How Much Is My Final Salary Pension Worth?

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10-10-2019

What is a Defined Benefit Pension?

A defined benefit pension is the gold standard of retirement savings, offering an income for life for you and typically your spouse that’s generally index-linked to keep up with inflation.

There are two main types of defined benefit pension:

  • A final salary pension
    The income from a final salary scheme is based on your final salary before you retire
  • A career average pension
    The income from a career average pension is based on an average of your income across your entire career with the company behind the defined benefit scheme.

A defined benefit pension is one of the most secure retirement arrangements around, offering you a lifelong income from retirement to death based on your earnings and your length of membership in the scheme.

How Much is My Final Salary Pension Worth?

Your final salary pension (or career average pension) has a benefit that’s defined from the start of your retirement. You’ll receive that income each year from your company’s pension plan for the rest of your life, plus inflationary increases each year along the way.

However, there’s more to the value of a final salary pension than you may realise. In the current environment, scheme members are being offered inflated transfer values to leave their schemes and give up all promises of an income from them.

The lump sum pension plans offer to members to transfer out of their final salary pension scheme is referred to as a cash equivalent transfer value or CETV. You receive this in exchange for swapping your defined benefit scheme and all of its secure guarantees for a defined contribution pension arrangement.

Calculating Your Final Salary Pension Transfer Value

The generosity of final salary pensions has proved expensive in an era of rising longevity of depressed investment returns, so employers are increasingly keen to shift pension liabilities off their books.

Offering a sizeable pension transfer value is partly to encourage people to swap their final salary pension for a defined contribution one. It also means that a final salary pension is now considered to have value beyond an annual income: a quantifiable cash lump sum in the form of a CETV.

How Cash Equivalent Transfer Values Are Calculated

A CETV is usually calculated as a multiple of the annual benefit you’re entitled to from the scheme, but how large a multiple will depend on your pension provider and your circumstances.

You can request a cash equivalent transfer value from your defined benefit pension scheme to work out how much your scheme will offer you if you decide to leave.

Is My Final Salary Pension Transfer Offer Good Value?

As well as asking your pension fund for a cash equivalent transfer value, it’s also worth using a final salary pension transfer calculator.

Our Final Salary Pension Transfer Calculator lets you do your own pension transfer calculations to make sure the CETV you’re being offered is favourable compared to other transfer offers being made in the market.

If you’ve already received a pension transfer value, Drewberry’s defined benefit transfer value calculator can help determine whether the offer is fair.

Even if you haven’t yet requested a CETV from your pension provider, the Drewberry final salary transfer calculator could be a good place to start.

If you know what your final salary pension could be worth, you can work out what would likely be a good transfer value for you and see if that matches up with what your provider is willing to offer.

Final Salary Pensions Transfer Calculator

Find out how much your final salary pension might be worth in today's money if you considered accepting a cash equivalent transfer value from your scheme.

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Should I Transfer My Final Salary Pension?

Whether or not you should transfer your final salary pension is dependent on your personal circumstances.

Like all decisions, it’s one you should consider by weighing up the pros and cons of transferring your DB pension, some of which are outlined below.

Advantages and Disadvantages of a Final Salary Transfer

There are pros and cons to transferring your final salary pension scheme.

While a high transfer value invested in a defined contribution scheme with access to all the pension freedoms might seem like a massive advantage, you’ve got to consider the fact that you’ll be given up a guaranteed income for the rest of your life.

The value of investments in a defined contribution scheme can fall as well as rise, meaning you could get back less than you invested.

This is opposed to a defined benefit pension scheme, where you face no investment risk and the pension you receive is guaranteed. Thanks to the Pension Protection Fund, your pension is guaranteed at least in part even if your employer goes bankrupt.

Benefits of a Final Salary Pension Transfer

Although your defined benefit pension offers you a guaranteed income for life, there may be a number of benefits to transferring out of your pension plan. These include:

  • Defined benefit pensions usually die with you. Transferring out and taking a cash lump sum from your pension scheme means you have far more freedom when it comes to loved ones inheriting your pension.
  • The 2015 pension freedoms give you unprecedented control over how you want to provide yourself a retirement income, which you could miss out on by sticking with your final salary pension.
  • Under the pension freedoms, if you choose pension drawdown, you can vary your income up and down each year to suit you, which could offer tax savings.
  • By transferring out of your final salary scheme, you may get a better deal if you’re in poor health and / or a smoker by purchasing an enhanced annuity. If you stay in a DB scheme as a smoker or someone with ill health, you could draw a pension for fewer years than a healthier, longer-lived colleague. Ultimately, you could receive less money than them even though you’ve paid the same in pension contributions.
  • If you’re concerned about the health of your employer, a transfer may make sense. While the Pension Protection Fund is there to pick up the pieces in the event of your employer going bust, there’s a cap on the amount you can receive from the fund if you’re yet to reach retirement of up to 90% of your entitlement. For a 65-year-old in the 2017/18 tax year, benefits would be capped to an income of around £35,000 per year if they had entitlement greater then approximately £38,000 per year under their scheme.

Disadvantages of a Final Salary Pension Transfer

One of the biggest risks of a final salary pension transfer is that you’ll no longer have a secure, lifelong income. Pension transfers are irreversible, so you should think carefully before proceeding.

Other potential drawbacks include:

  • You’ll have to manage your pension fund’s investments yourself and take on any risks involved, although this is an area where a financial adviser is well-placed to help.
  • The value of investments in a defined contribution pension, and in income drawdown, can fall as well as rise, meaning you could get back less than you invested.
  • If your investments perform badly and / or you spend too much, you might run out of money. Again, this is where pensions advice is essential to make sure you have the retirement you always thought you would.
  • If you want a secure income after transferring out of your defined benefit pension plan, one option is to buy an annuity. However, today’s annuity rates are far lower than they used to be, unless you’re in poor health and therefore qualify for an enhanced annuity.
  • You’ll be subject to the Money Purchase Annual Allowance, which kicks in for those flexibly drawing down a defined contribution pension and places a cap of £4,000 per tax year on the amount you can contribute to a pension and still get tax relief. This doesn’t apply to those getting final salary benefits, which means you can continue contributing up to your maximum annual pension allowance into a pension scheme in retirement.

It is recommended that you always seek financial advice or specific pensions advice before transferring a final salary pension. If your pension is worth more than £30,000, taking advice is a legal requirement from the FCA.

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