Defined Benefit Pension Transfer For Expats
LEARNING OBJECTIVES
We’re passionate about providing high quality, relevant and up-to-date financial information to British Expats around the world.
IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
How a defined benefit pension works
Key factors to consider when looking at a transfer
How long it can take, and how much it should cost
Best practise when taking expat financial advice
This article is intended for British Expats who hold Defined Benefit Pension Plans.
A Defined Benefit Pension Transfer, also known as a DB transfer involves transferring the value of your defined benefit pension plan to a different type of pension arrangement.
Due to the complexity and potential risks involved, if the value is over £30,000, you will require advice from a FCA authoursied UK pension transfer specialist.
If you want to transfer your DB scheme, this article looks at the key areas to consider and outlines the process involved.
Defined Benefit Pension Scheme
A Defined Benefit Pension, also known as a final salary pension, provides guaranteed pension income for life, upon retirement. By providing index-linked retirement income from a chosen retirement age, this type of workplace pension can ensure financial security. Furthermore, the scheme will usually pay your spouse or dependent a pension if you die.
The amount paid is calculated based on factors such as previous earnings, length of employment, and age at retirement.
Can You Transfer A Defined Benefit Pension
You can transfer a Defined Benefit Pension, but it needs careful consideration because of the important and irreversible consequences.
As you will be giving up an inflation-linked guaranteed income as well as other benefits, a strict process needs to be adhered to. This includes taking advice from an FCA (Financial Conduct Authority) pension transfer specialist.
They will provide advice on the suitability of transferring out of your DB scheme, ensuring you understand the risks associated with transferring your pension funds.
Should I Transfer My Define Benefit Pension?
Depending on your position and the benefits on offer, there are many pros and cons in transferring your scheme.
Reasons you might consider transferring include:
Flexibility in Access: Rather than take a fixed income amount every month, access your pension pot as you please. This can be a lump sum, ad hoc basis, or any regular amount to meet your income requirements.
Legacy Planning: Pass on 100% of the pension value in the event of death rather than 50% of the guaranteed income.
Currency risk: Mitigate the risk of investing in GBP whilst spending in local currency by investing and withdrawing in all major currencies.
Income is already guaranteed: Your income requirements are already met from existing guaranteed income sources whether state or private.
No dependents: No dependents to pass the reduced guaranteed income to.
Tax efficiency - By accessing as and when you please you can ensure you don't unnecessarily go into higher tax brackets.
There are however significant risks when transferring a defined benefit pension, including:
Loss of Guaranteed Income: Defined benefit pensions guarantee income for life, while defined contribution pensions depend on market changes and do not.
Investment Risk: Defined contribution pensions bear the investment risk, potentially leading to a decrease in fund value and a shortfall in required income.
Fees and Charges: Both initial fees for transferring out of your DB scheme and ongoing fees in your new arrangement, will impact your pension value.
Defined Benefit Pension Transfer Value Calculator
The Cash Equivalent Transfer Value CETV is the cash value of your total pension benefits. If you transfer to a new pension plan, you will lock in this value in exchange for giving up all the benefits on offer.
It is calculated based on factors such as age, salary, years of service, and the scheme's rules.
Factors Affecting the CETV
The CETV can vary based on several factors, including interest rates, investment performance, mortality assumptions, and the financial health of the pension scheme.
Following your request, your pension scheme will provide a CETV that is guaranteed for 3 months.
Should the transfer process not be completed within this time, a new CETV will need to be requested.
Defined Benefit Pension Transfer Advice
Defined Benefit Pension Transfer Specialists (PTS) are financial advisers that specialise in providing advice to members wanting to transfer their DB pension to an alternative scheme.
These specialists possess in-depth knowledge and expertise in the complexities of Defined Benefit Pension transfers, including the regulatory requirements, financial implications, risks, and considerations involved in such transfers.
Importantly, they are authorised by the Financial Conduct Authority FCA to provide advice on the suitability of whether to transfer out of your DB scheme or not.
Without this advice, you cannot transfer out of a final salary scheme.
How to Transfer A Defined Benefit Pension?
To transfer your final salary pension scheme, there are certain requirements in place.
The following is a general overview of the defined benefit transfer process with The Wealth Genesis:
Initial discovery meeting with a member of The Wealth Genesis team to discuss your position and objectives, the scheme benefits available to you, and the options available.
Complete a Fact Find, Risk Profile, and Letter of Authority (LOA)
LOA sent to DB Pension scheme for processing. Turnaround time is 10 - 20 working days depending on the scheme.
Once LOA is in place, a formal request for your Cash Equivalent Transfer Value CETV (if not in hand already), plus the additional actuarial calculations required for your Defined Benefit Suitability Report.
All documentation is submitted to the UK FCA-authorised pension transfer specialist.
7-18 days later the suitability report is provided by the Pension Transfer Specialist. This includes the end solution i.e. new pension arrangement, investment product, and fund allocation.
You will then have a call to discuss their recommendation and confirm you understand everything within the report
We will help you complete the transfer application pack before sending to the ceding scheme
We will liaise with the ceding scheme to confirm the deadline date has been met and your transfer value has been secured
The whole process is likely to take 7-10 weeks. Once the DB Scheme has received the paperwork they will carry out their due diligence.
This can include: requesting further information from you or a phone call, requiring a call between you and MoneyHelper, the free and impartial Government organisation setup for pension options, and other safety precautions.
Expat Financial Advice
Any pension transfer from defined benefit schemes follows a strict and thorough process. Whilst it can be frustrating, it exists solely for the protection of pension scheme members.
The Wealth Genesis is a cross-border pension specialist, helping expats in North America, Europe and the rest of the world. We've helped hundreds of expats with their DB transfer options, where often, the best solution is to retain the scheme benefits. Should a transfer be the right decision, we will guide you through the whole process. Starting with the discovery meeting to fully understand your position and objectives.
Contact us using the button below to discuss defined benefit pension transfer options, and how this can fit with your overall financial planning.
FAQs
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UK Pension Transfer Specialist - £2,250 (Additional fee of £1,450 for each additional scheme)
TWG Advice Fee - £3000 (no additional fee for additional pension schemes)
Total initial cost for 1 DB scheme = £5250
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In theory yes, there are express services available. However, due to the nature of the benefits you will be giving up, we would need to ensure you are not making a rushed and uninformed decision.
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One of the factors in calculating the transfer value is interest rates, when interest rates increase, the transfer values decrease, and vice versa. Based on the aggressive interest rate hikes endured since December 2021, CETV values have declined accordingly.
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Yes, you can consolidate your DB scheme with one or more DC schemes, including personal pensions, into one pot.
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The Pension Protection Fund (PPF) provides a safety net for members of eligible defined benefit pension schemes if their employer becomes insolvent and the pension scheme cannot afford to pay the promised benefits.
If the employer sponsoring the DB scheme goes into administration and the scheme does not have enough funds to meet its obligations, it may enter the PPF assessment process.
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The PPF pays compensation to eligible members of DB schemes that enter the PPF. However, the level of compensation is subject to statutory limits set by the government. As of 2022, the PPF compensation is capped at 90% of the member's expected pension if they have reached the scheme's normal pension age, or 90% of their expected pension at the time of the employer's insolvency if they have not reached the scheme's normal pension age, subject to an overall cap.
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You can find the FCA's detailed guide on how to spot pension scams here.
