DB or Final Salary Transfers

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Simon Lowndes - Financial Advisor
Simon Lowndes
Principal of LAD IFC Ltd

DB or Final Salary Pension Transfers.

Lowndes Alexander Daniel are authorised by the Financial Conduct Authority

There has been an increase in the transfer of ‘’Final Salary’’ pension schemes that have transferred over the latest financial year for which figures are available, according to new figures from a Freedom of Information request carried out by Royal London.

The figures reveal that for the period 1 April 2017 to 31 March 2018 an estimated 100,000 people transferred out of final salary pension schemes. This is a 25 per cent increase compared to the previous financial year when it was estimated that 80,000 transfers were made.

According to Steve Webb, director of policy at Royal London, these figures confirm a sustained growth in the volume of pension transfers, one of the biggest trends that have emerged three years on from the introduction of the pension freedoms. Separate number-crunching by Royal London also worked out that the average pot size for transferring out of a financial salary or DB scheme is just shy of £200,000.

‘While for many people, staying in a DB pension will be the right answer, there will be individual circumstances in which the greater freedom associated with a defined contribution pension will be more attractive.  In many cases, the value of the pension pot will be amongst the largest assets of an individual, and it is vital that they take impartial advice before making a decision to transfer,’ says Webb.

Pension dilemma: £659,000 today, or £22,000 a year for life?

In a similar vein, Steve Cameron, pensions director at Aegon, adds: ‘The pension freedoms have proved hugely popular, giving members of defined contribution schemes full flexibility over how and when they take their retirement income.

‘This involves giving up on a “guaranteed” income for life, so clearly isn’t right for everyone. But with pension freedoms creating greater differences between defined contribution and defined benefit schemes, there will be individuals who will benefit more from transferring than in the past.’

Why you shouldn’t cash out.

The first point to make is that there’s a good reason why final salary or DB pensions are looked upon with envy by the non-baby-boomer generation. The schemes were rolled out by employers during the 1960s, 70s and 80s, offering workers a guaranteed income for life when they retire.

The amount has historically been based on a percentage of a worker’s final salary multiplied by the number of years they have been in the scheme, though more recently schemes have been modified to base payouts on a less generous ‘career average’ salary.

As well as typically being inflation-proofed, most schemes also offer a continuing spousal income, usually 50 per cent, upon the death of the pension holder.

However, final salary schemes became increasingly unaffordable for employers, for a number of reasons including increasing levels of life expectancy. Nowadays, except in the public sector, the vast majority of those entering the UK workforce will find themselves paying into defined contribution pensions whose fortunes are linked to underlying investment performance.

For many final salary pension holders, the benefits are essential and not worth giving up, particularly for those who do not have other resources to rely on in retirement.

Those who are not confident in investing or who do not want to seek out a reputable financial adviser or wealth manager – should also steer clear of cashing in. By switching your final salary pension to a defined contribution scheme you will be putting your pension pot at the mercy of the stock market.

Reasons to consider a transfer.

One of the main attractions behind transferring is that defined contribution pension schemes offer individuals greater flexibility in leaving a legacy.

In the case of defined benefit schemes, the benefits stop when your spouse dies. If you both die early, it is simply a case of tough luck. Moreover, if you are widowed or divorced the pension will end on your death, with no benefits paid to children or grandchildren.

With defined contribution pension schemes, in contrast, the pension pot can be passed to whoever you wish. Transferring for this purpose should only be considered by those who are in a ‘comfortable’ financial position, with other assets to draw on for their retirement income, such as Isas or Sipps.

Is your final salary pension at risk?

Another reason to transfer is if the guarantees in the final salary scheme are less relevant to you, for example, if you are in ill health.

Either way, financial advice is crucial; the government insists that people with over £30,000 at stake take independent financial advice to understand the guarantees they’re giving up.


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