Savers with final salary pension schemes who are tempted to transfer their pensions to make it easier to access their cash are being warned of the risks of doing so.

A final salary pension, otherwise known as a defined benefit pension, is considered extremely valuable because it provides a guaranteed income at retirement. This income is usually based on how many years you’ve belonged to the scheme and a proportion of your final year’s pay.

However, final salary pension 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 pension 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.

The Pensions Regulator (TPR) in 2021 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 the cost of living crisis adversely affecting many people’s finances, 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.

Book your free pension review

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified local advisor give an unbiased assessment of your retirement savings.

Book my free call

Is a final salary pension transfer right for me?

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 pension drawdown account, which allows you to invest the money and take ad hoc lump sums or regular withdrawals – or both. You can find out more about drawdown in our guide What is pension drawdown and how does it work?

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. You can find out more about public sector pensions in our guide How do public sector pensions work? 

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 (rising to 57 in 2028).

In 2019 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.

According to XPS Pensions’ Transfer Value Index, defined benefit (DB) transfer values increased to a record high during June 2022. The increase was a result of a rise in long-term inflation expectations during the month, partially offset by rising gilt yields. However, in October 2023 they fell below £150,000 for the first time since last September’s mini budget, due to increasing gilt yields.

How long could a final salary pension transfer take?

Final salary or defined benefit pension transfers tend to take much longer than defined contribution pension transfers, generally at least six months. First, you will need to request a Statement of Entitlement from your pension scheme. This provides details of the pension’s transfer value and other information required by the provider you want to move your pension to. This transfer value is guaranteed for three months. Within the next four weeks, you should receive a notice from your current provider telling you that you should seek professional financial advice.

Six months is the deadline for confirming that you want to transfer your pension and providing proof that you have sought financial advice, and nine months is the deadline for your pension scheme to complete the transfer.

How much will I get if I transfer my final salary pension?

If you are considering transferring your final salary pension then you will be quoted a figure known as a “cash equivalent transfer value” or CETV. This is calculated based on your final salary pension, and generally comes out to a multiple of the annual retirement income you would have received under your current plan. Transfer values are generally around 20 times the annual income due at retirement, so if you were expecting an income of £20,000 a year from your pension, you may be offered a lump sum of £400,000. However, they can be much higher than this, so depending on your scheme, you might be offered a transfer value 30 or 40 times your expected annual retirement income.

While this figure is expressed as a lump sum, you won’t receive it as such. Rather, this amount will usually be invested into a new pension in the hope it may provide a similar retirement income to the one guaranteed by your current pension plan (though this is not guaranteed). Alternatively, you can use it to set up a drawdown scheme if you want to start drawing your pension straight away. You can find out more about drawdown in our article How pension drawdown works.

Book your free pension review

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified local advisor give an unbiased assessment of your retirement savings.

Book my free call

The risks of transferring from a final salary pension

The pandemic has meant 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 pension 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.

Should you consider a final salary pension transfer?

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 when considering a final salary pension transfer

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 advisor (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 advisor 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.

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

Calculate your pension

Use the Rest Less pension calculator to find out how much you might need to save for retirement, how much your pension pot could potentially be worth and how long it could last.

Calculate my 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 pension 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.

Rest Less Money is on Instagram! Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.