Defined benefit pensions are a promise from your employer’s pension scheme to pay you an income for life after you retire.
The pension you’ll receive is usually based on your salary at your retirement date (final salary schemes) or an average of your salary across your work history with the company (a career average scheme).
If you’re a member of a defined benefit pension plan, you won’t have a pot of retirement savings with your name on it to live off in your old age.
Instead, you get a promise from your employer’s pension scheme to pay you a retirement income for the rest of your life, with the amount you receive typically linked to your salary and the length of time you’ve spent with that employer.
This income is generally index-linked to keep up with inflation and the scheme will usually offers a reduced widow’s or survivor’s pension for your spouse after your death until the end of their life.
While very generous for employees and retirees, final salary pensions are an expensive promise for employers. This is especially true as people live longer and investment returns continue to disappoint in the current underlying economic environment.
Low interest rates, poor yields on government bonds and rising UK life expectancy are just three factors that mean final salary schemes are paying out for longer than expected in a world where investment returns have disappointed, making them increasingly difficult for companies to afford.
A sizeable number of final salary schemes are now closed to new members; today they’re generally only offered by the public sector or the largest private sector companies.
As well as cutting costs by closing schemes to new members, some companies have also been providing existing members enhanced transfer values or transfer incentives to leave these pension plans.
An enhanced transfer value is an offer your defined benefit pension scheme will make over and above what it feels is the current ‘market rate’ for transfers at that time.
Enhanced pension transfer offers are not new. They’ve been offered in the past when schemes have faced notable financial stress as an incentive for members to leave final salary pensions to cut schemes’ future liabilities.
However, with today’s unique combination of circumstances many of the current enhanced transfer values are at new highs, partly as companies look to tempt employees to leave the scheme to reduce future liabilities and try to fill pension fund ‘blackholes’ that have appeared in some schemes.
A cash equivalent transfer value or CETV is the amount of money your final salary pension fund is willing to offer you (which will be invested in a defined contribution pension) in order to leave your defined benefit scheme and give up all future claims to an income from it.
You usually have to request a CETV from your pension provider, although sometimes it may be mentioned on an annual pension statement.
An enhanced transfer value, on the other hand, involves your pension fund contacting you with a higher transfer offer as an incentive for you to leave your pension scheme at that time. This may be due to some unexpected financial pressures within the scheme or with your employer, or simply as part of an exercise to reduce future pension liabilities.
It’s important to consider how any enhanced transfer value you receive compares to others being offered in the market today. Even though it may be enhanced for the your pension scheme, if it’s still below current market norms it’s probably better to stay where you are.
Our Final Salary Pension Transfer Calculator can help plot your transfer value against the rest of the market to see if you’re being offered the best pension transfer deal.
IMPORTANT NOTICE 🧐
As of the Spring budget 2023, the UK chancellor announced the abolition of the pension lifetime allowance (LTA). This came into effect from 6 April 2023.
It’s important to note however, the Labour party has announced that if they were to be elected, the allowance may be reintroduced in the future. If this occurs, we will update our records to reflect any changes. The information on this page is based on the LTA pre 6 April 2023.
For the majority of people, the answer is no.
A final salary pension scheme is incredibly valuable and provides you with a risk-free income for the rest of your life. They’re underwritten by the Pension Protection Fund (PPF), which will guarantee you a level of income even if your employer and its pension scheme goes bust.
It’s hard to replicate the benefits from a defined benefit pension scheme using a defined contribution scheme, so the reality is that most people will be better off staying where they are.
Ultimately, whether or not a final salary transfer is right for you will depend on your circumstances. Factors that may make a transfer suitable for you could include:
If your final salary scheme is worth more than £30,000, it’s a regulatory requirement that you seek pensions transfer advice and get expert help with your transfer. This will help ensure that any pension transfer is right for you as an individual and safeguard your retirement savings.
If it becomes apparent that the enhanced transfer value your pension provider is offering you is sufficiently attractive given your age, the size of your entitlement from your pension scheme and various other factors, then it may well be worth examining whether a transfer is right for you.
An adviser is best-placed help you decide if this is the case for you, but some of the benefits of leaving a final salary scheme in exchange for an investment in a defined contribution scheme include:
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
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