Should you transfer out of a final salary pension?

Should I transfer my final salary pension? The regulators say most people are better off keeping it, though a transfer can suit a few. Here is what to weigh.

A final salary pension pays a guaranteed income for life, and moving it into a pot you invest yourself is a step you cannot undo. If a general conversation would help before anything else, an FCA-authorised adviser can ring for a chat about your choices, which is not charged for; scheme members can set that up via the form on this page. That is a call you ask for, not a check of your pension and not the transfer advice the law can require, which is paid for.

Should I transfer a defined benefit pension? What the regulators say

For most people the answer is no. The FCA says: "The FCA and The Pensions Regulator (TPR) believe it’s in most people’s best interests to keep their DB pension." It adds a warning about timing: "You can’t reverse a transfer, so you need to make sure you understand the risks so you can make an informed decision."

Firms that advise on a transfer start from the same place. When a firm makes a personal recommendation to someone with safeguarded benefits, such as a final salary pension, the FCA's guidance at COBS 19.1.6G says that "a firm should start by assuming that a transfer, conversion or opt-out will not be suitable." It should treat a transfer as suitable only if it can clearly demonstrate, on contemporary evidence, that the move is in your best interests.

What you give up if you transfer a final salary pension

The FCA lists the main losses. Moving to a defined contribution pot means giving up:

• the lifetime income your scheme promises, which also covers your dependants;
• the protection against inflation that a final salary pension usually carries (see how final salary pensions rise).

In exchange you take on new costs and risks. The pot pays charges to the pension provider and to whoever manages the investments, you choose how to invest it or pay someone to do so, and its value can fall as well as rise. You could end up with less income in retirement, and the money could run out in your lifetime.

If you are unsure what sort of pension you hold, see what a final salary pension is. The case for each kind of pension is weighed in is a final salary pension better, and the other things you can do at retirement are in your final salary options.

What are the possible reasons to transfer?

The FCA accepts that a transfer "may be suitable for your needs" in some circumstances. Its examples are people who:

• will not rely only on the final salary scheme because they have other sources of retirement income;
• have a limited life expectancy and want their family to be financially secure when they die, since a transfer may then give more value to them and their family than staying in the scheme;
• are in serious financial difficulty. Here the FCA says: "On rare occasions, if you’re in serious financial difficulty, you may benefit from a transfer. But this will generally mean sacrificing long-term security for short-term gain."

MoneyHelper points to what a pot can offer: you decide how and when to take the money, including several lump sums, and money left in the pot can usually pass to others free of tax if you die before 75. It also says your income would depend on how the investments perform after fees, so it "could be higher than your defined benefit pension, but it could be much lower." Each of these is a trade, not a bonus. Whether the trade works depends on your health, your other income and your family, which is what regulated transfer advice has to weigh.

How do I avoid a pension transfer scam?

The FCA lists the usual warning signs: an offer of a guaranteed better return, hard-sell pressure, out-of-the-ordinary investments, which it says tend to be unregulated and high risk, and set-ups so complex you cannot see where the money ends up. On reviews it warns: "If you’re contacted unexpectedly and offered a free pension review, it’s likely to be a scam." It adds that professional advice on pensions is not free, that any adviser you use should be authorised by the FCA, and that you should not take advice from whichever firm approached you.

MoneyHelper tells you not to move money or invest after any unsolicited approach by phone, in person, by email or by text. It also says your current scheme must make checks for any risk of a scam; if it is worried about the new scheme, it can delay the transfer until you have had a free Pension Safeguarding Guidance appointment, or stop it if it has serious concerns. Details of the warning signs are on the FCA's pension scams page and in our guide to pension scams.

Who is least suited to a transfer?

The FCA says a transfer is probably not for you if this is your main or only pension, if you could not live on a lower income, or if you will rely on it throughout retirement. The same goes for someone whose scheme already meets their needs, so there is no reason to hold investments that might fall in value, and for a household where dependants might prefer a guaranteed income to a lump sum. It adds one more case: another route may reach what you want, such as providing death benefits for your family.

Pressure to move is a separate matter. The FCA's advice is not to rush and not to transfer just because colleagues are doing the same. If your employer is closing or replacing the scheme, it asks you to read the information the employer sends. And if you are worried the employer could fail, note that leaving the scheme means losing the Pension Protection Fund's protection for eligible schemes; how final salary pensions are protected explains it.

Do I need advice before I transfer?

Often, yes. The FCA says: "If the value of your DB scheme is more than £30,000 you must, by law, get advice from a regulated financial adviser." In law the line is drawn on the transfer value of your safeguarded benefits: under regulation 5 of SI 2015/742, as it has read since 6 April 2018, the trustees may skip their check that you took advice only where that value comes to no more than £30,000 at the valuation date. The advice is paid for, usually by you; MoneyHelper says your employer must pay if it has offered a financial incentive to transfer out. It also says that abridged advice may be cheaper and can tell you a transfer is not suitable, but you would need full advice for a positive recommendation or to go ahead.

The legal test is set out in the advice requirement, who gives or checks the advice in what a pension transfer specialist is, and how the figure you are offered is calculated in pension transfer values.

Questions people ask about transferring a final salary pension

Is a transfer reversible once it has gone through?

No, the FCA says, and the section above covers why that matters. A transfer value is only guaranteed for three months, and you may have to pay for another if you ask again within 12 months.

Is a transfer worth it if my employer offers me an incentive?

MoneyHelper says you are usually better off leaving a defined benefit pension where it is, even if your employer has offered an incentive to move it. The FCA points to MoneyHelper's material on why an incentive might not always be as good as it looks. Transfer bonuses have their own page.

Can I transfer a public sector final salary pension?

Usually not into a defined contribution pot. MoneyHelper says: "Most public sector pension schemes will also not allow a transfer to a defined contribution arrangement." Whether yours allows any transfer is a question for the scheme, and the broad rules for public sector members are something an FCA-authorised adviser can explain at no charge, a point worth raising via the form on this page.

Could a limited life expectancy make a transfer more suitable?

The FCA gives it as one circumstance in which a transfer may suit, because a pot can pass on more than a scheme pension might. The FCA also notes that dependants might prefer a guaranteed income to a lump sum; final salary pensions on death shows what many schemes pay.