Defined benefit (DB) pension schemes are often desirable for their potential extra security in retirement. They ensure that people are guaranteed a certain level of income upon retirement.
But in recent years, people have been given the option of exchanging their DB pension for a cash value and transferring into a different pension type. Significant cash sums are sometimes offered in exchange for transferring.
This can make transferring an attractive option for some, but it could also bring increased financial risk, which is why it’s important to seek professional advice before making any decisions.
What is a defined benefits pension transfer?
A defined benefits pension transfer is choosing to exchange some of the benefits in your current defined pension scheme for cash value, and then moving this into another pension scheme. It’s an option that could allow more flexibility and control over your pension. You may be interested in actively managing your pension by transferring from one defined benefit, or final salary, pension scheme to another.
There are a variety of reasons why this may be beneficial to you. But taking out your pension as cash value to transfer to another scheme could result in a loss of money or pension benefits. The decision involves a little less reassurance as to exactly how much money you could have in later years.
That’s why the government recommends you only make the decision to transfer with the help of a pensions expert. Choosing the right pension scheme could make a real difference to your quality of life in retirement.
What is a partial defined benefit (DB) transfer?
A partial DB pension transfer is where you decide to exchange a percentage of your funds from your scheme rather than the full amount. This may be a viable option if you want to move a portion of your funds into a new scheme but still retain the benefits of your existing scheme with a smaller sum.
Why transfer a defined benefits pension?
Transferring your DB pension involves taking out the cash value of your pension and transferring it into another scheme. The reasons for wanting to transfer your defined benefit (DB) pension may vary, but common ones include:
* Wanting to combine different pension pots for easier overview and management
* Wanting a pension that charges less in fees
* Wanting a higher pension income than your current provider offers
* Moving abroad and wanting to transfer your pension scheme to the country you live in
* Wanting a different pension scheme than the one your current provider offers
Can I transfer my defined benefits pension?
Yes! You can transfer out of your DB pension, but before making any decisions to do so it’s best to get advice from an independent pensions expert, like the ones we work with.
You can transfer your pension if you match these requirements:
* You are in a private sector defined benefit scheme
* You are in a funded public sector pension scheme
* A transfer from your DB pension is often not possible if you are in an NHS pension scheme or other public sector plan.
How do I work out a DB pension transfer value?
The transfer value is the amount your DB pension balance is worth in cash if you decide to transfer it to another provider. If you request a transfer out of your DB pension, the scheme trustees will convert any benefits you’ve accrued into a cash sum.
Your transfer DB pension in payment is called the transfer value, or a cash equivalent transfer value (CETV).
How are defined benefit pension transfer values calculated?
You may be wondering what a DB pension transfer calculator is. There are two main ways scheme trustees can calculate your CETV:
Using a method that works out the best estimate of expected costs of providing the benefits in a scheme
An alternative method in cases where trustees agree to pay CETVs above the minimum sum
The best estimate method involves a framework for calculating an initial cash equivalent (ICE). This places a value on accrued benefits and any other discretionary benefits decided by the trustees. If necessary, this is adjusted further before trustees arrive at the final CETV available for transfer.
Many schemes have benefits that may not be automatic, but which the trustees and/or employer could choose to add according to established customs and any potential requirements for employer consent. Your current pension provider will have to work out what the cash equivalent of your defined benefits are once you request a transfer.
Could I lose pension value through transferring?
A defined benefit scheme often comes with benefits. These could include guaranteed income upon retirement or even benefits for your family or partner if something were to happen to you. These benefits can significantly increase the total value of your pension and thus can be hard to fully match if you transfer out of your defined benefit pension scheme. This is why it’s a legal requirement to seek professional advice when transferring any value of £30,000 or more.
All calculations of how your defined pension benefits translate into transfer values will have to follow the government’s regulatory guidelines, so you can rest assured that the outcome will be secure and fair.
What are the fees for a defined benefit pension transfer?
In some cases you will have to pay a fee for an early exit of your pension, however, if the sum of your pension pot matches its transfer value, there will likely not be a DB charge to pay for transferring.
If the transfer value turns out to be lower than the actual value of your pension pot, there’s a chance you’ll have to pay an early exit fee. Speak to your current provider to find out if there is a defined benefits transfer exit charge to pay or what your transfer value would be.
Where can I transfer my DB pension too?
If you’re wondering what the options are for transferring your defined pension, you can choose to invest its cash value in:
* A stakeholder or personal pension
* Another employer’s pension scheme
* A self-invested personal pension (SIPP)
But bear in mind that not all personal pensions, SIPPs, or employer schemes, will accept transfers.
Should I transfer my defined benefit pension?
Bear in mind that there are many advantages, disadvantages, and caveats involved with a pension transfer.
