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.

There are advantages and disadvantages to DB schemes, and in most cases, the advantages far outweigh the disadvantages.

Advantages:

  • 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. Typically a survivor’s pension is half of your pension income and will be paid for the duration of your spouse’s/civil partners lifetime. However, a dependants pension may only be paid for a limited period, i.e. until they reach the age of 23.
  • 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.

Disadvantages:

  • 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.

Our regulator, the Financial Conduct Authority (FCA), is clear that we should start by assuming that any transfer of a DB pension into a personal pension would most likely not be suitable. Also, 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, for example, public sector schemes for teachers, nurses and civil servants.

If your pension savings are worth £30k or more, you will be required to seek financial advice before even considering transferring a DB pension. 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.

Past performance is not a reliable indicator of future results