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Final Salary (Defined Benefit) Pension Schemes

Final Salary or Defined Benefit Pension Schemes are Occupational or Company Pension Schemes where pension benefits are usually calculated by the salary you were earning at the time of leaving employment and the number of years you worked for your employer. This provides a guaranteed income when you retire which in many cases will rise with inflation each year


Your pension provider has the responsibility for providing the benefits irrespective of investment performance or current annuity rates.


In most cases, the cost, potential loss of benefits and the risks of transferring from a defined benefit pension scheme to a defined contribution pension scheme outweigh the advantages, but there are a few scenarios where it might be the best course of action such as having greater flexibility and access to tax-free cash or you may have a serious medical condition that could shorten your life expectancy and you want to pass the money to your family. Its important that you carefully consider all the facts before making any decision.

What happens if I transfer our of a final salary pension scheme?

If you do for some reason decide to transfer out of your final salary pension scheme, then your pension trustees must convert the benefits into a cash sum or transfer value (also known as a cash equivalent transfer value [CETV]) and transfer this to another pension scheme with another employer or to a personal, self invested or stakeholder pension scheme.

Reasons why you might consider transferring:

  • Your pension scheme is being closed or wound up or there are concerns over the financial strength of the scheme and/or your employer.
  • You have several small defined benefit schemes and want to bring them all together into one pension scheme.
  • You plan on taking early retirement benefits from age 55.
  • You want to take a phased retirement where you require the tax free cash, but no pension. This might not be an option from your defined benefit scheme.

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