Transferring a Final Salary Scheme to secure death benefits

Transferring a final salary pension can turn a guaranteed income into a pot that may be passed on to children, but it means giving up that income, the spouse's pension and Pension Protection Fund cover, and the FCA's starting assumption is that a transfer is unlikely to be suitable for most people. From 6 April 2027, unused pension funds are also due to come into the scope of inheritance tax, which weakens the inheritance argument. For someone who mainly wants to leave money to their children, there may be other ways to do it while keeping the guaranteed income.

Illustrative example: the situation

Transfer value: £435,000

Imagine a man aged 55 with these circumstances:

• Married
• Aged 55
• Outgoings of £1,600 a month
• No loans or mortgage
• Good health
• Three adult children, none financially dependent on him

He has just received his transfer value from his final salary scheme and is surprised by how large it is. His first thought is that he should transfer it into his own name so that it is "safe".

When he thinks it through, it becomes clear that his main goal is to pass money to his wife and children when he dies.

This is his only significant pension, and he plans to work for another ten years. His worry is that if he dies early, the transfer value is "lost" to his family. Under his scheme, only his wife would benefit, through a 50% spouse's pension: half of his pension, for the rest of her life.

His pension is forecast to pay him £17,450 a year from age 65. Together with his wife's NHS pension of £5,200 a year, that is more than enough to cover their forecast outgoings of around £16,000 a year (in this example, his outgoings fall from £1,600 a month once work-related costs stop). Two years after he retires, he also expects a full State Pension, increasing their guaranteed income further.

He has no investment experience and doesn't need more income or flexibility in retirement. His main concern is to leave something to his children, because he has no other savings.

What a regulated adviser might point out

A pension's main job is to make sure you, and your spouse or partner, have enough income in retirement. Anything left over is a bonus. Leaving money to family is a natural wish, but it usually shouldn't come at the cost of an income you will need while you are alive.

If he asked for regulated advice, an FCA-authorised adviser with the pension transfer permission would start from the FCA's assumption that a transfer is unlikely to be suitable. In a case like his, the adviser would typically weigh:

• What he would give up: a guaranteed income of £17,450 a year from 65, usually with inflation increases, a 50% spouse's pension for his wife and the protection of the Pension Protection Fund
• His need for the income: this is his main pension, and the household relies on it
• His experience: with no investment experience, managing a large pot for decades would be a significant new risk
• Inheritance tax: from 6 April 2027, unused pension funds and most death benefits are due to come into the scope of inheritance tax, so a transferred pot may not pass on as efficiently as he expects. See our 2027 pension IHT guide
• Other ways to meet his goal: whether he could leave money to his children without giving up his guaranteed income

Other ways to leave money to children

People in his position often haven't thought about other ways of leaving money to family. One option an adviser might discuss is a whole of life insurance policy. This is life cover that pays out whenever you die, whether that is at 65 or 95, as long as the premiums are paid.

Some policies have premiums that are guaranteed not to increase, while others are reviewable. Whole of life policies are often written in trust, which can mean the payout is usually kept outside the estate for inheritance tax, depending on how the trust is set up. Premiums depend on age, health and the amount of cover, and they need to be affordable for life.

Likely outcome of regulated advice: keep the final salary pension. An adviser might suggest he explores whether an affordable life insurance policy could help him leave money to his children, without putting his own retirement income at risk.

There are cases where a regulated adviser concludes that a transfer is in someone's best interests, for example in some cases of serious ill health. Those cases usually involve other overriding factors, specific to the person, and the decision always depends on full advice.

Death benefits from final salary schemes

It is worth understanding what your scheme already provides. Final salary schemes usually offer:

• A spouse's or civil partner's pension: often 50% of your pension, sometimes more, paid for life
• Children's pensions: in some schemes, paid while children are in full-time education or for life if they have a qualifying disability
• A lump sum on death before retirement: many schemes pay a lump sum, such as a refund of contributions or a multiple of salary or pension, if you die before your pension starts
• A guarantee period: some schemes keep paying for a minimum period, often five years, if you die soon after retirement

Ask your scheme for details of its death benefits, and keep your nomination form up to date.

Getting help

The decision is personal and depends on your circumstances and goals. If your DB benefits are worth more than £30,000, the law requires you to take regulated advice from an FCA-authorised adviser with the pension transfer permission before transferring.

I don't give pension transfer advice. I offer a free, no-obligation chat that gives general information about how DB transfers and the advice process work, and if you want regulated advice I can introduce you to an FCA-authorised firm that holds the pension transfer permission. Arthur Browns may receive a fee from the firm we introduce you to if you become their client. Introductions are for transfer values of £50,000 or more. You can book a free chat about how the process works.

Free, impartial guidance is available from MoneyHelper and Pension Wise. Be wary of anyone who contacts you unexpectedly about your pension; the FCA's ScamSmart site explains the warning signs.

Learn more: What affects defined benefit transfer values?

Frequently asked questions

Can I transfer my final salary pension to pass money on to my children?

It is possible to transfer a final salary pension to a personal pension, where any money left on death can be passed to beneficiaries. But you would give up your guaranteed income, any spouse's pension and PPF protection, and from 6 April 2027 unused pension funds and most death benefits are due to come into the scope of inheritance tax. Other options, such as life insurance, may help you leave money to children without giving up your guaranteed income. If your benefits are worth more than £30,000, you must take regulated advice before transferring.

What happens to my final salary pension when I die?

Most final salary schemes pay a spouse's or dependant's pension on death, often 50% of the member's pension. Many also pay a lump sum if you die before your pension starts, and some pay children's pensions. Final salary schemes generally do not pass a full fund value to children or other non-dependants. Check your scheme's rules.

What is a whole of life plan and how does it compare with transferring a pension?

A whole of life plan is a life insurance policy that pays out whenever you die, as long as the premiums are paid. Some people use one to leave a lump sum to family while keeping their guaranteed pension income. Premiums vary with age, health and cover, and the policy is often written in trust. A regulated adviser can explain whether it would suit you.

Should leaving money to family be the main reason to transfer a defined benefit pension?

Regulators and advisers generally caution against transferring a DB pension mainly to leave money to children or other beneficiaries. The FCA's starting assumption is that a transfer is unlikely to be suitable for most people, because of the guaranteed income you would lose. Death benefit planning should be considered alongside the full picture, and other options may be more appropriate.

How do I find out whether transferring is right for me?

That depends on your health, income needs, other assets, goals and attitude to risk, and it can only be decided through regulated advice. If your DB benefits are worth more than £30,000, the law requires advice from an FCA-authorised adviser with the pension transfer permission before you transfer.

This is a hypothetical, illustrative example. The person described is not a real client, and the figures are examples only. It is not advice.