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Cashing in a final salary pension is just the first decision

The Greybeard is exploring post-retirement money in modern Britain.

Gentle reader, I have a confession to make. As I have written before, a short spell working for a FTSE 100 engineering firm in the early 1980s had left me with a generous-looking pension as I approached retirement.

For years – literally decades – I had filed the annual statements, marveling at how projections of my annual income in retirement inexorably rose.

Gold-plated pension

Seven or eight years ago, the engineering firm’s pension trustees launched an early retirement enhanced benefit scheme. The hope was to persuade pension fund members to transfer out, or take higher immediate benefits in exchange for lower longer-term benefits.

They paid for a firm of financial advisers to offer advice, and calculate projections. I duly filled in the forms, wryly noted the resulting recommendation to take the money – and then I did nothing.

Why cash in a gold-plated, and partially inflation-linked, final salary pension fund?

As I turned 60, this pension had become – again, quite literally – one of my most treasured possessions, offering a retirement income of £5,000 or so a year, for as long as I lived. Even better, a reduced widow’s pension would be paid to my wife, should I die before her.

No longer. As of early April, that pension is part of my past, not my future.

Take the money

What happened? Last autumn’s bond market turmoil, in short. As gilt yields plunged in the wake of the Brexit referendum result, pension transfer values rose accordingly.

Some pension fund members were being offered transfer multiples of 30-40 times projected annual pension income. Not surprisingly, they were tempted to take the cash.

Among those tempted was former government pension minister and retirement activist Ros Altmann, who saw the transfer value of two pension schemes roughly double, with the transfer value of one scheme reportedly rising from £108,000 to £232,000, and the transfer value of another climbing from £57,000 to £104,000.

She took the money. As did, according to the Pension Regulator, about 80,000 other people.

Among them me.


Now, a few caveats.

For a start, I didn’t get a multiple of 30-40 times that £5,000. More like 20 – but certainly a helluva lot more than the same firm had dangled in front me of a few years previously.

In part, I suspect, that lower multiple is because I wasted several weeks trying to resist the temptation.

I dallied because while I’m a fairly confident and experienced private investor, a pension transfer is a lot more than a transfer of a pension.

It’s really the transfer of a risk, and an obligation.

As a member of its pension fund, my former employer was obligated to pay me that annual income, and to shoulder the associated risks.

No longer. As of the transfer, all of that is on my shoulders, instead.

Repent at leisure

Now, not for nothing are pension experts and the Financial Conduct Authority (FCA) alike concerned about the increasing frequency of such pension transfers.

Just because a transfer value happens to be high is not a sufficient reason for executing a transfer. Particularly if you have no or little experience in personal investing – and even more so if one of the prime motivations is simply to get your hands on the tax-free cash.

And it’s of little help to point out that the rules governing such transfers call for mandatory advice from a financial adviser if the sum involved exceeds £30,000.

For a start, that’s arguably too high, and – perhaps more to the point – the advice that such advisers are obligated to offer can be of little help in real-world decision-making.

Short-term pain, long-term gain

What do I mean by that? Simply that central to the FCA-mandated adviser calculation is something called the ‘critical yield’, which loosely translates as the rate of return that you’d have to achieve in order not to be worse off, in income terms, after the transfer transaction.

Which scarcely figured in my own calculations at all.

I know I’ll be worse off, in the short term.

But what I’m interested in is longer-term income, longer-term inflation proofing (hopefully 100%, not roughly two-thirds), and the prospect of a six-figure lump sum to leave to my heirs. That is the trade-off in which I was interested.


The timing of the now-complete transfer was unfortunate. (And not solely in terms of the recent health scare which has unfortunately delayed my promised follow-up column on actively-managed ‘smart’ income ETFs.)

Basically, you don’t have to be Howard Marks – prescient though he can be – to worry that we might be in bubble territory with the stock market.

So my six-figure sum is currently uninvested, sitting there as cash, while I figure out what to do.

  • Sit it out and wait for a hoped-for correction? I’ve succeeded in that in the past. But I might have a long time to wait.
  • Drip feed into the market as opportunities present themselves? The trouble is, at present those opportunities seem few and far between.
  • Dive in and lock in income now, rather than remaining uninvested?

What would you do? Dear reader, my confession is complete. But I’d welcome your answers in the comments below, please.

Further reading: See our article on one reader’s experience of transferring a final salary pension into a money purchase scheme.

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{ 68 comments… add one }
  • 51 Hari August 4, 2017, 2:39 pm

    Three years ago I took £98k in lieu of £3k that will become payable in 2 years time, with limited inflation linking it has worked well for me so far but largely because it is about 5% of my investable assets…..it simply will not make a huge difference to my life if I had decided to go the other way.

