Defined Benefit Pension Transfers
A Defined Benefit (DB) pension, otherwise known as a final salary scheme, is a type of workplace pension scheme in which an employer promises a specified pension payment, lump sum (or a combination of both) on retirement.
The benefits payable are predetermined using a number of factors, typically including an employee’s earnings history, tenure of service and age, as opposed to relying directly on individual returns. A typical DB pension scheme usually continues to pay a pension to a spouse, civil partner or dependents (for a restricted period) when the member dies.
Our regulator, the Financial Conduct Authority (FCA), is clear that we should start by assuming that a transfer would not be expected to be suitable. This is because of the promised level of income provided by the scheme.
There are advantages and disadvantages to DB schemes, and in most cases, the advantages far outweigh the disadvantages.
Your pension lasts as long as you do so there is no risk of you having no pension income.
Although each scheme varies, there will be something for your surviving spouse/civil partner/dependants.
Some protection against inflation is provided to help you maintain your spending power.
Your pension does not rely on the ‘rise and fall’ of the stock market, thus making it much more secure than a personal pension.
The death benefits of a DB scheme are extremely rigid – if you are not married and have no financially dependent children, your fund may die with you.
If you are concerned with your life expectancy, your DB pension scheme may offer you a poor total capital return.
It is not possible to vary the level of income you receive from the scheme, thus making it largely inflexible.
If your employer becomes insolvent, there may not be enough assets in the pension scheme to pay your pension, although The Pension Protection Fund (PPF) may provide compensation.
You cannot transfer from a DB pension scheme if you are already taking your pension. There are also some types of DB pension schemes where transfers are not possible, e.g. public sector schemes for teachers, nurses and civil servants.
If you leave your DB pension scheme, the benefits you’ve built up still belong to you and they can remain there until you retire or you can transfer them to a different type of pension scheme if the scheme rules allow, or you can purchase an annuity. In many cases, you would also be able to transfer to a new works scheme that you were an active member of, if you so wished. Some schemes even offer a partial transfer out, meaning you could keep some pension benefits there and move some to another scheme of your choosing.
If you have reached age 55 and want access to your pension fund, the scheme may allow you to withdraw 25% of the pension fund as tax-free cash, as with a personal pension. If they do not allow this, you could transfer out to a personal pension before withdrawing said money.
You may be offered a financial incentive from your employer to transfer out of a DB pension scheme. This is typically in the form of an enhancement to your scheme benefits; known as an ‘enhanced transfer value’.
For more information, click on the most suitable link:
Self-Invested Personal Pensions
Pension Annuities
Pension Drawdown
The MAP Investment Process
Ongoing Financial Reviews