Income options for your pension under the 2015 rules What if I've got a final salary pension?
This page explains how you can use the pension freedoms if you have a final salary pension, how to turn your pension money into a pot of cash - and the pros and cons of doing this.
What are my options if I’ve got a final salary pension?
People with a private final salary (also called 'defined benefit') scheme or a funded public final salary scheme can use the new pension rules by transferring their money into a defined contribution pension, which is essentially a pot of cash.
Public sector workers in unfunded schemes (where no contributions are made to the scheme in advance and no investment fund is built up) are banned from transferring out of their deal – this includes NHS staff, teachers, armed forces, civil servants, the police and fire-fighters.
If you are eligible to make the switch from a final salary to a defined contribution scheme, you need to be aware that you could lose valuable benefits by doing this, including a guaranteed income that's linked to inflation. You'll need to get independent financial advice before you leap.
The pros and cons of transferring your final salary pension
- you can have greater control of your pension fund
- you can get your hands on a large lump sum
- if you have no spouse, you may have no need for some of the benefits
- you can pass on money to your heirs via a transfer
- you might have more than one final salary scheme and only want to transfer one fund.
- you’d be giving up a guaranteed, predetermined income for the rest of your life
- with a final salary scheme you don’t have use investments to generate retirement income
- final salary pensions are index-linked, meaning that they rise with inflation
- it's tough to know whether the ‘cash equivalent transfer value’ (CETV) you get represents a good deal or not
- final salary schemes usually provide better retirement income than you could secure by other means.
What to do if you want to cash in a final salary pension
If you decide to give up your final salary pension for cash, you’ll need to make a request to your pension scheme for a 'cash equivalent transfer value' CETV. How the scheme arrives at this figure is a complex calculation.
Most private schemes are currently ‘under-funded’, meaning they don’t have enough assets to meet the costs of providing pensions of all the people in the scheme, with the result that you might only get 80% of the full pension value.
Final salary pensions are expensive to run and so schemes might be keen to get you off their books. As a result, you could be offered an ‘enhanced transfer value’ – which will be more than the scheme is obliged to pay you.
Financial advice for a pension transfer
If your final salary pension benefits are worth less than £30,000, you can take a lump sum directly from the scheme, without having to seek financial advice.
Anyone with final salary savings of more than £30,000 is obliged to take professional advice on the transfer, and confirm with the receiving scheme that they’ve done this. In many cases, the increased risk and potential for financial detriment will lead an adviser to counsel against any move.
Be aware that seeking advice will cost around £1,000 or more, even if the recommendation is not to do anything. If you do go ahead and move your money, you face additional charges for arranging and managing an investment portfolio. If your adviser recommends a transfer, the transfer value forms the initial capital for the new defined contribution scheme.
Mark, aged 51, from Huddersfield
Mark Williamson is a firefighter with a final salary pension scheme who has decided that he’s going to retire. His wife works as a nurse.
He opted to retire and take the 25% tax-free lump sum from his scheme. Taking this money enabled them to move house and remain mortgage free.
While Mark has decided to retire from the Fire Service, the loss in income will mean that he has to seek part-time work to maintain his current living standards.
You can’t convert public sector final salary schemes into a defined contribution scheme, but Mark says he wouldn’t have taken advantage of the new pension freedoms anyway.
Which? expert view
Unlike Mark, some people will be allowed to switch from a final salary scheme and may seek the greater flexibility that this entails.
However, although the prospect of money up front may seem appealing, it won’t usually match the benefit of a guaranteed lifetime income, which keeps pace with inflation. You shouldn’t give up your attractive final salary pension without some serious consideration.
- Pensions and retirement - all you need to know about pensions and retirement income
- What is Pension Wise? - free guidance from the government on pensions
- The Which? Money Helpline - get expert advice on your annuity
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