Note: ALWAYS seek the advice of a qualified, FCA regulated and independent financial adviser before making changes to your pension. This content is for information purposes only and is NOT to be construed as financial advice.
We know a thing or two about what can go wrong with the transfer of a final salary pension.
You should ALWAYS seek independent advice from a regulated adviser when considering a final salary pension transfer, and while we’re not here to advise you on what you should do with your pension, we’re happy to give you some points to think about.
Final salary pensions are what is known as defined benefit pensions. They are different from personal pensions (and many other workplace pensions) in that they promise a guaranteed income in retirement, for as long as the scheme member lives.
It is the responsibility of the scheme operators to make sure they have enough money to pay scheme members, not the members’ responsibility.
Of course, it is possible for the scheme to go bust, however these instances are fairly uncommon and in that event, they are covered by the PPF (Pension Protection Fund) up to 90% of their value.
Transferring a final salary pension almost always means moving it to a Defined Contribution scheme – a pension that does NOT always offer a guaranteed income in retirement, but rather one based on how much money is paid into the pension and how well the investments perform. It may be possible to use a DC pension to purchase an annuity that offers a guaranteed income in retirement, however the rate may not be as beneficial as a defined benefit scheme payout.
Sadly, not everyone makes it to retirement. However, members of defined benefit pension schemes should know that their family may be better protected by the scheme.
Final salary pensions usually come with fairly generous Death benefits, which means a spouse may be entitled to a large portion of the pension benefits if the scheme member dies before retirement, and dependent children may also benefit substantially. Typically, this is around 50%, although in other cases it could be much more or much less depending on the scheme.
Many people are persuaded to transfer final salary pensions because they are told they can have more money in retirement if they pull out their pension and invest it through a personal one.
But the financial markets aren’t always as predictable as that, nor as forgiving as we would like to think.
When leaving a final salary pension scheme, many people are given a critical yield calculation. This is the percentage by which the new pension has to grow in order to be worth as much as the old final salary pension, based on figures set by the regulator.
In many cases, due to investments underperforming, economic fluctuations (and even crashes), many new pensions fail to keep pace or exceed the critical yield, meaning they could be worth less than the final salary pension would have been by the time retirement comes around.
Final salary pensions promise to keep paying out until the scheme member dies, whether that’s 5 or 25 years or more into retirement.
The same cannot always be said of a personal pension. In many cases, once it is gone, it’s gone. Even buying an annuity with the personal pension may not match the pension benefits of a final salary pension scheme.
It’s not just the amount of income in retirement that is in question when it comes to a final salary pension transfer, but whether there will be any income at all.
Transferring a final salary pension nearly always implies taking a risk as the money is then invested into the stock market.
As any honest adviser would tell you, investment values can go down as well as up, and in some cases they can become illiquid (the investment needs to be sold before you can draw your money, eg property) or even collapse completely.
It is not unheard of for people to transfer a pension worth hundred’s of thousands of pounds, only to have it reduced to nothing a few years later.
Many investments available through personal pensions such as SIPPs may not be protected by the FCA or FSCS and therefore compensation for an investment collapsing may not always be available.
The points we’ve made above outline some of the more crucial thinking points about the suitability of final salary pension transfers, and the answers to each one will be different for almost everyone.
But of course, there are other things to consider, including some potential benefits!