What is a Final Salary Pension?
A pension that provides Defined Benefits (DB)
A Final Salary pension scheme is an occupational pension that offers clients a guaranteed and safeguarded annual income, which is linked to an accrual rate on their salary. People also commonly refer to it as a Defined Benefit pension scheme or DB pension scheme. Most Final Salary pensions are ‘index-linked’ meaning your pension benefits are guaranteed to grow and keep pace with a measure of inflation and/or a fixed rate of increase. As such, people usually refer to Defined Benefit schemes as being ‘gold-plated’ because they effectively guarantee an indexed income for life and with little risk for the scheme member. As such, they are incredibly valuable.
If your DB Cash Equivalent Transfer Value (CETV) is over £30,000, you must, by law, get advice from an authorised and regulated Pension Transfer Specialist (PTS). To ensure you are fully aware of the risks of transferring (The FCA). All DB pension transfer enquiries with Cameron James are completed by an independent, 3rd party FCA Pension Transfer Specialist, who is paid a fixed fee for the advice.
Final Salary vs Defined Contribution
Final Salary schemes are completely different from Defined Contribution schemes.
DC vs DB pension schemes in the UK. These are the two most common types of employer-sponsored pension schemes in the UK. Final Salary or Defined Benefit (DB) schemes, which are referred to as a ‘gold-plated’ pension scheme, are a scheme that offers a guaranteed income (annual scheme pension) to be paid out to the member for the rest of their life from their Normal Retirement Age (NRA), or earlier/later if the scheme permits doing so.
Conversely, a Defined Contribution is a pension scheme in which you and/or your employer make regular contributions to save for your retirement over the course of your employment. The key difference between a Defined Benefit and a Defined Contribution plan is that a DB scheme is safeguarded and provides guaranteed income for life, irrespective of how the markets perform. For many clients, this can be an invaluable, safe source of retirement income, and thus the most suitable option for them. On the other hand, in a DC scheme your income at retirement will vary based upon market performance and growth of the investments made, minus any charges payable. You can learn more about Defined Contribution vs Defined Benefit pensions in one of our YouTube videos below.
What is a Final Salary Pension Transfer?
Transferring a Final Salary pension into a DC scheme
A Defined Benefit pension transfer is the transfer of your DB scheme into a flexible pension scheme, like a workplace DC or a SIPP. Scheme members are effectively giving up their rights to a guaranteed income for life in return for a one-off Cash Equivalent Transfer Value (CETV), which they will then go away and invest and take on risks that they did not have before. The Financial Conduct Authority (FCA) has put in place strict advice requirements to protect any member considering transferring a Final Salary pension with a CETV above £30,000. The strict regulatory framework in place today has vastly increased the amount of work and costs associated with any type of DB pension transfer, which has made it economically less viable for many advisers to provide advice to clients who have a CETV under £250,000. Although additional regulatory scrutiny has contributed to costs increasing for both consumers and advisers, it has also unquestionably ensured that higher quality financial advice is received. The level of detail, analysis and thoroughness of DB Financial Advice provided today is drastically greater than it was, even in 2020.
Are Final Salary pension scheme benefits guaranteed?
In principle, yes, but some schemes aren’t fully funded, so there are some risks if the schemes get into difficulty
The term Defined Benefit refers to the fact that those who hold these schemes should expect guaranteed (defined) benefits in retirement. As such, the benefits are defined, but there is no cast-iron guarantee that every scheme or employer will remain fully funded and able to make all defined payments. There could also be changes in UK pension legislation. With a growing life expectancy, the UK has a need to replace baby boomers. Besides an increasing life expectancy, fertility rates are falling due to rising birth control (The Financial Times).
However, with interest rates rising, those deficits are shrinking, and many schemes are the strongest and most resilient they have been for many years. Whilst many members are worried about the Scheme, the vast majority of schemes are in good shape, and even if there are difficulties, there is the Pension Protection Fund, also known as the Lifeboat Scheme, which will secure most of the benefits, if not all of them, for the members.
