Defined Benefit Pension Transfer Guide For UK Expats
This article is intended for British expats with defined benefit pension schemes who are considering a transfer to another pension provider.
Understanding Defined Benefit Pensions
A Defined Benefit Pension, also known as Final Salary Pension Scheme is a workplace pension scheme that provides a guaranteed retirement income based on your salary and years of service with an employer. The company is responsible for managing the pension fund and investment decisions.
What Is A DB Pension Transfer?
When transferring from a defined benefit pension to a defined contribution scheme (personal pension), you exchange your guaranteed pension income for a lump sum known as the Cash Equivalent Transfer Value (CETV). This sum is then moved into a new pension plan.
By transferring your CETV, you are giving up all the pension benefits held within your final salary pension scheme.
Is A Final Salary Pension Transfer Right For Me?
In most cases, transferring from a final salary scheme to a defined contribution scheme will leave you financially worse off, even if your employer offers an incentive to do so.
Both the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) generally advise that retaining a defined benefit pension is in the best interest of most individuals. Once you transfer out, the decision is irreversible.
Do I Need Advice To Transfer My Cash Equivalent Transfer Value CETV?
Under UK law, you can transfer your DB pension to another scheme without a financial adviser in the following cases:
Your final salary pension has a transfer value of less than £30,000.
While financial advice isn’t always legally required, consulting a regulated financial adviser is strongly recommended. They can guide you through UK pension transfer rules, ensure compliance, and help you avoid potential penalties.
For all CETV's over £30,000, it is mandatory to receive advice from an independent, FCA-regulated Pension Transfer Specialist (PTS) firm.
Why Might I Consider Transferring My DB Pension Scheme Benefits?
Transferring out of a Defined Benefit pension is a significant decision that depends on your personal circumstances and financial goals. While most people are advised to remain in their DB scheme, there are some situations where a transfer may be beneficial.
Control and Flexibility in Taking Your Pension Income
With a Defined Benefit pension, you’re guaranteed a fixed income for life, but this amount remains unchanged (albeit in line with CPI), meaning you can’t change how you take it based on your needs or circumstances.
In contrast, a Defined Contribution (DC) pension offers more flexibility, allowing you to access your pension from age 55 (age 57 from April 2028). This flexibility means you can choose from various options, including:
Taking regular pension income, where you can withdraw funds monthly, quarterly, bi-annually, or annually.
Taking lump sums - Access your pension as and when needed on an ad hoc basis.
Using a combination of these options.
This can be particularly useful when entering retirement as you may want to make the most of your retirement in the 'early years'. This means spending more in the first 10 - 15 years when you can travel, take more holidays, and spend time with your grandchildren. You can then reduce the amount taken over the subsequent 10 - 15 years as life slows down.
Estate and Inheritance Planning
Your final salary scheme will end upon your death, and typically, any financial dependents, like a spouse, may receive 50% of the annual pension. This means that when you (and any financial dependants, such as a widow or widower) pass away, the pension ends, leaving nothing for your family.
Those who want more control over their legacy might consider transferring to a scheme that offers inheritance planning. Transferring to a personal pension allows you to pass 100% of any remaining pension funds to your children or other beneficiaries.
Health Considerations
If you have a health condition that could reduce your life expectancy, transferring out of your defined benefit pension may be a viable option, as you might not receive the same value from the pension as others.
When the scheme calculates the cash equivalent transfer value (CETV), it generally reflects the life expectancy of an average person in good health. This amount may be higher than what it would cost the scheme to provide you with pension income if you remained in the scheme but passed away earlier than the average life expectancy.
By transferring the funds to a defined contribution pension, you might be able to take a higher income based on your shorter life expectancy, and you could potentially leave some money to your family.
Transfer Incentives | Enhanced Transfer Value
A transfer incentive occurs when your employer provides a financial incentive to encourage you to transfer out of a defined benefit pension scheme.
This incentive could include:
A cash payment added to the transfer value
An enhanced transfer value, which boosts the calculated transfer value of your benefits within the scheme
Enhanced transfer values can see multiples rise to extraordinary values such as £5k per annum or £450k CETV. Any multiple over 30 times is usually considered enhanced.
