensive. You are also responsible for the shape of withdrawals and could run out of money.  

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