Whilst there are some schemes that are still in trouble, having worries about your scheme’s financial health is typically not a reason to seek out transfer advice, certainly not at least in and of itself.
Can I take my Final Salary Pension at age 55?
Yes, most schemes will allow for access at 55, which is before the Scheme’s NRA, 60 or 65 usually, but they will reduce your benefits to account for the extra years of payments
Yes, most schemes will allow for access at 55, which is before the Scheme’s NRA, 60 or 65 usually, but they will reduce your benefits to account for the extra years of payments
Whilst most schemes allow for early access before the NRA, the reduction in value is significant to take account of the extra years the pension is expected to be in payment. So taking the pension early is a big decision, and advice should be sought as the decision is irreversible.
UK Final Salary & Defined Benefit Advice Process
Simple and Straightforward
If you have a DB Pension, Steps 2 & 3 With PTS
Possible Advantages of a Final Salary Pension Transfer
For those clients who have ill health which has resulted in reduced life expectancy, then it may be the case that a Defined Benefit style annuity doesn’t really suit you, as you will likely have passed on before you obtained significant benefits from the Scheme. You may also be eligible for an enhanced annuity, which will pay out more than your DB Scheme, perhaps even with better escalation rates and death benefits. That would potentially lead to a transfer being suitable, as it would maximise benefits. You could also potentially benefit from transferring and accessing the pot flexibly, and providing more benefits to your surviving family members.
Ill Health is typically the most common reason to be advised to transfer these days, as the typical risks that apply to most people looking to transfer without ill health either don’t apply, or are substantially fewer or less relevant.
A Defined Benefit pension transfer provides you with access to an incredibly diverse array of investment options, like low cost exchange-traded funds (ETFs) commonly referred to as ‘passive’ investments, funds and trusts. Your Financial Adviser, as part of any transfer analysis, will complete an assessment of your risk profile and advise the portfolio with a proven track record, low fees, and level of “risk,” that match your risk profile and provide opportunity for the required/expected level of growth.
If you are severely risk-averse, and do not wish to explore investment options for your money, then a DB transfer is unlikely to be suitable for you as by transferring out, you are effectively increasing the level of risk you are taking on. If you are a cautious investor, and find the volatility of markets stressful, then it is very unlikely, except for ill health reasons, that a transfer is suitable for your risk profile, as you won’t be willing and/or capable of being able to tolerate the return volatility required to make a transfer a suitable option.
Within a typical solution such as a SIPP, you have full control over your pension benefits, matching your fluctuating income needs and also managing your liability to tax.
In contrast, upon taking benefits from your DB Scheme, you will be forced to take, for example, annual pensions of £10k, paid monthly. Many people prefer the idea of controlling their pension income, but again, just because you prefer flexible access, it doesn’t make it a good enough reason to transfer, in and of itself, given that flexible access could also mean you run out of money quicker, especially if you do not have a proper financial adviser to help you plan your retirement income needs.
Higher Tax-Free PCLS
A DB Scheme offers the ability to take a tax-free lump sum at the onset of you taking your DB Benefits. However, this value is derived via a process known as “commutation” which means that, as there is no pension pot with your name on it to receive a portion of, they reduce your annual income by a certain rate and then provide a tax-free lump sum in exchange for the reduced annual income.
A transfer will typically “unlock” a higher PCLS, as 25% of the CETV is likely to be greater than the tax-free commutation offered, but if market returns are poor before you take the lump sum, it could ultimately be lower than the tax-free cash offered by the DB Scheme. Also, the comparative PCLS difference is typically greater, the lower interest rates, and commensurately higher relative CETV values, are.
Maximising Spouse Pension & Death Benefits
Your Final Salary pension has strict rules on what happens to your pension benefits when you die. The scheme will typically pay your spouse 50% of your annual pension, at the date of your death, whilst some schemes also have higher rates. If you do not have a spouse, your DB scheme is not obliged to pay out to a partner or family member, unless they are a child and the scheme offers a children’s pension.
