27 Oct What is a defined benefit pension transfer?

When you retire as an employee you may be a member of a Defined Benefit (DB) pension scheme. Also known as a ‘final salary pension scheme’, it promises an income payout when you retire based on your earnings. This article looks at a defined benefit pension transfer – transferring such safeguarded occupational pension schemes to more flexible personal pensions.

How do Defined Benefit and Defined Contribution pensions differ?

DB pensions and Defined Contribution (DC) pensions will both give you an income in retirement but have crucial differences.

With a DB pension the amount you will receive at retirement is funded by the employer. It is guaranteed and paid directly to you for life. Once in payment, it can’t change and will never run out. A DC plan, however, allows employees (and their employers if they wish) to contribute to an investment ‘pot’.  This is more flexible, but does not have the same guarantees as a DB scheme and it could run out if spent too quickly.

In recent years there has been a shift towards DC occupational pension schemes, which has placed a greater burden of investment on employees. It is possible to have a transfer out from either type of scheme, depending on your objectives in retirement. [For more information about transferring out of a DC scheme, please speak to us.]

Why consider a Direct Benefit pension transfer?

Most people consider a DB pension transfer because they want to exchange the  security of the ‘safeguarded’ benefits of the scheme for something more ‘flexible’. The scheme will calculate the sum of your benefits and translate this into a cash equivalent transfer value (CETV).

You can invest the CETV in another type of pension scheme which offers benefits more suited to your needs.

There could be several reasons why you want to transfer your DB pension. Primarily it will be because of your goals in retirement. However, other reasons could include:

• having concerns about the solvency of your employer.
• your employer may have indicated that they are going to change how their DB scheme operates.
• you are single and don’t need your pension to provide for a spouse or partner.
• you have limited life expectancy and want to make arrangements for your family.
• your scheme is offering an enhanced transfer value.
• you no longer live in the UK and transferring to an overseas pension might be better for you.

There may also be other circumstances where you may need appropriate advice about a safeguarded pension, such as DB sharing pension rights after divorce. There can be complexities when looking at the pros and cons of transferring your pension, which is why getting good advice is essential. More on this later.

What you need to know about a Direct Benefit pension transfer

Here’s what you need to know about transferring out of your DB pension scheme:

What you cannot and can transfer

You will not be able to transfer your pension to a DC scheme if you are in an unfunded public sector pension scheme. (Examples are the Civil Service, NHS, Teachers, Armed Forces and the Police). A DB pension transfer is however possible if you are in a funded public sector pension scheme (such as Local Government and Universities schemes) or a private sector DB scheme.

You are normally required to transfer all of a DB scheme, but some DB schemes offer partial transfer options.

A DB to DC transfer can only be done once

Once you have made a DB to DC transfer, it is irreversible. Also, once you have started receiving benefits from a DB pension scheme you will most likely be unable to give up the benefits for cash unless the scheme is able to offer you some form of a deal.

How a DB pension transfer works

If you decide that a DB pension transfer is best for you, the trustees running it will convert the benefits into a cash sum – the ‘transfer value’ or CETV.

The transfer value can be invested in a pension scheme with a new employer, a stakeholder or personal pension or a SIPP (Self-Invested Personal Pension), or if you live abroad, to a Recognised Overseas Pension Schemes (ROPS). Keep in mind that not all personal pensions, SIPPs and employer pension schemes will accept transfers.

You can transfer your DB pension to a new a scheme and receive cash out of the action if you are at least 55 years old or older.

Beware of pension transfer scams

The lure of large cash sums can be both beguiling and bewildering! Beware of claims telling you that you can transfer your pension for cash before age 55, and statements claiming that you can get more returns in a new pension scheme than your current one. In most cases, these are risky moves and are likely a scam.

The Personal Finance Society (PFS) and the Financial Conduct Authority (FCA) are both very clear on this. The FCA believes that “it will be in most people’s best interests to keep their defined benefit pension”.  Which is why it is vital that you understand the risks and make an informed decision.

Getting permitted pension transfer advice

The law requires that you seek financial advice if you wish to transfer a DB pension valued at £30,000 or more. Here at PX we are able to work with clients who have a DB pension pot of £150,000 or more, and we are permitted to provide pension transfer advice by the FCA.

If you are in this category, then the best way to go about a DB pension transfer is with the guidance of an authorised financial adviser, such as PX. That way, you can understand the process of transferring your defined benefit pension, avoid the guesswork, and make an informed decision.

PX has signed up to the Pension Transfer Gold Standard, which means we’re “a firm that is going beyond minimum requirements when giving financial advice” and we meet the criteria of the voluntary code of good practice for safeguarded and defined benefit pension transfer advice.

PX has the Pension Transfer Gold Standard, which should be viewed as essential if you are considering a defined benefit pension transfer

By using PX you can meet your legal obligations as well as getting guidance according to your best interests. The standard was developed by the Pension Advice Taskforce and is facilitated by the PFS.

You can read more about the process of transferring a DB pension on this website, or call us for a free initial discussion.

You should always seek advice from a pension transfer specialist to see if transferring defined benefit pension benefits are in your best interests. Transferring from a defined benefit scheme means giving up valuable guaranteed benefits in favour of a scheme type which may rely on the performance of the underlying investments. These investments can go down as well as up and you may not get back the initial capital invested.