Advantages and Disadvantages of Final Salary Transfers

Transferring your Final Salary (or Defined Benefit) Scheme into Pension Drawdown involves swapping your guaranteed pension entitlement for a cash sum and investing it into a registered, or HMRC recognised, pension scheme.

It is a big decision and one we are here to help you with, in fact we have been advising clients on final salary pension transfers since 1999 and are specialists in this field.

In addition to our free of charge initial consolation (contact us) and the Final Salary Information page, here is a balanced view on the advantages and disadvantages of final salary transfers.

Advantages of doing a Final Salary Transfer

Value of Asset: A final salary benefit can be a significant family financial asset, a transfer capitalises and gives you control of this asset, which can be passed down through the generations without inheritance tax.

Record Transfer Values: Transfer values reached record highs in 2017 and remain high compared with recent years as a consequence of the sustained period of low interest rates. With interest rates already starting to rise this will have the effect of reducing transfer values. There has never been a better time to consider the alternatives to a final salary pension scheme.

Flexibility: Transfers offer you complete flexibility over when and how much you draw from your pension and are in complete contrast to the typically fixed monthly pension income paid by Final Salary Schemes. It is implausible that 60 year olds retiring now with the prospect of potentially 30 years or more of retirement will have the same cash needs year in year out until they die. This flexibility extends to taking the cash as early as age 55 and deferring the taxed pension until it is needed. The potential uses of this early cash sum are extensive, from paying down mortgages early, to investing in ISAs to generating tax-free income, or helping the next generation on to the property ladder.

Life Expectancy: A final salary transfer takes away the life expectancy gamble implicit in a Final Salary Scheme lifetime income. It capitalises the benefit once and for all based on normal life expectancy, irrespective of your personal health now and in the future.

Tax: The increased flexibility provided from transferring a Final Salary Scheme into Pension Drawdown facilitates efficient tax planning. In virtually all the cases where we have recommended a transfer there has been the ability to save tax as compared to the rigid final salary pension benefits.

These can include:

  • A higher tax-free cash sum following the transfer
  • The ability to limit pension income to specific income tax bands
  • The opportunity to defer and minimise the impact of lifetime allowance (LTA) penalty tax charges

Disadvantages of doing a Final Salary Transfer

Certainty: One advantage of having a Final Salary Pension is that it lasts as long as you do. If you happen to live longer than average then the scheme has to find the money for this. If you decide to transfer away from the scheme then someone else has to manage the risk – either you or a financial adviser. There is a risk that if the investment does not perform that you could run out of money prematurely. Alternatively, you may be so worried of running out of money that you draw down the funds too slowly and miss out on enjoying the full benefit of your retirement savings.

Inflation: From virtually no inflation in recent years, there is the risk of rising inflation of 2-3% in 2018 and beyond. If you happen to be retired for 20-30 years the value of having an income which has some protection against rising prices could be considerable. Many DB schemes are inflation-proofed but check your own individual scheme for precise details. Of course if you invest your DB pension proceeds successfully, you may be able to achieve an above-inflation rate of return but the protection against inflation is not guaranteed in the way that it may be with a DB scheme.

Investment risk: As a member of a DB scheme your money is invested for you and in reality it is rarely something you have to give a second thought to. The scheme has to pay your pension come what may so in effect you are insulated against the ups and downs of investments. By contrast, if you take a cash equivalent transfer and invest the money yourself, the value of your fund can, and will, go up and down. The upside of this is that your capital could grow considerably but the downside is that if your assets perform badly you will have to live on a much reduced income. A key consideration therefore is your attitude to risk. It is important to consider how you might feel and how you would cope if your investments did badly. This is something to talk through with your financial adviser.

Provision for survivors: Since 1997, Defined Benefit pension schemes have had a legal duty to provide a pension for a surviving spouse (and children up to a certain age) if the scheme member dies after reaching a scheme pension age (this may differ and is dependent upon your scheme rules). This is a valuable benefit and should not be dismissed lightly.

Final Salary Scheme to Pension Drawdown transfers are irrevocable: You cannot change your mind a few weeks or years later if you regret having made the transfer.

Risk Warning exclamation mark icon

This guide should not be construed as individual advice to transfer out of a final salary pension scheme. Pension transfers are relatively complex and irreversible transactions and it is both imperative and a legal requirement to seek advice from a suitably qualified adviser before accepting a transfer.

Always remember the value of investments and the income they produce can fall as well as rise and you might not get back all your initial capital. This document has been produced based on our understanding of current pension rules and pension tax treatment. These do change from time to time.

Risk Warning exclamation mark icon

This guide should not be construed as individual advice to transfer out of a final salary pension scheme. Pension transfers are relatively complex and irreversible transactions and it is both imperative and a legal requirement to seek advice from a suitably qualified adviser before accepting a transfer.

Always remember the value of investments and the income they produce can fall as well as rise and you might not get back all your initial capital. This document has been produced based on our understanding of current pension rules and pension tax treatment. These do change from time to time.