Should I transfer my final salary pension?

Savers with final salary pension schemes who are tempted to transfer their pensions so they can access their cash during the pandemic are being warned of the risks of doing so.

Final salary pensions, otherwise known as defined benefit pensions, are considered extremely valuable because they provide a guaranteed income at retirement. This income is based on how many years you’ve belonged to the scheme and a proportion of your final year’s pay.

However, final salary schemes don’t provide the same flexibility as defined contribution pensions, which usually enable you to withdraw as little or as much as you like from your retirement savings once you reach the age of 55. Unlike a final salary scheme, with a defined contribution pension, the amount you get when you retire will depend on how much you paid in and how the investments in your pension have performed.

Earlier this year,  The Pensions Regulator (TPR) ruled that pension companies must write to anyone considering giving up their so-called gold-plated final salary pensions to warn them that transferring is unlikely to be in their best long-term interests.

With Covid-19 affecting many people’s livelihoods, there is much concern that pension members could be at risk of making knee-jerk decisions, which will significantly impact their long-term financial future.

Charles Counsell, chief executive of The Pensions Regulator, said: “We are determined to do all we can to protect savers’ retirements from the unprecedented impact of Covid-19. A decision to transfer a pension pot that’s taken a lifetime to build is a very serious one, and we’d urge members to be very, very careful making any transfer decisions at this time.”

Final salary pension transfers – the background

When you transfer out of a final salary pension, you are effectively swapping your guaranteed retirement income for a cash lump sum.

For those who are still saving for their retirement, the money can be transferred into a personal pension where it can be invested in the stock market.

Should you want to start living off the proceeds, it can be transferred into a drawdown account, which allows you to invest the money and take ad hoc lump sums or regular withdrawals – or both.

Some defined benefit pensions can’t be cashed in even if you wanted to, such as public sector schemes for teachers, police, firefighters, NHS staff, civil servants and the armed forces.

Yet the rise in transfers out of these old-style company plans from other industries has been one of the key trends since 2015 when pension freedoms were introduced, giving savers the flexibility to access every penny of their retirement funds from the age of 55.

Last year alone, according to The Pensions Regulator, £34 billion was transferred from defined benefit schemes to enable people to access the money held within their pensions.,.

In addition to the flexibility of accessing your money through a defined contribution pension, another attraction has been that transfer values (the size of the cash lump sum received for a given level of lifetime income) have been relatively high, with companies keen to cut long-term costs by moving members out of these schemes. These values are likely to be lower now however, with transfer values falling 3% in the month of March, according to XPS Pensions’ Transfer Activity Index.

The risks of transferring from a final salary pension

The current pandemic means that through no fault of their own, many people have seen their income fall and need to look for alternative sources of cash.

So whilst cashing in a defined benefit pension may seem really tempting, it is rarely the right decision. Few things in life are guaranteed, with the rare exception of a final salary pension. So the main risk is that by transferring out of the scheme, you are giving up a guaranteed annual income for life.

Defined benefit pensions also offer some protection from inflation, as your payout rises with the cost of living. The exact provision varies from scheme to scheme, but there is a legal minimum which all schemes have to deliver.

Final salary pensions must also, by law, offer benefits to a surviving widow or widower if you die after reaching the scheme’s pension age. The amount they’ll get will vary depending on the company you worked for, but it could be as much as 50%. Many schemes go beyond the minimum and offer payouts to dependent children, too.

When you transfer your pension into a defined contribution plan, you take on all the risks associated with funding your retirement – instead of leaving it for the company you worked for to worry about. This means that if stock markets take a tumble, so will your retirement savings – not something that you have to worry about if you have a final salary scheme.

It’s a big responsibility and many savers might struggle to make the returns they hoped for – especially with a recession on the horizon. The ultimate concern is that you risk running out of money in retirement, which could be devastating for you and your family.

Why some people are considering transferring their pension…

Whilst transferring out of a defined benefit pension is rarely the right long term decision, there are still some people who decide to do so.

Part of the attraction of cashing in a final salary pension is that you have greater control of your money and how and when you access it.

It means you can invest your savings how you want to – and spend it when you like, once you reach the age of 55.

