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If you’re fortunate enough to have a Final Salary pension, you have options for creating a retirement income that suits your goals. But, if you’re tempted to transfer out of a scheme, it’s essential you understand what you’d be giving up first.

Figures published in the Telegraph show cash transfer values for retirees leaving a Final Salary pension scheme reached record highs this summer. The estimated cash transfer value of a 64-year-old with a £10,000 a year pension was worth £260,800 in mid-June. It’s easy to see why Final Salary pension holders may want to transfer out of their existing scheme when such large sums are on offer.

However, it’s not in the interest of most people and there are numerous factors to consider before taking the next steps.

What does transferring out of a Final Salary pension mean?

A Final Salary pension, also known as a Defined Benefit pension, provides you with a guaranteed income for life.

When you start paying into a Final Salary pension, the calculation to understand your eventual retirement income is already defined. Usually, this is linked to how long you’re a member of the scheme and your final salary or career average. It is the pension scheme’s responsibility to meet these financial commitments. Investment performance will not affect how much you receive.

In recent years, the number of Final Salary pensions available has fallen as it becomes more expensive for schemes to meet their obligations due to longer life expectancy. This has also led to schemes offering greater sums to pension savers that wish to transfer out, known as a cash transfer value.

If you transfer out of a Final Salary pension, you lose a guaranteed income for life and instead receive a lump sum, which you will need to place in a personal pension, a self-invested personal pension (SIPP) or a pension scheme with another employer.

With a personal pension, your money is invested, and the performance will affect your retirement income. You’re also responsible for how and when you’ll access the savings, including ensuring it’ll last a lifetime.

5 things to think about if you’re considering transferring out

1. What income will your Final Salary pension provide?

The first step is to understand what income your current pension scheme will provide. You should receive an annual statement with these details or can contact your scheme to find out more. The scheme will also set a retirement date, this is often before traditional State Pension age. Remember this income will be paid for the rest of your life. It is also usually linked to inflation, preserving your spending power throughout retirement.

2. What additional benefits does your Final Salary scheme provide?

Many Final Salary pensions come with additional benefits, which, depending on your circumstances, can be valuable. For example, your scheme may offer a spouse or dependents’ pension. This would ensure loved ones continue to receive an income even if you pass away. If your family rely on your financial support, this can provide peace of mind. Any additional benefits from a pension will cease if you leave the scheme. As a result, if you transfer out, you will need to consider alternative measures.

3. What cash transfer value are you being offered?

To be able to understand how transferring out will affect your retirement long term, you need to review the cash transfer value your pension scheme will offer. You can request this from your pension scheme. While this can seem like a significant sum, remember this will need to last for the rest of your life and that inflation will have an impact long term.

4. How long is your life expectancy?

No one wants to think about passing away, but this is an important question when retirement planning. It’ll help you understand how long the cash transfer value will need to last for and how this compares to the guaranteed income. Keep in mind that we often underestimate how long we live for and there’s a good chance that you’ll exceed the average life expectancy and you need to factor this in.

5. What investment returns can you expect from a personal pension?

If you transfer from a Final Salary pension, your savings will usually be invested. This can help your savings to grow and keep pace with inflation. However, this comes with challenges too. To achieve your desired annual income, what returns would be needed? Once you have a figure, you also need to ask:

  • Are your expectations realistic?
  • How much risk will you need to take?
  • How will you manage market volatility?

It can be difficult to understand how a lump sum will translate into an income for what could be a 30 or 40 year long retirement. This is where financial advice can add value, helping you to grasp what giving up a Final Salary pension means for you in terms of income and lifestyle goals. You can’t transfer Final Salary pension with a value of more than £30,000 without seeking specialist financial advice.

Considering your lifestyle

One of the reasons that people consider transferring out of a Final Salary pension is the lump sum on offer. It can provide you with more flexibility in how and when you access your pension. For instance, you may plan to spend significantly more in the early years of your retirement.

However, in many cases, you can use other assets to create more flexibility and still benefit from the security of a guaranteed income. As a result, you need to consider your retirement lifestyle in the short and long term before you move forward with plans. Financial planning can put your options into perspective with your goals in mind. We’re here to help you create a retirement lifestyle that suits you, please get in touch.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Transferring out of a Defined Benefit pension is not in the best interest of the majority of pension savers.

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