Transferring out of a final salary pension

A final salary pension, formally called a defined benefit pension, is a workplace pension that pays you a guaranteed income for life based on your salary and how long you worked for your employer¹. Transferring out means giving up that guarantee: the scheme calculates a one-off cash value for your benefits, called the cash equivalent transfer value (CETV), and moves that money into a different pension, usually a defined contribution pension where the income you get depends on how the money is invested³.

The transfer value can look like a large sum of money, sometimes hundreds of thousands of pounds, which is why the idea appeals. But the regulators are blunt about it: the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) both say most people are better off keeping a defined benefit pension¹. Once transferred, the money is yours to invest and spend, but the promise of a guaranteed, inflation-protected income for life is gone for good, and it cannot be bought back.

Because the stakes are so high, the law steps in. If your defined benefit pension is worth £30,000 or more, you must take regulated financial advice from an FCA-authorised adviser before a transfer can go ahead, and you pay for that advice yourself¹. This page explains what a transfer means, what it costs, what you give up, how to check the firms involved, and what to do if you were badly advised in the past.

What a final salary pension transfer means

A defined benefit pension is a workplace pension where the amount you receive in retirement is worked out from your salary and your length of service, not from how investments perform. These schemes are known as "final salary" or "salary-related" pensions, and there are two main types: final salary schemes, based on what you were earning when you left or retired, and career average schemes, based on an average of your salary over your career². When you retire, you can take some of your pension as a tax-free cash lump sum, with the rest paid as a regular income².

A pension transfer is where you move the money in an existing pension to a different scheme or provider¹. In the case of a final salary pension, this means asking the scheme to calculate what your future promised income is worth today. That figure is the cash equivalent transfer value, calculated by your scheme³. If you go ahead, the scheme pays that value across to another pension, and your link to the final salary scheme ends.

The destination is almost always a defined contribution pension, such as a personal pension or a SIPP. There, the money is invested and its value can rise or fall. What you eventually get depends on how much the pot grows, the charges you pay, and how you choose to draw the money, whether through drawdown, lump sums or an annuity.

Not every final salary pension can be transferred at all. If you are already receiving payments from a defined benefit scheme, you will not be able to switch it to a defined contribution scheme³. The same applies to members of unfunded public sector defined benefit pensions, such as those for the NHS, teachers, the armed forces, the civil service, police and fire service³. If you are in one of those schemes, a transfer out is simply not available, and the public sector schemes page explains what you hold instead.

The regulators' view: most people are better off staying put

The FCA and TPR state plainly that most people are better off keeping a defined benefit pension¹. Independent guidance reaches the same conclusion: it is usually best to leave your money in a final salary pension rather than transfer it to a defined contribution scheme³. This is not a rule that stops you transferring, but it is the starting point from which any transfer decision has to be justified.

The reason is what a final salary pension guarantees. The income is promised for life, no matter how long you live or what happens to financial markets, and it rises automatically each year¹. A transferred pot has to generate that same income from investments, annuity purchase or careful withdrawals, and it carries the risk of poor investment performance, high charges, and the risk of running out of money if you live longer than expected. An employer's incentive to encourage a transfer, plus the effect of Income Tax and National Insurance, might not make up for the guaranteed income you would lose¹.

The scale of transfer activity shows why the regulators keep issuing warnings. A review of defined benefit transfer advice found advice was provided on £82.8bn of transfers, with 162,047 members being recommended to transfer their pension⁸. The Pensions Regulator's own assessment found that, despite concerns from industry, 5% of pension transfers could have features of a scam⁹. Defined benefit pensions are also still a real part of the landscape: they were the most common type of workplace pension until the 1980s¹⁰, and official statistics for April 2018 to March 2020 found defined benefit pensions remained more common than defined contribution pensions among women, at 25% versus 23%¹¹.

There are circumstances where a transfer can make sense for a particular person, for example where someone is single, in poor health, has other secure income, or wants flexibility over when and how the money is used. Money left in a defined contribution pension can be left to anyone you nominate, so this option might mean more of your money passes to family¹. But these are personal circumstances an adviser has to weigh, not reasons that apply to everyone, and the defined benefit vs defined contribution comparison sets the two side by side.

Advice is a legal requirement at £30,000 or more

If your defined benefit pension is worth over £30,000, you must pay for financial advice before you can transfer it into a defined contribution pension¹. The Pensions Protection Fund confirms the same rule from the member's side: obtaining independent advice is a legal requirement if you are considering transferring out of your defined benefit scheme, and the value threshold is £30,000 of safeguarded pension rights¹². Without a certificate from an authorised adviser confirming you have received advice, the receiving scheme cannot accept the transfer.

