Final Salary Pension Transfer Explained

While final salary pension schemes are particularly rare these days, there are still many setup years ago which are still active. A final salary pension transfer is a particularly complicated process and one which should be undertaken in tandem with independent financial advice.

Due to the guaranteed nature of final salary pension schemes, it is important to tread very carefully.

Over the last 30 years or so, we have seen many companies moving away from a defined benefit/final salary schemes to money purchase pension arrangements. Slowly but surely, final salary pension schemes are being closed down with members often offered attractive terms to transfer elsewhere.

However, as a member of a final salary pension scheme, you have rights!

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What Is a Final Salary Pension Scheme?

As the term suggests, a final salary pension scheme is a pension arrangement that is based upon your final salary. The way in which the two are linked will vary from scheme to scheme, but the greater your final salary, the greater your pension payments.

Due to a mixture of reduced returns and increased costs, many companies have been actively looking to close down their final salary pension schemes.

What Is a Money Purchase Pension?

Money purchase pension funds are the norm in the modern era. In effect, upon retirement, there are various options with regards to using your pension funds. They can be converted into a lifetime annuity, drawn down on a regular basis, as well as the opportunity to take a tax-free lump sum.

The money purchase description refers to the purchase of an annuity, at the market rate of the time. This compares very differently from defined pension schemes, where there is a degree of guarantee from day one.

Should I Look to Transfer My Final Salary Pension Fund?

There are many different factors to take into consideration when looking at the transfer of a final salary pension fund. These will include issues such as age, size of the pension fund, specific terms of the pension fund, and any potential enhancements to encourage transfer.

As we touched on above, many companies are now looking to close down final salary pension funds and limit their long-term liabilities. In order to encourage scheme members to transfer elsewhere, you may well be offered an enhancement on the long-term “value” of your final salary pension fund. In many cases, this can seem extremely attractive!

However, it is vital that you take independent financial advice regarding the transfer of your final salary pension fund to, for example, a SIPP (Self-Invested Personal Pension). You are transferring from a defined benefit scheme to a money purchase pension arrangement.

Can I Reverse My Final Salary Pension Transfer?

No. Once the transfer of your final salary pension has been completed, it is highly unlikely this could be reversed. There may be occasions where the previous trustees/advisers had given inaccurate advice/information. In this situation, they may be forced to reinstate your pension fund arrangements.

If you were given inappropriate advice by an independent financial adviser, it would be a case of seeking compensation for this inappropriate advice as opposed to reversing the transfer. So, in the majority of cases, once the transfer has been completed, that is it (assuming your 30-day cooling-off period is also over).

What Is a Cash Equivalent Transfer Value?

When looking to transfer pension funds from a final salary scheme, the trustees should provide you with the cash equivalent transfer value. This is a calculation of the current cash value of your final salary scheme entitlement.

All pension fund members have a statutory right to transfer their pension assets to another party – and an obligation to take advice in this scenario. It is important to consider the current cash value together with the defined benefits you will effectively be giving up. Not always easy, but something that your financial adviser can assist with.

Do I Need Independent Pension Advice?

In a nutshell, yes. The Internet is a hive of information about any subject you can think of. The problem is that some information may be out of date or even misleading. The interactive nature of the Internet has effectively created an information exchange. However, not all of that information is correct.

How Can I Find an Independent Pension Adviser?

The first thing to note is that any adviser should be regulated by the FCA - if they aren’t, don’t even consider them. You will likely find that your current financial adviser will have experience with pensions or colleagues who offer such a service.

If not, your bank may be able to extend your relationship with pension fund advice. As a last resort, the Internet will alert you to pension fund advisers in your area. If using the Internet route, it is sensible to check out the latest feedback on companies that come onto your radar.

What Are My Options as Part of a Final Salary Pension Scheme?

Firstly, pension fund regulations tend to change on a regular basis. Therefore it is important to seek advice before taking any action. However, as things stand at the moment, the options for those who are part of a final salary pension scheme are as follows:-

Under 55 years of age:-

• Take no action and remain in the scheme
• Request a transfer value
• Transfer to a private pension scheme

If you are over 55 years of age:-

• Take no action and remain in the scheme
• Arrange to take benefits directly from the pension scheme
• Request a transfer value from the trustees
• Purchase an annuity
• Transfer to a private plan
• Transfer/take benefits from the fund
• Take a lump-sum payment

It will depend upon your particular circumstances, and the size of your pension fund, as to which options are available. Your financial adviser will be able to inform you of the appropriate action for your situation.

Summary

It is safe to say that the transfer of final salary pension funds is one of the more complicated/controversial areas of the UK pensions industry. On the one hand, we have companies looking to reduce their long-term pension fund liabilities, while on the other, we have advisers looking to protect the rights/future income of their clients. Then we also have the issue of enhanced transfer values to “encourage” members to transfer out.

Advisers are now obligated to ensure their clients fully understand the consequences of their actions. Once you have transferred from a defined benefit scheme to a money purchase scheme (final salary scheme to a personal pension), this cannot be reversed.

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