How To Transfer A Final Salary Pension To International SIPP
LEARNING OBJECTIVES
We’re passionate about providing high quality, relevant and up-to-date financial education to Expats around the world.
IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
The benefits of a final salary pension
The legal requirements when taking financial advice
How the transfer process works for these schemes
What a defined benefit pension transfer should cost
This article is intended for British Expats with final salary (defined benefit) pensions schemes.
Transferring a Final Salary Pension to an International Self-Invested Personal Pension (SIPP) involves several steps and considerations. Below is a general guide, but it's a legal requirement to seek professional advice tailored to your circumstances. The complexity and potential consequences of such transfers warrant that any decision is not rushed into.
What is a Final Salary Pension?
A Final Salary Pension, commonly referred to as a Defined Benefit (DB) pension, is a form of workplace pension scheme.
The payout is calculated based on the number of years you've been a member of the employer's scheme and the salary you earned upon leaving or retiring. These pensions provide a reliable income for life, with annual increases aligned with inflation.
Key features of a Final Salary Pension include:
Guaranteed Income
Members of a Final Salary Pension are promised a guaranteed income from a set date of retirement. This defined benefit is calculated using a predetermined formula specified in the pension scheme.
Inflation Protection
Final Salary Pensions come with inflation protection, ensuring that the pension income increases over time to keep pace with rising living costs. This is usually linked to a specific measure of inflation, such as the Consumer Prices Index (CPI) or Retail Prices Index (RPI).
Employer Responsibility
The employer is responsible for funding the Final Salary Pension scheme. Employers contribute to a pension fund to ensure there are sufficient assets to meet the future pension obligations to their employees. A board of trustees then oversees the fund on behalf of the employer.
Limited Member Contributions
In most cases, members make contributions to the Final Salary Pension scheme, but these are typically lower than in Defined Contribution schemes. The bulk of the responsibility for funding the pension rests with the employer.
Lifelong Income
Final Salary Pensions provide a guaranteed income for life, and often include spousal benefits, ensuring that a percentage of the pension continues to be paid to the member's spouse or partner following the member's death.
No Investment Risk for Members
Unlike Defined Contribution pensions, where the retirement income is dependent on the performance of the underlying investments, members of Final Salary Pensions do not bear the investment risk. The employer is responsible for managing the investment portfolio to meet pension obligations.
Final Salary Pensions were more common in the past, particularly in the public sector and large private companies. However, due to the financial burdens they place on employers and the volatility of investment markets, many employers have shifted towards Defined Contribution pension schemes in recent years.
Final Salary Pension Transfer
To transfer your DB pension scheme, a strict process needs to be followed.
If the value of your pension pot is over £30,000 you will need to take advice from a FCA-authorised Pension Transfer Specialist. They will provide advice on whether to transfer out of your defined benefit pension scheme or not.
The transfer process is as follows:
Initial Meeting - A member of the Wealth Genesis team will run through your position. We need to understand your overall financial position, the DB pension on offer, and transfer value, as well as your reasons for wanting to transfer.
Information Request - Complete a LOA Letter of Authority for the scheme/s you want to transfer. These will be submitted to your pension provider (ceding scheme) to gather all the required information for the pension transfer specialist. The LOA should be processed within 10 - 20 days with the requested information provided thereafter.
This will include the CETV Cash Equivalent Transfer Value and final salary pension scheme information. If you already have a CETV we will still need to submit an LOA as this allows us to request further information and liaise with the scheme on your behalf throughout the process. You have 90 days from the date of the CETV for the transfer documentation including the suitability report to be submittedDiscovery Meeting - We will run through the Fact Find and Risk tolerance documents with you detailing your financial assets and reconfirming your key objectives for wanting to transfer. It's important we fully understand your personal circumstances. These include retirement goals, investment views such as ESG investing, the level of risk you are happy to take, and more personal areas such as family and health.
Internal Report - A summary report will confirm the information you provided. This will also include all associated costs, product utilised, and fund information. This report is not advice but is there to confirm the information provided to date.
Full Defined Benefit Transfer Advice Report - This is provided by the FCA-authorised PTS Pension Transfer Specialist. It involves a full analysis of your pension scheme as well as your personal and financial position. A recommendation will be made based on the suitability of transferring out your scheme.
Documents sent to DB Scheme to meet the deadline - Signed and completed DB transfer report, final salary transfer scheme documents, International SIPP application pack along with the required due diligence forms will be sent to the ceding scheme
The whole process should take 8 - 10 weeks. The ceding scheme will have further due diligence requirements which they will contact you directly on. This will include speaking to MoneyHelper and perhaps a call with their internal compliance team
Transferring your final salary pension to an International SIPP can take 2-3 months after submitting the paperwork. Your pension funds will be sent directly from your DB scheme provider to your International SIPP. The money can then be invested per the Defined Benefit Transfer Advice Report.
Transfer a Final Salary Pension
If you want to transfer a final salary pension to an International SIPP the first step should be to speak to a regulated financial adviser. It's important to understand exactly what you will be giving up and or gaining by leaving your existing scheme.
The Wealth Genesis helps expats outside the UK with their financial planning needs. We provide bespoke wealth management solutions for all our clients. A final salary scheme is the type of pension that offers substantial benefits over the long term.
A DB transfer is not the best option for most clients and as such, you should not jump into making rushed decisions.
To discuss your position in greater detail and understand the options available, use the button below to schedule an initial consultation.
FAQs
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From our experience, the main reasons clients transfer are;
Death Benefits - Pass on 100% of the pension pot to your beneficiaries of choice rather than 50% of the annuity being offered or nothing at all
Flexibility in drawdown - Take pension income as and when required, be it lump sum, regular monthly income, or a combination
Ill Health - if you are in poor health or have a reduced life expectancy then it can be appealing to transfer. Not only do you gain from legacy and flexibility perspective but DB pensions generally reflect the average life expectancy.
Tax efficiency - take money from your pension in a tax-efficient manner rather than pay unnecessary income tax
Currency risk - Gain the ability to convert, invest, and withdraw in local currency.
High transfer value (CETV) in relation to guaranteed income offered
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Loss of income for life - Final salary schemes provide an inflation-protected guaranteed income for life. It is in essence, risk-free.
Investment risk - Upon transferring to a personal pension, the value of the investments can go down as well as up. Should your pension drop significantly it could create a large pension income shortfall.
Lack of other pension provisions - If you do not have any other assets earmarked for your retirement, losing a guaranteed income source offers too great risk.
Associated costs of transfer - There are many costs associated with a final salary pension transfer.
Low transfer value (CETV) in relation to the guaranteed income being offered
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Yes, this should be documented to you as one of the options on the CETV. Often this suits members best by offering a large lump sum whilst still providing guaranteed income in retirement.
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This depends on the stated NRA on your CETV. You cannot access any UK pension scheme before age 55. This is for safeguarded benefits and defined contribution schemes. However, most NRAs are stated as 60 or 65, in which case you can access your retirement savings.
Importantly, if you want to transfer your DB pension to gain access, it is unlikely a transfer is right for you. Any early pension withdrawals can result in a significant income shortfall in retirement.
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These pension transfers are complicated and take a lot of time to complete. Most advisers will charge between 1% and 5% of the total transfer value. You will also have to separately pay for the UK pension transfer report, which is required by law.
This typically costs between £2,000 and £3,000.
At The Wealth Genesis, we charge all our clients the same flat-fee of £3,000, regardless of the transfer value.