The threshold works like this:

• £30,000 or more: advice from an FCA-authorised adviser is legally required, and you pay for it¹.
• Under £30,000: no legal advice requirement applies, but some schemes will not accept transfers without advice whatever the value³.
• Very small pensions: in some cases a defined benefit pension can be taken as a one-off lump sum rather than transferred, if the value of all your private pensions is less than £30,000, the scheme rules allow it, and you have not cashed in another defined benefit pension in the last 12 months¹³.

Advisers do not start from a neutral position. The rules require an adviser to start by assuming a transfer is not suitable, and only to recommend one if your circumstances clearly justify giving up the guarantees. The Pensions Regulator's review of the advice market found that the suitability of defined benefit to defined contribution transfer advice has improved, but that unsuitable advice is still at an unacceptably high level¹⁴. Common problems the Financial Ombudsman Service sees include advisers who did not check a person's attitude to risk or their capacity for loss, meaning whether they could afford or wanted to make riskier decisions, and advisers who recommended transferring away guaranteed benefits without good reason¹⁵.

Free guidance is available before you pay for anything. Pension Wise offers free guidance on your pension options, and the FCA produces free, easy-to-understand guides about pensions¹⁶. Guidance explains your options; it does not tell you what to do or satisfy the legal advice requirement.

What financial advice on a transfer costs

Advice on a defined benefit transfer is not free, and it is not cheap. The FCA states that this can often cost thousands of pounds¹. You will usually have to pay for the advice of an independent financial adviser about workplace pensions⁴. The cost is yours whether or not you go ahead with the transfer, because the work of analysing the scheme, your circumstances and the alternatives has to be done either way.

How advisers are paid varies. Some advisers charge a fee; others receive commission from the pension provider¹⁶. Ask any adviser before you engage them how they are paid, what the total cost will be, and what you owe if they recommend against a transfer. A firm that is vague about its fees, or that only quotes a percentage of the transfer value without giving the cash amount, is a warning sign.

When weighing the cost, remember what it buys: an assessment of whether giving up a guaranteed income for life makes sense for you. The fee is a one-off, but the decision is permanent. The pension transfer advice rule page covers when advice is required in more detail.

Where you can transfer a defined benefit pension to

A UK pension pot can be transferred to another registered UK pension scheme⁴. For a defined benefit transfer, the realistic destinations are defined contribution pensions: personal pensions, SIPPs, and workplace defined contribution schemes. The main guide to transferring pensions between providers covers the mechanics, and the personal pension and SIPP providers page describes who operates in that market.

A transfer into a defined contribution scheme can bring genuine advantages: it might save money if the other scheme has lower fees, give access to different investment options, and give more options for taking money from your pension¹. Flexibility over withdrawals, the ability to pass the pot to anyone you nominate, and control over where the money is invested are the main attractions¹.

Two protections are worth knowing about at this stage. First, trustees of defined benefit schemes must provide members with a link to FCA information on considering a pension transfer from a defined benefit pension, so members receive official information from their own scheme before any transfer¹⁷. Second, if the employer sponsoring the scheme becomes insolvent, the Pension Protection Fund will assess the scheme to see if it can enter the PPF, which protects members of defined benefit schemes¹⁸. Once a transfer out has taken place, that safety net no longer applies: the PPF vs FSCS comparison explains the two protection systems.

Transfers to overseas schemes and transfers to unregistered arrangements raise separate tax and legal issues that this page does not cover; the moving abroad page deals with emigration.

How a transfer works, and how long it takes

The official process for transferring a pension has six steps¹:

1. Check your current scheme allows transfers out.
2. Make sure you will not lose any benefits.
3. Decide which scheme to transfer into.
4. Check if you need to pay for financial advice.
5. Ask your current provider for a transfer value.
6. Ask the new scheme to start the transfer.

Timing matters at both ends. A transfer often takes between two and six weeks, but your provider has up to six months to action your request¹. Your existing company must move your pension within six months of the start of the transfer process³. Some in the industry argue transfers can be done much faster, with one provider saying 10 days is doable and doable at scale³, but the legal maximum is what protects you if things stall. If a transfer drags on, the delayed transfer page explains what to do.

There is also a deadline on eligibility. You can generally transfer at any time up to one year before the date when you are expected to start drawing retirement benefits⁴. Some defined benefit schemes will not allow transfers out after your pension has started paying out, or within a year of reaching normal retirement age¹. In some cases it is also possible to transfer to a new pension provider after you have started to draw retirement benefits, but this applies to other types of pension, not to a final salary pension already in payment⁴.

