What is a Final Salary Pension?
A final salary pension (a defined benefit or DB pension) is a type of workplace pension. It provides you with a guaranteed annual income for life once you retire, based on your final or average salary.
What is a defined benefit pension transfer?
You can transfer your final salary workplace pension into a more flexible defined contribution pension, but it comes with risk and is not suitable for everyone. Find out everything you need to know about transferring a final salary pension.
Defined Benefit vs Defined Contribution Pension Scheme
Your defined benefit pension guarantees you an income for life, safeguarding you from potential risk. A defined contribution scheme does not guarantee an income; your pension pot is used to invest into funds, which can either rise or fall – meaning you could get back less than you invested.
You can access a defined contribution scheme when you turn 55 (rising to 57 in 2028). There are potential options for receiving your DB benefits early, yet, this may affect your income.
How do I find out what type of pension I have?
Contact your pension provider or employer if you have any questions about your pension or if you’re unsure what type of pension you have.
Can I transfer my defined benefit pension?
Unless you are within a DB scheme that does not allow a transfer, such as a Teacher, Civil Service or NHS pension scheme, the option to transfer out is available. It’s always best to check with your employer.
Do I need a financial advisor to transfer my pension?
Unless your cash equivalent transfer value is under £30,000, you are legally required to acquire qualified financial advice if you are considering transferring out of your current final salary scheme.
Here are some things to consider:
- The Financial Conduct Authority (FCA) require all advisers to start advice assuming the transfer is unsuitable for most people.
- An advisor can only recommend a transfer after a thorough investigation of your financial & personal circumstances.
- You must outline your financial & personal goals to understand what benefits you could achieve from transferring.
- The trustees running your defined benefit scheme will convert your accumulated benefits into a Cash Equivalent Transfer Value (CETV) that can transfer to a defined contribution scheme if your adviser recommends a transfer and you agree to go ahead.
- If you are already taking an income from the scheme, you cannot transfer.
How are contributions invested?
Your investments depend on the scheme you select – the plan could invest in a limited range, or it may allow more varied investments. You have the choice to move your investments into a different fund or have future contributions invested in another fund.
Over time, the value of your pot will change. Its value at any time will depend on the following:
- how much is contributed
- the length of time that each contribution has been invested
- investment growth over this period
- charges deducted from the scheme.
Pros & Cons
Potential advantages of defined benefit schemes
- You will receive a secured income for life, which is likely to rise each year in line with inflation, and your spouse/civil partner can receive an income (subject to income tax) upon your death.
- There is minimal paperwork needed to start the payment of benefits and no ongoing monitoring of the scheme is required once the first payment has been made.
- Defined benefit schemes will place no personal investment risk on you.
- Defined benefit schemes have a legal duty to provide a pension for a surviving widow/widower or dependent in the event of your death.
Potential disadvantages of defined benefit schemes
- A defined benefit scheme is rigid in its structure, you will get a set amount of money each month until you die therefore it cannot adapt if your needs change throughout retirement.
- The payments of your scheme pension must be selected before taking any benefits and cannot be changed at a later date.
Many defined benefit schemes have a pre-selected retirement age and taking benefits early can result in reduced pension benefits. - Any income you receive from a defined benefit scheme will be subject to income tax at your highest marginal rate.
- Any income you receive from a defined benefit scheme may affect your entitlement to means tested state benefits.
- Only your spouse/civil partner and children under the age of 23 (unless legally defined as a dependent if older) will usually be entitled to a reduced pension on your death.
- You will not be able to leave your pension benefits on death to any other party.
- Any options (if offered by your scheme) to provide benefits on death must be selected at outset and will result in a lower initial pension payment.
- You will receive a secured income for life, likely to rise yearly in line with inflation. Your spouse/civil partner can receive an income (subject to income tax) upon your death.
- There is minimal paperwork to start the payment of benefits, and no ongoing monitoring of the scheme is required after you make the first payment.
- Defined benefit schemes will place no personal investment risk on you.
- Defined benefit schemes have a legal duty to provide a pension for a surviving widow/widower or dependent in the event of your death.
- A defined benefit scheme is rigid in its structure. You receive a set amount of money each month until you die; therefore, it cannot adapt if your needs change throughout retirement.
- You must select your pension scheme payments before taking any benefits; you cannot change them later.
- Many defined benefit schemes have a pre-selected retirement age, and taking early benefits can result in reduced pension benefits.
- Any income from a defined benefit scheme will be subject to income tax at your highest marginal rate.
- Any income from a defined benefit scheme may affect your entitlement to means-tested state benefits.
- Only your spouse/civil partner and children under 23 (unless legally defined as a dependent if older) will usually be entitled to a reduced pension on your death. You will not be able to leave your pension benefits on death to any other party.
- Any options (if offered by your scheme) to provide benefits on death must be selected at the outset and will result in a lower initial pension payment.
- The tax-free pension commencement lump sum (usually referred to as Tax-Free Cash) of an individual pension or drawdown plan can be greater than from a defined benefit scheme.
- You can choose how and when you take your benefits — offering you greater flexibility and choice.
- When taking benefits, there are no restrictions on the amount of money you can withdraw at any time.
- On your death, your nominated beneficiaries will receive the remainder of your pension fund. There is no restriction on whom you choose to receive these benefits.
Transferring out of your current employer pension scheme comes with risk, and by law, you are required to seek advice from a qualified FCA-regulated advisor. This helps you understand what a transfer could do for your retirement income.
When referring to financial services, advice is a service which recommends a detailed course of action based on your circumstances and financial goals.
Guidance is information and options, helping you narrow your choices without making an explicit recommendation.
Getting advice on the best way to combine or transfer your pension pot is important and is a legal requirement if you have a defined benefit pension worth over £30,000. Our financial experts can help you determine what transferring or combining your pension pots could help secure your income in retirement.
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