A final salary pension transfer could swap £10,000 a year for £175,000 cash – is it worth it?

Swapping your “final salary” pensions for a cash lump sum is not as generous as it once was, but you could still turn a £10,000-a-year pension into more than £175,000.

The value of so-called “pension transfer values” has fallen by a third over the last year and a half, according to the consultancy XPS Pensions Group. 

This is higher than the record low of £148,316 in October 2022 but far below their peak in December 2021, when the same £10,000-a-year pension could have been swapped for £270,840 inside a personal pension.

Whether or not it is worth swapping a guaranteed income for cash depends entirely on your circumstances. 

Below, the Telegraph explains what you need to consider before giving up highly valuable pensions, including when the best time to swap a pension is.

Why transfer?

A final salary pension, also called a defined benefit pension, provides a guaranteed, inflation-proofed income for life plus extra benefits, such as paying money to a spouse or partner after you die. 

They are now rare in the private sector, with 930,700 people still paying into such schemes, according to the Pension Protection Fund. This compares to 3.62 million in 2006. Most public sector workers are still members of these generous schemes.

While highly generous, final salary pensions are relatively inflexible compared to modern “defined contribution” personal pensions. 

You can take ad hoc lump sums from defined contribution pensions whenever you like (which can be useful in limiting income tax) and they can be passed on down the generations indefinitely, whereas final salary schemes typically stop paying when the member or their partner dies.

However, replicating the income of a final salary scheme is incredibly difficult and the City watchdog has said that in most cases it is not in the best interests of the member. 

There have also been cases where financial advisers were found to have mis-sold the benefits of giving up final salary plans. In 2022 former steelworkers won compensation when it emerged they had been convinced to give up their company pensions wrongly.

Under rules set out by the Financial Conduct Authority, any transfer worth £30,000 or more must be signed off by a financial adviser. 

This is to ensure you fully understand the value of what you’re giving up. In the past Telegraph readers have found it all but impossible to find an adviser willing to sign off on a transfer. 

Once a transfer is complete, you are responsible for where your pension is invested, you must decide how much income you take and bear the risk that your investments might underperform. 

If an adviser does not recommend a transfer, it can be all but impossible to proceed. Major personal pension providers Hargreaves Lansdown, AJ Bell, interactive investor, and PensionBee said they would not accept a transfer from a final salary scheme unless an adviser recommended it. 

AJ Bell said it does checks to ensure any advice given has come from an adviser with the credentials to advise on transfers.

However, Aviva confirmed it would accept so-called “insistent customer” transfers – where the advice is not to proceed but the customer insists on the transfer taking place – but only into a stakeholder plan. 

Few advisers now offer pension transfer advice and fees are high due to the complexity of the work. 

Charges vary, but the cost is usually expressed as a percentage of your transfer value, with an average of £2,500 for a pension worth £100,000, according to unbiased.co.uk, a directory of financial advisers.

An adviser must tell you what they will charge before you go ahead with the advice. Note that you will be charged regardless of whether a transfer is ultimately recommended or not. It is therefore important to consider whether the fee is worthwhile. If, for example, you make a transfer and save £1,000 of income tax in each of the next 10 years it will be money well spent. But if you spend £2,500 only to be told not to go ahead with a transfer it can be frustrating.

Fiona Tait of Intelligent Pensions, a firm of advisers specialising in pension transfers, said: “Ask your adviser if they offer either a ‘triage’ service or ‘abridged advice’, both of which can help you to quickly rule yourself out before you commit to paying the advice fee.”

The Telegraph asked Aegon, the pension and investment firm, to help savers understand the chances of an adviser recommending a transfer before they proceed.

Our table indicates the kind of questions an adviser will ask – and what sort of response will make a transfer more or less likely.

If your answers include a lot of “more likely” results, then it may be worth exploring further. 

If you get more ‘less likely’ answers, it is less worth your exploring a transfer. Note that this does not constitute financial advice. 

Why transfer values are low right now

Transfer values are designed to give you a fair sum in return for giving up your income for life.

The trustees who are responsible for overseeing defined benefit schemes have to balance the interest of those departing a scheme with those remaining. 

Paying out too much could leave the scheme underfunded in the future.

When interest rates rise, pension schemes get better returns on their assets – which are largely bonds – and so they need less money today to finance the pension they have promised. 

This means that the amount of money they would put in to pay future pensions has gone down, and so your transfer value goes down. 

Conversely, when interest rates are low, a scheme needs much more money today to be able to guarantee you’ll have enough to pay a given income for life.

Steven Cameron of Aegon explains that transfer values are plummeting as the yield on government bonds rises: “Recently, we’ve seen a huge increase in the yields on government bonds, known as gilts, which is the rate often used in transfer value calculations. It’s why transfer values have fallen so sharply in value. 

“But you are still receiving a fair value because you need less today to replace or fund the income for life you’re giving up.”