Completing a Final Salary pension transfer means the value of your flexible pension pot passes in full directly to your spouse (or nominated beneficiaries) in the event of your death, if you want that to happen and state it in your will or Expression of Wishes forms. Were your spouse to pass away, their designated beneficiaries, which may be your children, would inherit as much of the pot as they willed etc.
Transferring your DB pension can be valuable financial planning in protecting family wealth for future generations but, again, death benefits alone are not a reason to transfer in and of itself, as there are potential other avenues to secure death benefits, like life assurance.
Disadvantages of a Final Salary Pension Transfer
Giving Up a Guaranteed Income
Once your pension transfer is complete, you cannot change your mind and reverse the transfer. It is an irreversible decision and why the FCA likely wants to ensure you obtain the correct advice before making any decisions. You are effectively exchanging your rights to a guaranteed, escalating income in return for a one-off lump sum amount. Whether a transfer is in your interest or not depends on numerous factors.
No Inflation Protection
A Defined Contribution pension, like a SIPP/International SIPP or QROPS, has no built-in inflation protection. Any annual growth is linked solely to the underlying investments within the portfolio. As a result, your investment value can rise as well as fall. On average, equities rise c.75% of the time, fall 25%, and have an average peak to trough (the difference between the high value and the low value that year) of 14%, so markets do tend to rise, but there can be considerable volatility, so a willingness and ability to ride out the volatility is key if you are to have a transfer be a potential option.
Although your pension benefits in a private pension are not guaranteed to increase every year, equity markets do have a long-term track record of performance. However, you might not experience those returns and/or have bad timing luck.
By transferring, you transfer the investment risk from the scheme on to yourself. If your investments perform poorly, then your retirement income could be reduced. Of course, returns can also be good, and you might obtain amazing benefits, but that is a risk that you didn’t have before. Unless you know and understand that risk and have the knowledge, ability and emotional strength to handle poor investment returns, which inevitably occur, even if just for short periods, then why subject yourself to that risk?
Qualified and regulated pension transfer advice is not free. Ensuring you have an educated understanding of which type of pension transfer is most in line with your requirements is an important decision, though. Seeking financial advice from a pension transfer specialist who can thoroughly analyse your DB scheme is a valuable investment.
They will either advise you not to transfer, outlining the grounds for this, or conversely, the reasons why you should transfer.
There are also ongoing financial planning/advice fees, platform fees and portfolio fees, which will eat into returns, so this needs to be taken into account when assessing required returns to meet retirement goals.
At Cameron James, we work on a UK RDR transparent fee basis. That means, all our clients, irrespective of being a UK resident or non-UK resident, know exactly how much their DB transfer advice process with the PTS will cost in advance. There are no concealed fees or additional charges. Learn more about our fees in Our Costs Section.
How do I obtain my Final Salary pension transfer value?
You can ask your Scheme directly, but the best option is to have a financial adviser ask for it on your behalf
A Letter of Authority (LOA) is a one-page document that allows a financial adviser to contact your Final Salary pension provider and request all relevant information about your policy. An LOA does not allow anyone to transfer, change or alter your pension in any way shape or form.
Completing this document also does not commit you to do anything with your pension, but it simply allows your adviser to gather all the required information for a detailed analysis. Final Salary schemes usually receive many valuation requests, and their turnaround times are frequently longer than other UK pensions.
Defined Benefit Pension Transfer Calculator
Only your DB pension scheme knows your transfer value
There are a plethora of low-quality financial advice websites that offer final salary pension transfer calculators with pop-ups every time you move the cursor. In our opinion, these are best to avoid. The simple fact is that no-one knows the transfer value of your DB pension other than your UK scheme. They are the only people who can supply you with this information. Any calculations or estimates you receive from another 3rd party are a poor use of time.