Control might be important for those undertaking inheritance tax planning too.

A final salary pension will often die with you and your spouse which means you may not be able to pass it on to children or grandchildren. However, should you transfer the money to a defined contribution scheme, you can pass your pension savings to your children (or whoever you nominate as your beneficiaries) tax-free if you die before 75.

You might also have concerns about your employer being able to pay your final salary pension – particularly if it has hit hard times as a result of the coronavirus lockdown.

It’s important to remember that if your company does go bust and can’t pay your pension, you’ll usually be protected by the Pension Protection Fund which will typically pay you 100% of your pension if you’ve reached the scheme’s retirement age, or 90% if you’re below the scheme’s pension age.

The importance of getting financial advice

Pension transfers are a one-way street: once you’ve cashed in your final salary pension there is no going back. In difficult times, it is very easy to be persuaded by the lure of short-term cash, but you  may well regret this decision later.

That’s why getting professional advice is crucial. If your pension transfer value is worth more than £30,000 you must talk to an independent financial adviser (IFA) before you proceed. This is compulsory under rules set by the city regulator the Financial Conduct Authority (FCA), even if you subsequently decide not to follow your IFA’s advice.

Even if your pension sum is less than £30,000, it could be a false economy to skip taking professional financial advice. An adviser will work out whether you’re likely to receive a higher annual income in retirement if the funds in the new pension pot generate a good investment return, compared to the total annual payments the final salary scheme will pay.

They will also look at your wider financial situation and help you weigh up the best options based on your individual circumstances.

You can find a local financial advisor on VouchedFor* or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

Watch out for pension fraud

Pension scams have been rife since the pension freedoms were introduced in 2015, with fraudsters offering bogus investment opportunities to the over 55s in the hope of hijacking their retirement savings.

Opportunists convince hard-working savers to move their retirement funds out of guaranteed final salary schemes and into different schemes that offer poor value for money, or that do not even exist at all.

Pension scams are devastating, and the most recent figures show that victims of pension fraud lost on average £82,000, which for some is their entire life savings.

Scammers can approach you by post, email or telephone and they often have very professional-looking websites and literature.

There are also concerns that pension scams have increased during the current coronavirus pandemic, despite a government ban on pension cold-calling introduced at the start of last year.

You can find out more about pension scams and the warning signs to watch out for in our article Don’t let scammers steal your retirement.

Have you transferred out of a final salary pension recently, or do you have a defined contribution pension and are using your retirement savings to boost your income during this difficult time? You can join the money conversation on the community or leave a comment below.

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18 thoughts on “Should I transfer my final salary pension?

  1. Avatar
    Isabel Brown on Reply

    I have been told I cannot transfer my final salary pension which is pretty worthless. £55k. It doesn’t have any option for my daughter to benefit from the money if I die as it only has a spouse provision and I have no spouse. Transferring would have allowed me to pay of my £24k mortgage and reduce my hours for the next 5 years up till I am 65 -but pension advisor said NO. I am not happy

    1. Avatar
      Oro on Reply

      Pension advisor is only an ADVISOR. I used my pension last month to pay off my mortgage in these uncertain times. One headache gone.

  2. Avatar
    Steve on Reply

    Great article.
    It really worries me that so many people are switching out of defined benefit schemes and one can’t help but be cynical about the motivations of those advising them to do so. Your guidance is well balanced and gives the right warnings.
    As a self-employed person for most of my life watching the impact of the latest financial crisis on my pension pot (3 years worth wiped out) I look with envy to those with DB schemes and agog at those who transfer out unless they have really high pots and an excellent grasp on fund management.

  3. Avatar
    Chris on Reply

    I closed by final salary pension against the advice offered by the advisor as I handed him his £5K fee.
    For me I feel it was the right decision.It allowed me to use the 25% for buy to let income and to invest in a drawdown pension.
    This diversified my investments and gave me a income from property and the ability to access from drawdown as and when I needed it.Overall the drawdown has grown in size despite recent drops. But I am able to pass on the whole fund value to my family,something I couldn’t with the company scheme.After 25years of saving I didn’t want to lose that option of my family getting my pot.