    To my mind this is the crux of the issue, if I had few investments or other pension/passive income then the reliability of the income the DB provides would be very valuable.

    The next point is that few people will manage the money well on their own and whilst I have met one talented IFA, experience suggests mere competence is hard to find.

    I am a fan of the Life Strategy approach from Vanguard ( or similar approach from other providers or a DIY) and this is the best chance of success for most people investing into a pension or drawdown , with sensible withdrawals.

    I very much doubt if Greybeard needs any advice on Investing!

  • 52 Midas August 5, 2017, 9:15 pm

    All you have to do is look at the charts to decide. Equities all the way if your invested for anything over five years! When I look at the charts from now and decades past equities always comes good in the end. All of the funds that I follow and put money into always come good. People say be wary of the volatile funds but as long as you are not invested in some niche part of the market you will be fine. Go for growth and not income and sell your units when you feel comfortable to realise their monetary value. Some of the funds mentioned here are so safe as to not worth the trouble to invest.

  • 53 PC August 6, 2017, 11:45 am

    Interesting, with hindsight .. I jumped too soon – I took a transfer value out of a deferred annuity in 2013. The multiple was around 20. I agonised over the decision for months but what tipped the balance was
    – high transfer value, it seemed at the time ..
    – very low bond yields in general, with limited room to fall further
    – uprating of the benefit was limited to CPI, which looked as if it might go negative, and the government was floating the idea of tinkering with the definition of CPI
    – the possibility of passing it on to my children, who had both developed long term illnesses preventing them from working.

    Once I’d made the decision – partly with the help of this site – and had taken the transfer into a SIPP , I bought 3 or 4 of the most general equity index ETFs I could find. The majority went into VWRL which has performed better than any of my personal choices.

    What worried me most at the time was not being invested at all. I allocated it all as soon as I could. I saw that as part of the whole decision. It wouldn’t make sense to me to take a transfer without a clear idea of what I was going to do with it and what my break-even return would be.

  • 54 weenie August 7, 2017, 9:25 am

    My ex-colleague has recently cashed out two DB pensions (from 10 and 15 years’ employment respectively), his sole reason being that he wants to pass the cash onto his offspring when he pops his clogs. In two years’ time, he’ll be 55 so likely to be making a 25% withdrawal, which we all reckon will be used as a house deposit for one of his kids.

    I didn’t ask for the exact transfer values but recall him mentioning something between 20-25%. The two pots have been invested by his ‘financial advisor’.

  • 55 britinkiwi August 7, 2017, 9:34 am

    @PC @TheGreyBeard – Just realised I did not state earlier whether I’d committed to investment out of the cash transfer, which I did pretty immediately becoming totally invested in a mix of individual shares (with a bias towards Australasia), various bonds (mainly company) and a few mutual funds of various stripes (again, some Australasian but also including UK IT’s).

    Rationale was to get in the markets and maximise any possible earnings/upside given the paltry interest being paid worldwide on cash….

    Currently at a classic 60/40 having just sold ~50% of UK IT’s held and wish I could have better access to the ETF’s available in the UK and US!

  • 56 Mark Meldon August 7, 2017, 1:41 pm

    @ermine, etc.

    Very quickly, ‘cos I’m on hols, here is a bit about whole life assurance.
    This is the oldest form of life cover, invented, I believe, in the early nineteenth century when life expectancy was rather lower than it is today. Whilst there have been many variants available over the years, including rather problematic unit-linked investment based arrangements, what we have available today is very simple.

    All worthwhile policies, from the likes of AEGON, L&G, Zurich and others, offer guaranteed premiums and a guaranteed sum assured. There is no cash-in value or maturity vale, i.e. it’s a “pure insurance” arrangement.

    You fill in a proposal form and this is then underwritten by your chosen insurer. Whole life is underwritten very carefully as, assuming you keep up the premiums, there will indeed be a pay-out one day when you die. Because of this, and due to the fact that most whole of life policies (excepting funeral plans) tend to have quite sums assured, the premiums are much more than for term, or “temporary”, policies.

    When you buy a policy, the premiums will normally fall within the “normal expenditure out of income” IHT provisions as they will, obviously, form a long-term pattern. You MUST write a whole of life policy into a trust (freely provided by life offices) as this makes sure that the payment is outside of your estate on death and thus free of IHT – I commonly recommend Whole Life for IHT mitigation purposes.

    What does it cost? Well, I have run a quick quote for me (I’m 54) based on £500,000 cover. If I qualified for standard non-smoker terms (unlikely as I have type 2 diabetes) than Zurich Assurance would charge £605 per month (I’d probably pay double – I have a policy that I took out long before diagnosis and I’m jolly glad I have it!).

