Key considerations with a Final Salary pension

Posted by: Nicola Macdonald, on January 13, 2017.

Should you consider transferring out of a Final Salary pension? 

The overwhelming majority of people who have a Final Salary pension (also known as a Defined Benefit or DB pension) are best advised to stick with it.

A guaranteed retirement income from such DB pensions may go some way in providing peace of mind that the bills will be paid in old age. Giving up this guaranteed, inflation-proofed income for life could be a risk too far. The recent trend for rising and higher transfer values from DB Pensions may be very seductive, but it’s important to remember any transferred pension has to last throughout retirement. For most, a transfer to a personal pension is simply too risky.

But for wealthier clients, worries about paying their bills or running out of money may well be less of an issue. A Defined Benefit (DB) income for life may simply mean surplus income and unnecessary tax. A transfer to a modern, flexible Self Invested Personal Pension (SIPP) may be a better fit for their needs. For example, they may be planning a more active lifestyle in the early years of retirement, spending more money early and less when they’re older. The ability to take income and tax free cash from a SIPP at the levels they need, when they need it, may give a more tax efficient income and a larger legacy for loved ones.

At the extreme, there will be those who don’t need their pension to support themselves in retirement at all. Instead, they may see a move to a SIPP as a way to preserve accumulated pension wealth and cascade it down to their family tax efficiently. It may provide a larger death benefit and opens up a much wider range of potential beneficiaries. And because a SIPP offers protection from IHT, by spending their non-pension savings and investments to support themselves in retirement, they are potentially reducing their IHT bill.

There are also reasons why a transfer may provide better ‘value’ because of an individual’s particular circumstances. These include:

  • Ill-health: Clients in ill health, with a shortened life expectancy, may get poor value from a DB pension, because it may not be paid for very long or it is paid at a significantly lower level to a surviving spouse. A transfer to a SIPP may give them a higher income for their lifetime, and death benefits may also be superior. 
  • Single status: For clients with no spouse or civil partner, a widow(er)’s pension from a DB scheme may be irrelevant to them. But the notional cost to the scheme of providing this benefit will be reflected in the transfer value.
  • Concerns about the security of the DB pension: Clients with a promised DB pension significantly above the Pension Protection Fund cap (currently £33,678) could face a large loss of value should the sponsoring employer become insolvent. Transferring out to a SIPP may give better value and more control over their futures.

In Summary

Most clients with defined benefits will be best advised to keep them. Having a sustainable income in retirement has to be the number one priority.

  • But not everyone needs a guaranteed income in retirement to feel financially secure. Some will have other savings and assets to provide that security, allowing them to withstand the ups and downs of investment markets. The flexibility of ‘anytime access’ from a SIPP may have more appeal, and prove better suited to their income needs and plans for passing wealth on to their loved ones.

We would like to acknowledge the contributor to this article: Technical Consulting, Standard Life.


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