  4. Avatar
    Pension Exchange on Reply

    Amazing Post! The article is well explained, and it mentioned every step regarding transfer of final salary pension. It will help me out in future. Thanks for such useful information.

  5. Avatar
    Carol on Reply

    Really interesting reading and I am currently in the limbo position of having sought advice, was advised that transferring the final salary would be in my best interests as I have no spouse. It’s a very difficult decision as I wanted to pay off my mortgage and am 55 soon. It’s very difficult to trust the advice you get as it sometimes seems conflicting and you wonder who exactly will be benefitting. . .you or the FA. . . .

  6. Avatar
    Paul on Reply

    I have just received a transfer value from my Final Salary pension provider for just under £300,000. Alternatively I do not transfer and stay in the scheme and receive a guaranteed pension of £2500 per annum. Surely a transfer would be in my best interests!

  7. Avatar
    Kevin on Reply


    sensibly invested £300,000 should give you a drawdown figure of £12,500.00 pa. However it is a must that you do need to take specialist advice for your individual circumstances and risk profile. defined benefit payment of £2,500 pa seems very low.

    good luck but don’t forget whatever the pension, you are giving up guaranteed benefits by doing so. try one of the generic calculators on the web to get an indication.

    I took CETV 2 years ago and have not looked back !!

  8. Avatar
    Hayley on Reply

    Great report. We are going through it ourselves. We’ve had the advice and for my pension, the 69k before fees will be better in my bank now, than the £1300 A YEAR will be worth to me upon retirement. Its really tough but for us, it has to be done.

  9. Avatar
    Martin, Doncaster on Reply

    I took my my frozen final salary pension 3 years ago, as i had split from my long term partner and did not want the pension to disappear, should i die, as i have 2 teenage children. My children will now inherit
    whatever is left in my pension pot when i die, this will be completely Free of any kind of Tax, as it is classed as a Trust Fund.
    Furthermore i have taken the full 25% tax free lump some and used it towards buying my Lakeside dream home, something i could never have done otherwise.
    Even after taking the Tax Free 120,000 pounds and the recent turmoil with the stock markets due to Covid, my Pension Pot is just about back to the level, when i took it out.
    I am still in employment, but there is enough in the Pot for me to take a living pension, should i decide to retire ( i,m 62), as my State Pension will be payable in
    5 years. Absolutely no regrets transferring out.

  10. Avatar
    Dave on Reply

    I’ve recently transferred out of my company scheme, it’s estimated that my pot will give around 20% more and last until I’m 97! The added bonus is that anything left in the pot when I die will be inherited by my daughter.

  11. Avatar
    Yelsel on Reply

    My husband and myself both have final salary pensions worth £450k. I have I’ll health and can’t work so money is tight for us as hubby earns more than £15k we get no benefits!
    It’s a really tough decision to make as I feel we are dammed if we do withdraw and dammed if we don’t

  12. Avatar
    Katrina on Reply

    Be very careful which adviser you use. Some pretend to have knowledge of final salary schemes but are not indemnified to provide the information and then charge you for getting the information from an indemnified company. St James Place are a FTSE 100 company with representative offices across the UK and they have a specialist office that do the analysis. They are significantly more knowledgeable & cheaper than anyone else I consulted.

  13. Avatar
    Ian on Reply

    Excellent article … very comprehensive and informative. Without doubt, this is the single, most stressful financial decision one will ever have to make. Getting expert, independent financial advice is absolutely essential. Because once you’ve signed on the dotted line, there’s no going back. And of course, only in hindsight many years down the line, will any of us be able to say “I was right to stay” or “I was right to leave”!! Carpe diem.

  14. Avatar
    Maisie on Reply

    Really good balanced article highlighting pros and cons..and need for independent financial advice. IFAs sometimes get a bad press but mine was brilliant and saw it as his job to help me make things happen…with the best financial advice. He advised against me transferring my final salary pension as it was one of the most generous he had ever seen and any drawdown pension I was transferring to would need to return at around 38% to match it. I needed the capital from my 25% to purchase a property for my son, on zero hours contract, as he had been made homeless three times in 2 years by private landlords. In this stressful and uncertain times for him being made redundant he at least has a roof over his overall for us as a family it’s been the right decision.

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