What is a Cash Equivalent Transfer Value?
After we have submitted your Letter of Authority and requested a CETV, your pension scheme will complete their calculations and provide a transfer value along with all the necessary transfer out paperwork. This transfer value remains valid for 90 days, and if it is over £30,000, and you want to transfer your pension out, then you must complete an authorised and regulated advice from a Pension Transfer Specialist, all transfer out paperwork must be submitted before the final date. If your CETV expires, we will need to request an additional valuation. Some providers charge up to £250-£500, for additional CETVs within 12 months.
Is transferring a Final Salary pension suitable for me?
A transfer is certainly not suitable for most people.
The FCA handbook states that advisory firms should “start by assuming that a transfer will not be suitable”. It protects DB pension clients, as Financial Advisers must evidence that a transfer is indeed overwhelmingly in the client’s best interests. A client can be classed as an ‘insistent client’ and effectively try to transfer against the financial advice of the advisory firm, but most firms cannot, or will not, process transfers against the advice, given their terms of business/insurance coverage. Cameron James can assist clients, but only on a case by case basis and after careful review.
The ability to transfer against the advice, whilst perfectly technically legal and the member’s right to do so, is made further challenging by the number of schemes willing to accept such a transfer being so few and, of those few, almost all of them require a financial adviser to be involved with the management of the pension. You can’t get financial advice, be told not to transfer, and then go off and transfer it yourself, without the assistance of a regulated financial adviser or, at least, we have not seen it been done, not for many years. You used to be able to do that, but these days the Pension Transfer Specialist will either not sign the Financial Advice Declaration, Financial Advice paperwork in the transfer out pack and/or the Scheme you want to transfer to just won’t allow it anyway. The ability to transfer when advised not to, is incredibly difficult, and it is only getting more challenging, and with good reason to protect consumers.
FCA sign-off for Safeguarded benefits over £30,000?
Protection for investors. Guaranteeing regulated and authorised financial advice.
The FCA has further protected investors on defined benefit pension transfer advice. As per Section 48 of the Pension Schemes Act 2015, any DB pension with safeguarded benefits over £30,000, must take financial advice from a firm regulated by the Financial Conduct Authority (FCA) with the permissions to provide advice on pension transfers. Hence, why Cameron James will always refer any DB advice enquiry to a correctly regulated third-party Pension Transfer Specialist (PTS).
This regulation helps to ensure that any financial advisers who are not authorised and regulated by the FCA to provide Pension Transfer advice are unable to advise clients on such important decisions, as they lack the qualifications, knowledge, expertise, FCA Sign-Off and insurance to do so.
While this has added costs to the financial advice process, it is vital in protecting clients from poor advice and poor outcomes. The rates of positive transfers advised continues to fall each year, which only continues to show why the FCA has “cracked down” so heavily, as evidently, there were many people advised to transfer previously, who shouldn’t have been.
What is a final salary pension transfer specialist?
A regulated and authorised Financial Adviser who can provide DB transfer advice
Seeking advice from a qualified and experienced Independent Financial Adviser is essential, especially when dealing with a Defined Benefit Pension. The underlying calculations for assessing whether a transfer is in your interests are complex, and this is not an area of advice anyone can give. A final salary “Pension Transfer Specialist” is regulated and authorised to provide this advice and has passed the necessary examinations.
Taking advice from anyone, other than a defined benefit pension transfer specialist, is a waste of your time and money. Your UK pension scheme will request proof that the Adviser is authorised either way. If someone is not qualified to the right standard, then they are likely to not be able to go into the depths necessary to advise you correctly. As a result of this, their advice may be unhelpful or misleading, or done in their best interest, rather than yours. Be wary of any adviser who tells you, or insinuates that a transfer is suitable for you, who isn’t qualified, and hasn’t done the in-depth analysis required to come to that conclusion, as they are very likely manipulating/influencing you for their own personal benefit.
Conflicts of interest in DB pension transfer?
