Final Salary & Defined Benefit Pensions: Should you stick or twist?

What is a Final Salary Pension?

Also known as Defined Benefit Pensions, Final Salary Schemes offer a guaranteed, inflation-proofed annual income in retirement. The actual income received is calculated using several factors, including the length of time you have been in the scheme and your pensionable earnings at retirement.

To keep matters simple, we’ll use the term ‘Final Salary’ for the rest of this article. However, our thoughts apply equally to Defined Benefit Pensions.

What do we mean by ‘transferring’?

As retirement approaches and you consider how best to move from a life of work, you are faced with a range of options and questions.

If you choose to continue with your Final Salary Pension, you will receive the annual income each year, for the rest of your life. Furthermore, if you die before your spouse or civil partner, they will receive a pension in your place; albeit usually at a lower level than the income you received. It’s also worth noting that some Final Salary Schemes will pay pensions to other financial dependents.

However, you may choose to transfer your Final Salary Pension into an alternative arrangement; such as Flexi-Access Drawdown, an Annuity or combination of these, and other, options. Indeed, an increasing number of people are transferring away from their Final Salary scheme.  However, by giving up a guaranteed, inflation-proofed income, those people are in many respects taking a leap into the unknown.

Our intention in this article is to outline some of the advantages and disadvantages of transferring your Final Salary pension.

How do you know how much your Final Salary pension will be worth?

Your transfer value is determined by your Final Salary Pension trustee, who will provide you, or your financial adviser with a Statement of Entitlement, containing a Cash Equivalent Transfer Value (CETV).

This shows how much you could transfer into an alternative Pension, if desired.

Reasons to consider transferring

Transferring a Final Salary Pension is not the right option for everybody. In fact, for most people it is the wrong thing to do.

However, there are reasons to consider it, including:

Leaving a legacy

Final Salary pensions provide you with an income for life. When you die, your spouse or beneficiary may continue to receive a pension from your scheme, but this will be significantly less than your original income. However, Final Salary Schemes do not enable any lump sum legacies to be left to loved ones or good causes.

In contrast, transferring out of a Final Salary scheme means that it may be possible to leave a lump sum to your chosen benficiaries.

Having flexible access to money

Transferring your Final Salary Pension to an alternative such as Flexi-Access Drawdown allows you to mould your income to suit your needs. For example, you may wish to retire early and take a higher level of income until your State Pension starts.

You might also wish to take a variable income, so you can control the tax you pay, only withdrawing the income you actually need.

The increased flexibility means you may decide to combine both an Annuity to meet your essential expenditure, and Flexi-Access Drawdown to cover your variable and discretionary costs.

In short, transferring potentially allows for greater flexibility. However, that comes at a price; the guarantees offered by the Final Salary pension are lost and your income is reliant on the investment performance of your fund.

Because a spouse’s pension isn’t important

If you are single or have no dependents, some of the benefits offered by Final Salary Schemes will not be of interest to you. Most notably, a pension for a spouse or dependent. This, in conjunction with other factors, may give cause to consider transferring.

Avoid the uncertainty of future transfer values

Without superpowers, we simply do not know what the future has in store. Whilst transfer values have risen recently for many people, that does not mean that they will continue to rise. So, it is a matter of judgement as to whether you take the current figure, or gamble on future quotes being higher.

Reasons to consider staying put

We should be in no doubt that for most people continuing with their Final Salary pension is the right answer. This is because the scheme offers:

A guaranteed income

Transferring your pension away from a Final Salary scheme means giving up a guaranteed and secure income. Protection is offered by the Pension Protection Fund, which is in place to ensure that employees of companies going out of business still receive the majority of their pension entitlement.

This valuable protection is not to be underestimated; recently, for example, employees of British Steel have been very grateful for the existence of the Pension Protection Fund.

Inflation-proofed income

The Final Salary Scheme provides an inflation-proofed income, this means that your income increases each year in line, maintaining its buying power.

Spouse and Dependent’s Pension

If you are married, in a civil partnership or have dependents, your Final Salary Scheme may offer a reduced income for your spouse or beneficiary if you die before them. Typically, this is half the value of your original income, although each scheme will have their own rules.

Avoiding Pension scams

As scammers turn to increasingly desperate measures to get you to part from your money, there are several scams which are designed to tempt you into transferring your Final Salary Pension to high risk investments.

If you are contacted, unsolicited, by anybody who wants to talk about your pension planning, be wary.

Although legislation banning pension cold calling will soon be in place, this will not completely stop the scammers. Therefore, it is sensible to do your research when contacted by any means about your Final Salary Pension.

Remember: If it seems too good to be true, it usually is!

The importance of advice

Taking financial advice is vital when making big decisions, and none are bigger than transferring your Final Salary Pension, as it is completely irreversible.

This is a landscape which can be hard to navigate if you do not have an experienced professional to guide you through it.

A financial adviser can help you to weigh up the options, steer you away from those looking to part you from your hard-earned money and help you to define and meet your retirement aspirations.

To talk about your circumstances and decisions around your Final Salary pension, get in touch.



An annual, potentially inflation-proofed income which can be bought with part or all your pension fund.

Cash Equivalent Transfer Value:

The amount you can transfer out of your Final Salary Pension. This can increase and decrease according to external factors.

Flexi-Access Drawdown:

A flexible arrangement which allows you to withdraw your retirement income on an ad-hoc basis.

Pensionable earnings:

The earnings your pension trustee uses to calculate your benefits. This may differ between schemes. Your financial adviser will be able to give you more specific information.

Past performance is no guarantee of future returns and the value of investments and the income the produce can fall as well as rise. You may not get back your original investment and you may lose all your investment.

Accessing pension benefits early may affect levels of retirement income and is not suitable for everyone. You should get advice to understand your options at retirement.

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