An article written by one of our advisers Craig Southern…
Gone are the days when pensions were straightforward... when you signed up to work at a company with a decent plan, worked there for decades, then retired at 60 to start spending said pension without giving the scheme a second thought!
Today, we work longer, live longer, and move from company to company throughout our lives. Pension options are more complex and competitive, giving you more ways to save, invest and access your money. While choice is great, it’s also confusing.
No wonder, then, that one of the most common questions we’re asked is: should I transfer my final salary pension?
In this article, I’ll help you answer exactly that.
What Is a Final Salary (Defined Benefit) Pension Scheme?
A final salary defined benefit pension gives you a regular, defined monthly payment based on what you were earning when you retired, and how long you’d been working at the company.
For example, if your employer uses a 1/60 model to calculate your pension, this will be equal to 1/60 of your final salary for every year you’ve worked there. If you stay at the company for 20 years, your pension will be 20/60, or one-third, of whatever your monthly salary is by the time you retire.
What’s the Difference Between a Final Salary (DB) Scheme and a Personal Pension Scheme?
A final salary pension offers peace of mind: you have a set, guaranteed income for life. It doesn’t matter how long you’re around for, your pension won’t run out.
A personal pension scheme (PPS), on the other hand, is finite – it can run out. At the same time, it’s much more flexible.
Over the course of building up your pension pot, you (and your employer) have much more freedom over how much money you put in each year. You also have far more wiggle room about when you can start claiming your pension, how much you can take out, and where the money goes after you die.
Okay, So… Why Would I Switch to a Personal Pension Scheme?
While a regular, reliable income is great, there are downsides.
You can cash out 25% of your fund tax-free at the start, but after that, your hands are tied. No matter how much money you’ve added to your pension pot over the years, you can only access this at the rate your final salary scheme allows.
In many cases, you’re stuck working until the last possible moment – if you take early retirement, there’s a penalty. What’s more, other than the smaller benefits paid out to a surviving partner and dependent children, when you die your pension dies with you. You can’t pass it on.
If you switch to a personal pension, you can start drawing your pension at 55, even if you’re still working. You can also cash out as much of your pension as you like at any time (although you might have to pay tax on this), and you can pass on your whole pension to your partner, children or anyone else you choose - so the money you’ve accumulated is never lost.
Right. So Should I Transfer My Final Salary Pension?
Ultimately, the decision boils down to this: are you more worried about having a regular income that never runs out, or making sure you get the most out of the money you’ve saved?
Put it this way: if your pension pot isn’t huge and you think you might live until 106, it could make sense to be cautious.
On the other hand, you may have reason to think you’ll have less time to enjoy your pension fund and you’d rather access more money now - or have better ways to support your family after you’re gone. Perhaps you’ve saved enough that you’re unconcerned about exhausting your fund, but could do with a chunk of capital to, say, pay off your mortgage or relocate abroad. Perhaps you want to retire early, without being penalised.
Whatever your individual circumstances and goals, make sure you talk to someone who knows the pension landscape inside out and can help you figure out the very best match for you. Even if the answer is that you’re already on the best plan, it’s important to find out now!
It is the opinion of both ourselves and our regulators (The Financial Conduct Authority) that most people would be better off staying in their final salary scheme but it does depend on individual circumstances.