We mitigate possible conflicts of interest as best as possible
At Cameron James, we believe a conflict of interest can exist if the company advising on the Suitability of Transfer is also the company that the client selects to transfer their pension and manage their retirement asset and planning needs. Ultimately, it could be in the company’s interest for the sign-off to be approved and the transfer to proceed as they will gain a new client and increase their income by providing ongoing advice. Whilst the initial fee is non-contingent, so payable regardless of the advice and whether the client transfers or not, any future ongoing advice income is contingent on the client transferring. The Non-Contingent charging ban has certainly reduced the conflict of interests involved, but it hasn’t eliminated them.
All DB pension transfer advice with Cameron James is completed by an independent, 3rd party FCA Pension Transfer Specialist, who is paid a fixed fee for the advice. The fixed fee ensures the FCA Adviser provides a neutral and unbiased assessment on whether the DB transfer is in the client’s best interests. Cameron James is involved, as we provide the pension and investments advice, as part of the 2-adviser model, but we do not advise on the suitability of a defined benefit transfer itself.
As Cameron James does not hold the requisite permissions to provide DB advice. As such, the actual suitability of a transfer is done by the independent 3rd party, who are authorised and regulated to give the advice. We believe this also helps to maintain independence, and remove any potential bias in the advice process.
What are the costs of defined benefit pension transfer advice in the UK?
The cost of Defined Benefit pension transfer includes a fixed DB Report Fee of £3,000-£3,500 and an asset size fee of 1-3%, depending on the size of the transfer value, number of DB Schemes being assessed, and residency of the member.
The FCA has strict rules for financial advice on DB schemes. Section 48 of the Pension Schemes Act 2015. The fixed fee for FCA sign-off through Cameron James is £3,000-£3,500. This sign-off is completed independently of Cameron James by an FCA regulated and authorised Adviser who assesses the credibility of transferring your defined benefit policy. Their report will confirm whether a transfer is in your interest or not in your interest.
UK DB Pension Transfer Advice is charged on a non-contingent basis. Any fees applicable will be disclosed to you before you proceed with any advice, and there are different options for how to pay for that advice, which will also be disclosed and agreed with you before you proceed with any formal advice. View a full breakdown on Our Costs Page.
What happens if you pass away following a DB pension transfer?
The entirety of your pension pot can be passed on to your spouse or beneficiaries.
That is one of the core benefits of transferring your DB scheme. The full 100% of your pension passes to your named beneficiaries. When setting up a new pension, your adviser will have you document who you wish to nominate as your beneficiaries.
You are free to nominate your beneficiaries however you wish, and it can also include friends, relatives, trusts and charities.
Your beneficiaries can also be changed at any time if your relationship or family situation changes. You only need to fill one form, and your beneficiaries will be updated accordingly. If you have formed a long-standing relationship with one of our Advisers, they are well-placed to continue advising your family in line with your wishes. Alternatively, your family can move the investment to another Adviser of their choice or withdraw the capital.
Should I transfer my final salary pension?
The simple answer is that we don’t know, everyone’s situation is different.
Unfortunately, there is no checklist to help you find out if you should transfer or not. It’s just far too complex and important a decision, and needs to be analysed carefully and thoroughly, by someone qualified and regulated to do so. We could provide a list of typical things we see with clients advised to transfer, but the truth is that it could cloud your judgement, and every persons situation is unique, and needs proper scrutiny.
The only generic situation that is worth knowing is in regard to whether a transfer is a non-starter, which is mainly if the pension is your biggest asset, you are many years from accessing the pension, and do not have a specific need to obtain flexible access, and do not have any health issues. If that sounds like you, then it is likely trying to obtain DB Advice is not a good use of your time, effort or money, and you should wait until being much closer to needing to access pension benefits before seeking out advice.
Whatever your situation, seeking high-quality advice on your DB pension transfer is essential. Mainly because you cannot go back once you have made that decision, so you need to be as informed as possible.
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