Should you transfer a final salary pension?
A defined benefit pension transfer is one of the most consequential financial decisions a person can make. This guide covers what is given up, how the transfer value is calculated, and the legal requirements.
- •Transferring a defined benefit pension with a value above £30,000 requires regulated financial advice by law (FCA rules). A transfer cannot proceed without it.
- •This article provides factual information about DB pension transfers. It is not financial advice and does not constitute a recommendation to transfer or retain a DB pension.
- •The FCA has found that transferring a DB pension is not in the best interests of most members. Between 2015 and 2020, the FCA estimated that a significant proportion of DB transfer advice was unsuitable.
- •Anyone considering a DB transfer must speak to an FCA-regulated financial adviser with specific permissions for pension transfer advice.
- ▸A final salary (defined benefit) pension provides a guaranteed income for life, linked to salary and years of service. Transferring it to a defined contribution pot exchanges that certainty for investment risk.
- ▸The Cash Equivalent Transfer Value (CETV) is the lump sum the scheme offers in exchange for giving up the guaranteed benefits. CETVs are calculated by the scheme actuary and are not negotiable.
- ▸For transfer values above £30,000, regulated financial advice from an FCA-authorised adviser is required by law before the transfer can proceed.
- ▸The FCA's starting position is that retaining a DB pension is likely to be in most members' best interests. Transfers are appropriate only in specific, well-evidenced circumstances.
What you're giving up (guaranteed income for life)
A defined benefit pension — also known as a final salary pension — pays a guaranteed annual income from retirement for life. The amount is determined by a formula: typically (years of service) x (accrual rate) x (pensionable salary).
For example: 20 years of service x 1/60th accrual rate x £50,000 final salary = £16,667 per year for life.
This income is:
- Guaranteed. It does not depend on investment performance.
- Inflation-linked. Most DB pensions increase annually, either by CPI, RPI, or a fixed percentage.
- Lifelong. It continues until death, regardless of how long the member lives.
- Spouse-eligible. Most schemes pay a percentage (typically 50%) to a surviving spouse.
Transferring to a defined contribution pot means giving up all of these guarantees. The pot must then be invested, managed, and drawn down — with the risk that poor investment performance, high fees, or living longer than expected could result in running out of money.
The CETV: how it's calculated
The Cash Equivalent Transfer Value (CETV) is the amount the DB scheme offers to pay into a defined contribution pension in exchange for the member giving up all future DB benefits.
The CETV is calculated by the scheme actuary using assumptions about:
- Discount rate: The expected rate of return on assets held by the scheme to fund the guaranteed benefits.
- Mortality assumptions: How long the member is expected to live (and receive benefits).
- Inflation assumptions: The expected cost of future inflation-linked increases.
- Interest rates: Lower interest rates generally produce higher CETVs, because the cost of funding a guaranteed income stream is higher when discount rates are low.
CETVs are not negotiable. The scheme actuary calculates the figure, and the member either accepts it or retains the DB benefits.
CETV amounts can be substantial — multiples of 20–30 times the annual pension are not unusual. A pension of £16,667 per year might produce a CETV of £350,000–£500,000. The headline figure can be attractive, but it must be weighed against the value of the income it replaces.
CETVs are guaranteed for three months from the date of calculation. After that, a new CETV may need to be requested.
When transfer might make sense (and how rarely it does)
The FCA's default position is that retaining a DB pension is in most members' best interests. The regulator has made clear that the guaranteed income, inflation protection, and longevity insurance provided by DB pensions are exceptionally difficult to replicate in a DC pot.
The narrow circumstances where transfer may be appropriate include:
Serious ill health with reduced life expectancy. If the member has a significantly shortened life expectancy, the value of a lifelong income stream is reduced. A DC pot can be passed to beneficiaries; a DB pension typically offers only a reduced spouse's pension.
No dependants and no need for survivor benefits. A single person with no spouse or children does not benefit from the survivor pension provisions of a DB scheme.
Large other guaranteed income. If the member has substantial other guaranteed income (e.g. a large state pension plus another DB pension), the marginal value of additional guaranteed income may be lower.
Desire for flexibility. DC pots offer flexible drawdown, lump sum access, and inheritance options that DB pensions do not. Some members value control over their capital more than the certainty of a guaranteed income.
Even in these cases, transfer is not automatically the right choice. The specific numbers — CETV amount, annual pension value, alternative income sources, health status — must be analysed in detail.
The legal requirement for regulated advice
For any DB pension transfer with a value above £30,000, the member must receive advice from an FCA-regulated financial adviser with specific permissions for pension transfer advice before the transfer can proceed. This is a legal requirement under FCA rules, not a recommendation.
The adviser must:
- Analyse the CETV in relation to the benefits being given up
- Assess the member's overall financial circumstances
- Provide a personal recommendation to transfer or not transfer
- Provide this in writing, including a transfer value analysis (TVAS)
The cost of this advice is typically £3,000–£5,000, sometimes more for complex cases. Some advisers offer a fixed fee; others charge a percentage of the CETV.
If the adviser recommends against transfer and the member proceeds anyway, the member loses the right to claim compensation through the Financial Services Compensation Scheme (FSCS) if the transfer later proves to have been a poor decision.
The FCA maintains a register of authorised advisers at register.fca.org.uk.
- ▸FCA rules require anyone with safeguarded benefits (including defined benefit pensions) worth more than £30,000 to take regulated financial advice before transferring to a defined contribution scheme. [FCA]
- ▸Between 2015 and 2020, an estimated £82 billion was transferred out of DB pension schemes. The FCA found that a significant proportion of the advice given was unsuitable. [FCA]
- ▸DB pension CETVs are calculated by the scheme actuary and are guaranteed for three months. They are influenced by gilt yields, mortality assumptions, and inflation expectations. [The Pensions Regulator]
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.