Final Salary Pension Advice – Understanding Your Options
Should You Transfer or Stay in Your Defined Benefit Pension?
Final Salary Pensions, also known as Defined Benefit (DB) pensions, are among the most valuable retirement assets a person can have. They provide a guaranteed, inflation-linked income for life, along with potential benefits for spouses or dependents.
Because of their security and predictability, the Financial Conduct Authority (FCA) considers transferring a high-risk decision that is not suitable for most people. In many cases, staying in the scheme will provide greater long-term financial security than transferring.
However, some individuals may wish to explore a transfer, particularly if they have other financial priorities, such as estate planning. At Mather & Murray Financial, we provide FCA-regulated pension advice to ensure you fully understand the risks and benefits of transferring before making any decisions.
The Benefits of Keeping a Final Salary Pension
For most people, keeping their Defined Benefit pension is the best option due to the guarantees and security it provides.
Key Advantages of a Defined Benefit Pension
- Guaranteed, Lifetime Income – Your pension provides a regular income for life, regardless of investment performance.
- Inflation Protection – Many schemes offer annual increases to help keep up with rising costs.
- Spousal and Dependent Benefits – Your spouse or dependent children may continue to receive an income after your death.
- No Investment Risk – Unlike personal pensions, your income is not affected by market fluctuations.
- Simplicity and Security – No ongoing investment decisions or management are required.
- No Risk of Running Out of Money – Your pension will not be exhausted, unlike personal pensions that may run out if withdrawals exceed returns.
For these reasons, transferring out of a Defined Benefit scheme is only suitable in specific circumstances.
How Are Final Salary Transfer Values Calculated?
If you request a Cash Equivalent Transfer Value (CETV), this represents the lump sum your scheme would offer if you choose to transfer your pension into a personal pension or drawdown plan.
Your CETV is not fixed (except for three months from the date it is calculated) and is influenced by several factors, including:
- Long-Term Interest Rates and Gilt Yields – Transfer values tend to be higher when interest rates are low and lower when rates are high.
- Scheme Funding Levels – If your pension scheme is well-funded, your transfer value may be higher.
- Your Age and Life Expectancy – Younger individuals may receive a higher CETV due to the longer period their pension would need to be paid.
- Inflation Expectations – If inflation is expected to rise, transfer values may be adjusted accordingly.
Many people who considered transferring a few years ago may now find their transfer value is significantly lower, due to rising interest rates. This highlights the importance of seeking professional advice before making any decisions.
Comparing Your Pension Options
Understanding the differences between keeping your Defined Benefit pension and transferring to a personal pension is essential.
| Feature | Defined Benefit Pension | Personal Pension / Drawdown |
|---|---|---|
| Income Security | Guaranteed for life | Subject to investment performance |
| Inflation Protection | Often includes annual increases | No automatic increases – depends on investments |
| Spousal Benefits | Typically provides a pension for a spouse or dependent | Full remaining fund can be inherited |
| Flexibility | Fixed income, cannot be altered | Flexible withdrawals, ability to take lump sums |
| Investment Risk | No risk – income is guaranteed | Subject to stock market fluctuations |
| Tax-Free Lump Sum | Usually 25% of transfer value (subject to scheme rules) | 25% of fund value (can be taken upfront or via UFPLS) |
| Ongoing Management | None – scheme manages payments | Requires investment oversight |
| Risk of Running Out of Money | No risk – income is guaranteed for life | Possible if withdrawals are too high |
Who Might Consider a Transfer?
Although transferring is not suitable for most people, some individuals may wish to explore their options.
Examples of When a Transfer May Be Considered
- If you have significant alternative assets – A transfer may be more suitable if you do not rely on your pension for core retirement income.
- If leaving an inheritance is a key priority – A personal pension allows remaining funds to be passed to any chosen beneficiaries.
- If you are in poor health – Individuals with a lower life expectancy may wish to access more of their pension earlier or leave funds to their family.
Even in these cases, transferring remains a high-risk decision and should only be done after careful financial planning.
What Happens to Your Pension When You Die?
One key difference between Defined Benefit pensions and personal pensions is what happens when you pass away.
| Upon Death of Pension Holder | Defined Benefit Pension | Personal Pension |
|---|---|---|
| Spouse’s Pension | Usually 50%-75% of original pension | Full remaining fund available to beneficiaries |
| Children’s Pension | May provide benefits for dependent children | Can be inherited by any chosen beneficiary |
| Lump Sum Death Benefit | Only payable if pension not yet in payment | Entire remaining fund can be inherited |
| Tax Treatment | Benefits subject to income tax for the recipient | Death before 75: tax-free for beneficiaries Death after 75: taxable at recipient’s rate |
Important Update for 2027
From April 2027, the UK government has confirmed that pensions will be included as part of your estate for Inheritance Tax (IHT) purposes. This means that both Defined Benefit pensions and Drawdown pensions could be subject to IHT, making estate planning even more important.
Seeking Advice Before Making a Decision
Given the significant financial implications of transferring a Final Salary pension, FCA-regulated financial advice is mandatory for transfers over £30,000.
At Mather & Murray Financial, we provide:
- Independent, expert pension advice tailored to your circumstances.
- Comprehensive pension transfer analysis, ensuring you fully understand the risks and benefits.
- Long-term financial planning, including tax efficiency and estate planning considerations.
Next Steps
Before making any decisions about your Final Salary pension, book a free, no-obligation consultation with one of our specialist pension advisers in Swindon or nationwide.
Contact us today to arrange an appointment and receive the expert guidance you need.
