Can I Transfer Out of a Final Salary Pension Scheme?

Can I Transfer My Defined Benefit Pension?

Retired members of defined benefit schemes who are already receiving payment of their benefits are barred by law from making transfers to defined contribution schemes.

Transfers from unfunded public service defined benefit schemes are also prohibited. These cover somewhere in the region of five million UK residents and include the pension schemes for the NHS, teachers, the armed forces, the civil service, police and fire service.

The exclusion also extends to the 30,000 or so members of smaller unfunded schemes such as those run for MPs, the judiciary, research councils and the UK Atomic Energy Authority.

By contrast, it is possible to transfer out of funded public service defined benefit schemes. So if you’re looking to transfer out of the Local Government Pension Scheme then it may be possible, subject to certain safeguards.

Transferring Out of Private Sector Final Salary Schemes

Transfers from private sector defined benefit schemes are still permitted subject to certain requirements.

The biggest such requirement is that individuals seek professional pensions advice for the final salary pension transfer from an adviser who is independent from the defined benefit scheme and authorised by the Financial Conduct Authority (FCA).

Note that this requirement to seek financial advice doesn’t apply to scheme members with a pension pot of less than £30,000 as the ‘trivial commutation’ rules apply to situations like this. However, we’d recommend all individuals seeking to transfer their final salary pension seek advice because it’s a huge decision, one that won’t be right for most people.

Benefits of Final Salary Pension Transfers

Although your defined benefit pension offers you a guaranteed income for life, something a pension transferred to a defined contribution scheme doesn’t offer, there could be benefits to transferring out of your pension plan in limited circumstances. These include:

• If your former employer goes bust or the pension fund runs into trouble, you won’t be affected as you’ll already have transferred out.
• Having a defined contribution pension providing your retirement income means you can leave some of your pension to your children or other beneficiaries. With most final salary schemes, the pension dies with you / your spouse.
• The new pension freedoms offer huge flexibility for arranging a pension income, such as the ability to increase and decrease income in any given year to suit your tax situation.
• If you’re in poor health and / or a smoker, you may have a lower life expectancy, something defined benefit schemes don’t tend to adjust for. That means you might draw on your pension plan for fewer years than a healthier, longer-lived colleague in the same scheme, so they could receive more than you. If you transfer out and are in poor health, you might be able to make use of an enhanced annuity to boost your retirement earnings or make arrangements to leave your pension to beneficiaries after you’re gone.

Disadvantages of Final Salary Pension Transfers

One of the biggest risks of a final salary pension transfer is that you’re giving up a secure income for life. The move is permanent: you can’t transfer back in.

Other drawbacks include:

• You’ll have to take on the investment risk and make investment decisions for your pension fund yourself.
• The value of pension investments can fall as well as rise in a defined contribution scheme, meaning you could get back less than you invested.
• If your investments don’t perform as well and / or you overspend, you might run out of money. This is where pensions advice is essential for planning the retirement you deserve.
• One of the most common ways those with money purchase schemes secure a retirement income is by purchasing an annuity. However, annuity rates at the moment are poor unless you have a health condition that warrants an enhanced annuity.

Final Salary Pension Transfer Advice

For expert advice in the area of transferring final salary pensions, don’t hesitate to get in touch. We’re available on 02084327334 or you can email wealth@drewberry.co.uk.