That’s why it’s always recommended to consult an expert pensions advisor before you decide to transfer your pension. In some cases, getting financial advice before transferring is in fact a legal requirement for those seeking a change to their pension scheme.
How do I transfer my defined benefit pension?
The points that you may need to cover with your scheme provider could include:
* What is my DB pension transfer balance and value?
* Will I have to pay fees for transferring?
* Is there a certain age at which point I would lose the right to transfer? This is known as a protected pension age
* Are there any special features, such as a guaranteed annuity rate, I would lose?
* Will I forego the right to a protected tax-free sum, a tax-free lump sum of over 25% of my pension?
How do I transfer out of a defined benefit pension?
A defined benefits pension transfer specialist will be able to search the market for a scheme provider which matches your wishes and requirements. They can also provide help and advice on filling out any application forms and understanding the pros and cons of each scheme transfer option.
How could I do multiple defined benefit pension transfers?
If you’re looking to transfer more than a single pension, you may have to fill out multiple application forms and conduct a due diligence on the terms and conditions for each pension. You’ll need to find out about the exit penalty fees to find out how much you could end up paying for each pension transfer.
Deciding on whether multiple pension transfers are right for you can be a complex matter with consequences that aren’t always clearly visible.
Should I transfer my defined benefit pension into a SIPP?
Here are a few potential reasons for opting for a SIPP over your current pension scheme:
* SIPPs offer greater flexibility for managing investment risk levels
* SIPPs give you more control over your pension investments but offer equal tax advantages to other UK pensions
* SIPPs could potentially reduce your management costs
* SIPPS give you more control over a greater variety of investment options
However, as with all pension transfers, shifting your DB pension into a SIPP comes with potential risks. These could include:
* Paying an extra exit penalty fee
* Increased investment risk along with increased control
* Loss of existing pension scheme benefits
Transferring defined benefit to defined contribution
In a defined benefit pension plan your employer will put in the money and promise you a certain set payout upon your retirement. In a defined contribution (DC) plan, however, you contribute your own money into the pension scheme.
Defined benefit pension transfer pros and cons
It’s important to understand the potential pros and cons of a pension transfer if you’re interested in doing one.
Here are a few potential advantages to transferring:
* Greater control over the pension pot you’ve built up
* Attractive transfer values for defined benefit pensions
* An end to uncertainty about how secure your current pension scheme is and the prospect of greater certainty if you chose to transfer
Here are some disadvantages that you may encounter::
Exchanging some of your pension value for increased flexibility
Exchanging a guaranteed pension income for taking on more responsibility
You could face a significant tax bill if the lifetime savings limit of £1 million is exceeded
What are defined benefit pension transfer risks?
The transfer value of your defined benefit pension scheme could be affected by wider economics such as changing interest rates. For example, if interest rates increase, it’s likely that gilt yields will too and this will push down your transfer value.
In addition to this, there’s a chance that you’ll have extra exit penalty fees and your pension benefits may not add up to the equivalent in transfer value. You may also be taking added responsibility and risks for your financial future on your own shoulders.
Potential advantages of transferring from a defined benefit pension scheme could be outweighed by the costs, risks and loss of benefits. However, this doesn’t cancel out the fact that in certain scenarios a transfer may be a liberating option that works for your situation.
Defined benefit pension transfer rules
If your DB pension is valued at over £30,000, DB pension rules legally require you seek out independent advice before deciding to transfer your pension.
A specialist advisor with a defined benefit pension transfer qualification can help you compare the cash payment or transfer value to the DB pension benefits you’d be giving up. The pension scheme trustees won’t be able to transfer any value of £30,000 or above, unless a regulated financial advisor has signed it off.
FCA defined benefit pension transfers
In a move that tightens up the quality of the pension advice market, in 2018 the FCA updated rules for defined benefit pension transfer advisors. There are now stricter rules in place for qualifications needed in order to advise on defined benefit pension transfers as well as measures to ensure the independence of the advice.
By October 2020 all DB transfer specialists will need to hold a specific qualification which will ensure advisors are best placed to consider and understand their clients’ attitudes to risk of giving up safeguarded benefits against more flexible benefits.
Defined benefit pension transfer considerations
There is no right or wrong answer to whether or not a defined benefits pension transfer would work for you. What’s best for your pension and finances in retirement will depend on your circumstances and financial retirement goals.
It could be more difficult to predict your future pension income with any certainty if you chose to transfer out of your benefit pension scheme. It may also involve giving up any benefits you may have held in your former scheme.
What is the benefit pension transfer process?
An expert pensions transfer advisor will be able to guide you through the best options for arranging a transfer to help you decide if it’s right for your circumstances.
How long does a DB pension transfer take?
Defined benefit transfer timescales are around six months on average. They take this long because your advisor is legally obliged to put together a suitability report outlining the pros and cons of the transfer and they will be thorough during the fact find.