What you can lose by transferring

This is the heart of the decision. If you transfer a defined benefit pension into a defined contribution scheme, you lose the promise of a guaranteed retirement income for life with automatic annual increases¹. Everything else that can go wrong follows from that.

The official list of what a transfer can cost you is longer than most people expect⁴:

• You may have to make payments to the new scheme.
• You may pay a fee to make the transfer.
• You may lose any right you had to take your pension at a certain age.
• You may lose any fixed or enhanced protection you held, which are protections for pension savings built up before rule changes.
• You may lose any right you had to take a tax-free lump sum of more than 25 per cent of your pension pot.

Beyond the guarantees, you also leave the protections that surround a defined benefit scheme. If the employer sponsoring your scheme becomes insolvent, the Pension Protection Fund assesses the scheme and can take on its members' benefits¹⁸. A transferred pot has no equivalent promise: its value is what the investments are worth, and the protections that do exist, such as FSCS cover if a regulated firm fails, work differently and cover different things²⁰.

The risks are not evenly spread. Someone who transfers and then lives a long retirement faces the risk of the pot running out; someone in poor health may never receive back in income what the transfer value was worth. The transfer risks page works through these in detail, and the tax on pension income page explains how withdrawals are taxed, since a large transferred pot can push income into higher tax bands in a way a spread-out final salary income would not.

Pension transfer scams and how to check a firm

Pension transfers are a favourite target for scammers, because they involve moving large sums in one go. The Pensions Regulator's strategy to combat pension scams notes that, despite concerns from industry, 5% of pension transfers could have features of a scam⁹. The Financial Ombudsman Service has warned consumers to keep their pension safe from scammers, and points people to its free, independent service for complaints about how a pension provider or adviser handled a transfer²¹.

The defences built into the system are there for a reason. When members ask to transfer out of a scheme, the governing body should carry out due diligence on the scheme the member wishes to transfer to, to check whether the transfer can legally be paid²². Trustees must also send members a pension scams leaflet when a member requests a transfer²³. These checks can slow a transfer down, and that is deliberate: they exist to stop money leaving the system before anyone can intervene.

Before dealing with any firm, take these steps:

• Search the FCA Register to check that it authorises your financial adviser, and separately your new pension provider²⁰.
• Firms must be authorised by the FCA to advise on financial products such as personal pensions¹⁶.
• Check the details of the investment and whether the provider is genuine on the FCA's ScamSmart website²⁵.
• Check that the contact details you have match those listed on the FCA's register, to avoid scammers pretending to represent a real firm²⁶.

The pension scams page lists the warning signs in full, and the scams and fraud section covers the wider picture.

Complaints, compensation and where to get help

If you think you might have received unsuitable advice to transfer your pension, the route depends on whether the adviser is still trading. If the adviser is still trading, complain to them first; if you are not satisfied with their response, take the complaint to the Financial Ombudsman Service. The FSCS handles claims where the adviser has failed, and the adviser must have gone out of business and must have been regulated by the FCA at the time it gave the advice²⁷.

The ombudsman can look at complaints about how a pension provider or adviser handled a transfer, and its service is free²¹. If your complaint is about transferring from a defined benefit scheme, you may want to use the FCA's advice checker to find out more about whether the advice you received was right¹⁵. The ombudsman publishes contact details for regulated financial businesses, which helps you find the right firm to complain to²⁸.

Where the adviser has failed, the FSCS calculates compensation by comparing the benefits you have lost from your defined benefit pension with the benefits in your current pension; the difference is the compensation payable, up to the limit²⁷. Compensation may be refused where there is no evidence of the advice, no evidence of loss, a gain is shown, or the claim falls outside eligible dates²⁷. The British Steel Pension Scheme shows how this works at scale: the ombudsman notes that if you complained about advice to transfer your pension before the redress scheme started, you do not need to do anything else²⁹.

If you used a claims management company and are unhappy with the service, the results of the claim or the fees charged, you can complain to the Financial Ombudsman Service about that too³⁰. The Pensions Ombudsman page and the complaints about providers page cover the wider complaints landscape.

Free, impartial help is available at every stage: Pension Wise for guidance on your options, the FCA's own guides about pensions¹⁶, and the ombudsman and FSCS when something has already gone wrong. If money is tight, National Debtline's guidance on pension freedoms notes that pension savings can usually be taken into account in some debt situations, so it is worth getting debt advice before transferring or cashing in a pension to pay debts⁷.