    That’s why people with big DB CETV’s won’t “put their money where their mouth is”. Even though they say the £500,000 in my SIPP/PPP is for the kids, they don’t really mean it as they won’t pay out £7,260 a year in life assurance premiums. They won’t even do it when their fund is £1,500,000!

    Mind you, you don’t have to insure for the full whack, just some. To be fair, a handful of clients have taken just this approach, but it’s a very personal thing.

    Watch out for DB death benefits by the way as they are often surprisingly awful as far as cash is concerned. You can cover that gap by a term life policy.

    I hope that helps

  • 57 A Different Richard August 8, 2017, 2:28 pm

    I’m thinking of transferring a DB pension to my SIPP.

    The pension pays c£10k pa from age 65. I’ve yet to receive a multiple, but let’s take a low value – say 20x.

    Would you swap £10k a year for life from 65 for £200k now? I’m 50, so 15 years to go before I could draw the pension.

    The pension is index-linked so will still be worth £10k pa in 15 years’ time, in today’s money.

    If I take the assumed £200k and invest it I might get, on average, in real terms, 2.5% pa growth (my models assume 3% real growth less 0.5% fees).

    At 65 my £200k will be worth nearly £300k in today’s money. Thus my 20x transfer is actually closer to 30x (if you accept my assumptions, and the inherent risk).

    This is where I think those of us who are quite a few years away from DB scheme retirement age can potentially “win” – real growth in the SIPP between now and when I would otherwise be able to draw the DB pension vs no real growth if I keep the DB pension.

    Plus all the other plusses of access to the capital, tax-advantages, inheritance advantages etc. But risk, as well…

    Some have commented that the stock market seems high, and so if they do transfer they’ll stay in cash for a while.

    I take the opposite view – it’s the state of the “financial world” that is giving such high transfer multiples. I’m not a market timer so I would invest – I may lose something in the short term due to the high market values, but my transfer value is high for similar reasons.

    I’ll let you know what the offered multiple is and whether I take it…

  • 58 Scott August 11, 2017, 11:05 am

    @A Different Richard

    I’ve looked at it along similar lines to you (I’m 18 years from being able to start drawing DB.) Assuming real growth, then the pot, invested, would be worth more in 18 years time than it will be as a deferred pension. The question is whether the growth is enough to cover the guaranteed payment for life I’d get by keeping it in the DB scheme.

    I’ve been offered a multiple of 25. If I took the transfer and my investments kept pace with inflation(*) I’d break even at 25 years. If I have a 35 year retirement, then I’d need investment growth to be worth another 10 years of the annual pension I’d get by keeping it in the DB scheme. Is that achievable? Yes, if my pot achieves real annual growth of 2%. But then I’d still only be at break-even, so I need more than 2% in order for the transfer to be favourable (other than for reasons of access to the capital, inheritance, etc.)

    So if somebody can guarantee me, say, 3% annual average growth I’ll make that transfer!

    (*The DB scheme has some inflation protection, but it is capped. For simplicity here, I’ve assumed inflation never breaches that cap – not something I can say with confidence, so this could be another reason for taking the transfer.)

  • 59 A Different Richard August 11, 2017, 1:50 pm

    Hello Scott

    If I’m offered 25x I’ll almost certainly take it. I think 2.5% real growth (after fees) over a 15 – 40 year horizon is very likely to be achieved, although not guaranteed.

    Of course, by transferring you also get your sweaty little mitts on the capital sum. My maths says the capital in 15 years should pay me (as 2.5% real growth taken as income) the DB pension I would otherwise have got but with the capital lump sum sitting in my SIPP. Even if I have to draw down the capital that wouldn’t be the end of the world.

    I’m fairly sure I would take a lacklustre 20x, as in 15 years it will probably (no guarantees!) be the equivalent of 30x. If I’m not prepared to take that level of risk to get my hands on a £300k (in today’s money) capital pot in 15 years’ time then I shouldn’t be investing in the stock market at all.

    Of course it probably depends on your personal circumstances (spouse’s pension, etc) and other financial assets you may have.

    So are you going to make the transfer? “you’ve gotta ask yourself one question: “Do I feel lucky?” Well, do ya, punk?” 🙂



  • 60 Gary August 12, 2017, 1:24 pm

    I was in a similar position a year ago.

    Was offered x35, so a simple decision for me to take.

    Over the following 6 months I drip fed into a passive index tracker 60/40 portfolio as I will be drawing down in next 5 years.

    The biggest attraction for me was to be able to pass on any residual amount.

    Good luck!

