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What if I've got a final salary pension?

Learn what the pension changes mean for you if you have a final salary pension plan and why you should seek advice before considering transferring out of your scheme.

In this article
Can I cash in a final salary pension? Should I transfer my final salary pension? How do I cash in a final salary pension? Do I need financial advice?
Cashing in: a case study

Can I cash in a final salary pension?

Under the new pension rules, people with a private final salary (also called 'defined benefit') scheme or a funded public final salary scheme can transfer 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 deall.

This includes NHS staff, teachers, armed forces, civil servants, the police and firefighters.

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 so, including a guaranteed income that's linked to inflation.

Make sure you get independent financial advice before you leap.

Should I transfer my final salary pension?

Pros

  • 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.

Cons

  • you’d be giving up a guaranteed, predetermined income for the rest of your life
  • with a final salary scheme, you don’t have to use investments to generate retirement income
  • final salary pensions are index-linked, meaning 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.

How do I cash in a final salary pension?

If you do decide to give up your final salary pension for cash, you’ll need to make a request to your pension scheme for a 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, 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.

Do I need financial advice?

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.

Cashing in: a case study

Mark Williamson, 51, Huddersfield

Mark 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, 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.