Transferring out of a defined benefit pension scheme
Before answering the question of whether transferring out of a defined benefit pension scheme is the right choice, you should also ask yourself, why do I want to transfer out? It is important to understand what a defined benefit pension is so you can make an informed decision.
What is a defined benefit pension scheme?
A defined benefit pension scheme is a type of pension with income guaranteed for life. Your employer contributes to this pension plan and as it is a ‘defined’ plan. Therefore there is a formula for calculating the retirement benefits. Your employer, however, needs to make sure that there will be enough money at the time of your retirement in order to pay out the promised pension income.
Back in 2019, we have seen transfer values increase in value with all-time high record levels. For the period 2018/2019 The Pension Regulator in the UK estimated total transfer value of 34 billion. But is transferring out of a defined benefit pension scheme the right option for you?
Several things to consider when transferring out of a defined benefit pension scheme
- It is important to ask yourself what do you want to get out of your pension and what do you want to do with it. A defined benefit pension might have a small or big impact on your retirement. It is all about your personal circumstances. Do you have any other pensions, savings and investments in place or is this defined benefit pension the only source of income you will have in retirement? If it is, transferring out of your current scheme might not be the right move.
- Do you have physical assets? These can include a main home and/or even a second home for renting. Or will you still rent in retirement as you don’t own property?
- Do you have any dependents? Will this guaranteed income for life not only be a benefit to you but to your dependent as well?
- Did you take into consideration the fees and time that this will entail? By speaking to an independent financial adviser you can find out what the fees are and how long the process takes.
What is the process of transferring out of a defined benefit pension scheme?
Since the introduction of Pension Freedom rules back in April 2015, the tax rules were changed to give people greater access to their pensions. This meant that for those over the age of 55, upon transferring their pension, they were able to enjoy a 25% tax-free lump sum. This is why we have seen defined benefit pension transfers increasing. According to the Financial Times, this lump sum was used to pay off debt, and hose renovations among other things. This is where getting financial advice is most crucial. Once the transfer is done and completed, there is no turning back and no way to reverse this process. Once you have all the information, together with your adviser, you can make the right decision.
With defined-benefit pensions, if the sum is over £30,000, you require advice from a UK Financial Conduct Authority independent regulated adviser. If you don’t live in the UK, you will also require the advice of a local or cross border adviser who will guide you through this process. They will also liaise with the UK adviser on your behalf for the signed advice declaration that you require in order to transfer out. The process and fees will be clearly outlined to you.
Reasons for transferring out
- There is little flexibility on current scheme draw-down. By converting Defined Benefit (DB) schemes into Defined Contributions (DC) one, you can avail of the pension freedom rules. For those over the age of 55, they can access their defined contribution pension scheme. If you decide to stay in a DB scheme, you will only be able to access your pension typically from the age of 65.
- Life expectancy and illness are important factors. A DB scheme will last as long as you do. If for health reasons you expect your life expectancy to be below average then transferring out might be the right solution for you.
- No spouse and no dependents. If there is no one to leave your pension to upon death, it would make sense to want to access it before the age of 65.
- Death benefits and inheritance. Current tax rules make it more attractive to have your pension outside a DB scheme. When you convert your current scheme into a drawdown arrangement
So what should you do?
At Harrison Brook, we can tell you more about transferring out of a defined benefit pension scheme so you can get a full picture of what this formal process entails, and decide what the right choice is for you. You can also read more about it here, and get non-biased advice.
Contact several independent financial advisers if you need to. You should expect them to give you a detailed overview of the pension transfer process. If they don’t, below are some questions you can ask them or consider before choosing the right adviser for your needs.
- Can you give me a comparison of the benefits and risks?
- Explain to me the difference between a defined benefit and defined contribution pension?
- Can you walk me through the transfer process?
- Please summarise the advantages and disadvantages of your recommendation?
- What other options I have?
- Where are you regulated?
- Do you have any customer testimonials or an independent rating of your companies service standards from Trustpilot or Feefo?
The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.