  • 61 adi August 17, 2017, 10:33 pm

    I’ve just taken the CETV, worked out at 25x and it’s a large sum, more then 500k, less than 1500k, problem now is how to drip feed. I like the Vanguard life strategy funds, prob 100% equity, but as the £ is so weak I’m reluctant to invest overseas until the £… I know what etf/active funds I’ll invest in, just wondered if anyone had any stats on drip feeding? E.g. 10% per month. Thanks.

  • 62 Scott August 18, 2017, 11:36 am

    @adi Drip-feeding is the lower risk, rather than higher-return, strategy, i.e. statistically speaking, the evidence says that it’s best to invest a lump sum in one go if your aim is to maximise return (because markets tend to rise over time), however, that doesn’t over-ride the fact that you could lose money, at least in the short to medium term, if you happen to invest it all at the ‘wrong’ time, which is where drip-feeding comes in. It gives comfort, as should markets fall whilst you’re still in the process off drip-feeding money in then only some of your money will be affected by the loss, and with your remaining cash you have the opportunity to buy at lower prices. I don’t think it particularly matters how you drip-feed (10% per month, 25% per quarter, etc.) although the longer time period you do it over, the lower your aggregate return is likely to be (again, because the trend of markets over time has been upward, so you’d be missing out on these gains.) The bottom line is nobody knows where markets are going to go in the short term, so you’re always going to be taking a bit of a punt whenever you invest.

  • 63 A Different Richard September 8, 2017, 11:43 am

    Well…damp squib.

    Just got my paperwork back. I can have £10k a year from age 65 (in 15 years) and a £30k lump sum…

    …or…a transfer value of…



    I think I’ll not bother but revisit this closer to when I’m 65 if my health’s not so good…

    Rather ruined my Friday… 🙁

  • 64 Mr Optimistic October 5, 2017, 8:39 pm

    I have a transfer value 31x the pension. It’s a deferred DB scheme but they want me to transfer the associated DC scheme too as it sits on an old avc. Not sure what to do. As in the main article I know immediate income will be less but I wonder about an inflation cap of 5%, and the 50% spouse pension when she could have it all. Thinking…..

  • 65 Rozentas October 6, 2017, 9:50 am

    I had an option to make a transfer with a 20* multiple so did not take it. Had I been offerrred anything over 25 I would have taken it. At 31 I would have bitten their hand off.

  • 66 wibidee July 17, 2019, 12:22 pm

    when folk talk about a multiplier re. CETV , in case of a deferred DB pension , surely the multiplier must be forecast to what would be due at the scheme retirement age …ie need to be estimated in a deferred DB, not surely the muliplier at date of deferment ? Must confess i get confused over this issue, not least as my CETV (last year) of £423k related to a scheme of deferred in 2012 valued at £12.5k pa at NRA (63 years, 10 years after date of deferment. Estimating DB value at 63 is c. £14k pa, which makes a muliplier of c. x30, but c. X35 at value at date of deferment.

  • 67 Dean July 21, 2019, 7:15 pm

    What a great website. I wish I’d found this sooner.

    I’ve cashed in my DB pension which was £6018 per year when I turn 60. I cashed it in about 18 months ago when I was 39 for £392,000. By my maths that was 65x multiple.

    I’ve already invested it all, initially in funds through my IFA. Having researched the funds that he’d chosen for me I gradually withdrew money from each fund at a profit and transferred the money to a SIPP. I was glad I did. All the funds bar 1 are lower today. The only fund I sold at a loss was Neil Woodfords fund which is currently locked up. How lucky do I feel now. My IFA had put in £72,000 to that fund. I lost £1,000 when I sold out but it would be worth much less today.

    I do feel that I’m too heavily invested in one sector but intend to gradually change that over time.

    Rather than paying 1.5% to the IFA and Aviva plus the fund fees and now paying £120 a year for my SIPP with Interactive Investor and I’m managing my own money. It is worth £444,000 today and I’m looking at predicted dividends of over £20k this year.

    I’ve got a long way to go, and I will be looking to keep some of my money in cash to take advantage of the downturns in the future. I’m also going to move more of my money into funds not so much focussed on the UK.

    I can’t help feeling lucky with my timing on more than one occasion since I started the process but I have no regrets. I will be careful and reduce my risk over time. I’d also like to move money into other currencies and then invest on other stock markets directly. But the weakness of the pound currently prevents me from doing so.

    Good luck all.

  • 68 xxd09 July 23, 2019, 8:56 am

    Well done -you remind me of myself at that age-moving from opaque expensive Insurance Companies including Equitable Life through Mutual Funds finally to Index Linked funds
    Now 72-16 years retired-2 Funds only-Equities and Bonds
    Never stopped learning
    Try John Bogles books plus Lars Kroijer,s videos and book
    This site as you say is a great source of info

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