Control Over Investments
With a final salary pension, investment decisions are made by the scheme trustees, meaning the pension holder doesn’t need to manage the investments themselves. However, you may prefer to have more control over your investments and are willing to take on more risk.
A well-diversified self-invested personal pension SIPP offers the potential for higher returns than a DB pension, though this is not guaranteed. This can be attractive if you are comfortable assuming more investment risk in exchange for the possibility of outperformance.
Poor Scheme Financial Health
If your pension scheme is underfunded or at risk of insolvency, transferring out may help protect your pension benefits. In cases where schemes fail, the Pension Protection Fund (PPF) provides compensation, but this may be lower than your original DB pension entitlement.
When Would I Not Consider Transfering My DB Pension?
There are several situations where transferring your Defined Benefit pension may not be advisable. Here are some key scenarios to consider:
You Rely On Guaranteed Income
If you depend on the guaranteed income provided by a final salary pension for financial security in retirement, transferring may not be suitable. The certainty and stability of a DB pension could be more beneficial, especially if you are close to retirement.
Your Pension Scheme Offers Valuable Benefits
If your defined benefit pension includes valuable benefits, such as inflation protection, a spouse’s pension, or death benefits for dependents, you may not want to give these up. Transferring to a Defined Contribution (DC) pension may not provide the same level of security or benefits.
You Are Not Comfortable With Investment Risk
A defined benefit pension provides guaranteed income, whereas a DC pension puts your funds at risk with market fluctuations. If you are uncomfortable taking on investment risk (albeit under the guidance and advice of a regulated professional), it might be best to stay in your DB scheme.
Your Transfer Value is Low
If your cash equivalent transfer value (CETV) is relatively low, it might not be worth transferring. In such cases, the transfer might not provide enough of a lump sum to make a meaningful difference to your retirement income.
You Are Close to Retirement
If you are nearing retirement and don’t have much time to recover any potential losses from market volatility, transferring out of a DB scheme may not be a good option. The guaranteed income from your defined benefit pension can provide stability as you approach retirement.
You Don’t Have Access to Professional Advice
If the value is over £30,000, transferring your defined benefit pension requires adhering to a certain advice process. If you are unable to receive regulated financial advice, you cannot transfer your pension.
You Do Not Have Other Reliable Sources of Income
If you don’t have other sources of retirement income to rely on, transferring from a DB pension may leave you with less financial security in retirement. The guaranteed income from a DB scheme can act as a safety net, which might not be available with a personal pension plan.
DB Pension Transfer Guide Process
The Defined Benefit transfer process typically includes:
Obtaining a CETV – This indicates the lump sum value of your DB pension and is valid for 3 months from the date of calculation.
Understanding Scheme Details – Review the benefits on offer from your defined benefit pension scheme.
Receiving a Suitability Report – The legally required document that outlines the recommendation from the pension transfer specialist. This will compare the benefits of staying in or transferring away from the scheme.
Making the Final Decision – Deciding whether to retain the scheme benefits or transfer out once you have all the information to hand and have spoken to the pension transfer specialist.
DB Scheme | To Transfer Or Not To Transfer?
Whether to transfer your defined benefit pension scheme or not is an hugely important decision and should not be made lightly. The FCA states that the pension transfer specialist should take the view it is in the best interest of most members to stay in their final salary pension scheme.
As a result, over 90% of the suitability reports recommend remaining in the defined benefit pension scheme.
If however, your desire flexibility, control and estate planning that transferring out may be a suitable option.
Before making a decision, it's essential to:
Understand the long-term impact of leaving a guaranteed pension scheme.
Seek advice from an FCA-regulated pension transfer specialist to ensure compliance and suitability.
Assess your retirement goals and determine whether a transfer aligns with your financial objectives
Defined Benefit Pension Transfers Process
The defined benefit pension transfer process is complex and time-consuming. It can take several months to gather the necessary information, assess your financial situation, and complete all required paperwork. Furthermore, you have a set time frame of 3 months to complete the transfer which can further exasperate things.
