What is ‘pension risk transfer’ and how does it affect me?
A pension risk transfer is when a defined benefit pension scheme no longer wants to keep paying out a guaranteed income to its members.
This can be for various reasons, for example: people living longer, more people joining the scheme than predicted, or less income coming into the scheme in the first place.
As such, the scheme will try to dispose of or transfer the risk of these payments in a number of different ways. It may decide to try and end the scheme wholesale, or to only take the more expensive members off its books.
In some instances of risk transfer, you have a say, though in others you don’t. We’ve outlined the most common kinds of pension risk transfer below.
This is the most usual scenario, and one you may have heard of. In this scenario, your provider tries to entice you to leave the scheme by offering incentives, such as a large lump-sum on top of the money you’d get for transferring out anyway.
This may be offered to some or all of the people in the pension scheme, depending on how much risk the scheme wants to offload.
Section 32, or Buyout
In a Buyout which is legally referred to as a Section 32, another company often an insurance firm takes over the administration of your pension.
In the process, your benefits are cloned which means that the amount of money you’re paid will remain the same. The offer wont necessarily be made to everyone in the scheme, and not everyone who gets an offer will receive the same terms.
What are my options in a pension risk transfer?
Your options will depend on how the scheme decides to go about the transfer.
If your pension provider offers you an incentivised transfer
You can either choose to take the scheme’s offer and the various incentives or not. If you decline the offer, you’ll remain in the scheme. The scheme may choose to make you a different offer in future. Again, you can choose to decline.
If your pension provider initiates a buyout
In this scenario, you don’t really have any options. However, the law will protect your pension and you will retain the same benefits as you had before the buyout – you’ll just end up with someone else administering your pension scheme.
What are the pension transfer risks for moving out of my defined benefit pension?
Put another way – what are the risks to you, for transferring out of your workplace pension into another kind of scheme?
The risks of transferring to an annuity
Annuity transfers come with potential drawbacks that you should be aware of, including…
Possibility of lower returns
It’s less likely to find an annuity that will pay out at a rate comparable to your workplace pension
The risks of transferring to a defined contribution pension
Defined contribution transfers also have possible pitfalls…
Loss of guaranteed income
Whereas a final salary scheme promises to pay out a set amount of income until you die, the fate of a defined contribution based pension is directly tied to the performance of your investments.
Possible loss of benefits
Many defined benefit pensions provide a certain amount of protection against inflation, and additional benefits that can be paid to a spouse, if you pass away before them. This is not as common with drawdown-based pensions.
Of course, there can be pros to transferring out as well. As the name would suggest, a flexi-drawdown based pension provides increased options, and is ideal for the kind of person who wants more control with regards to their retirement savings.
Should I opt to leave?
Without knowing your personal circumstances, it’s impossible to say.
In many instances, transferring out of a defined benefit scheme is unlikely to be in your best interest, according to most experts. As many savers have found, it can be extremely hard to find a better deal elsewhere.