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What Is A Final Salary Pension?

Written by
Tom Lamb
Time to read
4 minutes, 34 seconds

 

Are you considering a Final Salary Pension transfer? This is a decision some investors may make ahead of retirement and requires careful consideration, as there are valuable benefits which you’d miss out on if you transferred out. A balanced view is required and it is vital that you speak with a financial adviser.

 

What is a Final Salary Benefit Pension? 

A Final Salary Pension is a type of pension linked to your employment. This type of arrangement is designed to provide you with an income, lump sum, or combination of both in retirement. The level of benefit you are entitled to is based on several factors such as length of service, salary and your age. This type of pension is also known as ‘defined benefit’ – because you have certainty over how much you’ll get.

This is different to a Personal or Workplace Pension, where the level of benefits available to you in retirement depends on your contributions and the performance of your investments. These types of pensions are also known as ‘defined contribution’ – because you have certainty over how much you add in, but not how much you’ll get back.

 

What is a Final Salary Pension transfer?

A Final Salary Pension transfer involves giving up your defined benefit in return for a lump sum (known as a Cash Equivalent Transfer Value or CETV) that can be invested in a Personal Pension plan.

This means that the benefits of your Final Salary Pension Scheme, including an income for life, are given a cash value. You can then invest this cash value at your discretion but, unlike in a Final Salary Pension, the money will be subject to market fluctuations, which means that the value can go down as well as up and you could get back less than you invest.

Since Pension Freedoms were introduced in 2015, people have had more choice around pensions and a Final Salary Pension transfer is an option some have decided to take in order to have more flexibility in retirement.  However, due to the valuable benefits that are lost on transfer, you must receive financial advice prior to transferring if your CETV is more than £30,000.

 

Why transfer out of a Final Salary Pension?

The potential benefits of transferring out of a Final Salary Pension are:

  • Greater control of your pension
  • Choice of where to invest your pension
  • More flexibility over withdrawing your money in retirement
  • Ability to pass your pension funds to a beneficiary

However, there are advantages to staying in a Final Salary Pension, including:

  • A guaranteed income for life
  • Income that usually increases over time, aiming to protect against inflation
  • Income that isn’t affected by the ups and downs of the stock market
  • No limit on how long you can withdraw for

Whilst there can be advantages to a transfer, one isn’t necessarily in your best interests and there may be costs and charges involved with a transfer. You may end up with a lower level of retirement benefits and there is a risk your funds will run out during your lifetime if you draw too much income. The Financial Conduct Authority and the Pensions Regulator believe that it will be in most people’s best interests to keep their Final Salary Pension. Once you transfer out, you will forego your entitlement to your accrued benefits within the plan and you can’t transfer back in should you change your mind.

Speaking with a financial adviser and taking in consideration of all affecting factors is essential.

 

How does a Final Salary Pension transfer work?

Typically, a Final Salary Pension transfer can be done at any time. However, transferring requires careful consideration, ensuring that you are aware of the risks associated, your circumstances are appropriate for transfer and you are getting a fair value from your scheme for your benefits.

When you transfer out of a pension, the trustees who run the scheme will convert the benefits to a cash value. This is known as the Cash Equivalent Transfer Value (CETV), the cash value placed on the total benefits of your pension. If you don’t have one of these, you can request one from your pension scheme.

 

What is the next step?

Speak with a financial adviser.

As you may lose benefits in your current scheme, you need a professional assessment from a financial adviser to ensure a transfer makes sense for your situation and your goals.

Getting regulated financial advice is a legal requirement for any transfer value over £30,000, and not all schemes will accept non-advised transfers out for under £30,000.

It is strongly recommended to get financial advice in all circumstances around Final Salary Pension transfers no matter the value. A financial adviser will start their assessment with the assumption that a transfer won’t be the right course for most people and they will then make a conclusion for or against transferring, which will be explained to you in writing.

 

To learn more, get in touch with our dedicated Final Salary Pension transfer team at True Potential

 

True Potential Wealth Management offers restricted financial advice. Our service is specifically designed for clients wishing to access their financial affairs online. With investing your capital is at risk. Investments can fluctuate in value and you could get back less than you invest. Pension eligibility and tax rules apply.  Tax is subject to an individual’s personal circumstances, and tax rules can change at any time.

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