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Your guide to Defined Benefit transfers:

Making the right choice, not a rushed choice

Since the introduction of pension freedoms in 2015, there has been an increase in the number of people considering transferring their pension from defined benefit (DB) to defined contribution (DC) schemes. If you are considering whether transferring your pension from a DB to a DC scheme is the right thing to do, this will depend on your individual circumstances. You should always start by assuming that it is not the right thing to do. Large transfer values are a function of the pension benefits being very valuable – often more valuable than the transfer value.

While transferring benefits from a DB scheme to a DC scheme can be the best outcome for some people, it is not appropriate for everyone. Don’t be blinded by the size of your transfer value or allow yourself to be pressured by family and friends. Take your time to weigh up your options and reach the decision that is right for you.

People who choose to transfer their pension from a DB to a DC scheme typically want to take advantage of the pension freedoms. While both DB and DC schemes provide income for people in retirement, there are some important differences between the two.

Defined Benefit (DB) Schemes, sometimes known as ‘final salary’ schemes:

  • You (the member) receive a regular income from your company’s DB scheme based typically on how many years you worked for the company and the salary you earned.
  • This income generally goes up with inflation and is guaranteed for your lifetime – regardless of how long you live or how the investments in the scheme perform.
  • The lifetime guarantee is funded by the amount of assets the scheme has under investment and the employer’s promise to make up any shortfall.
  • Since the DB scheme and the employer take on all the investment risk associated with the pension scheme, you can plan for your retirement with a high degree of certainty.
  • There is typically little flexibility in terms of how you can take your retirement benefits. For example you may not be able to take retirement benefits from age 55 and where permitted there would normally be a significant reduction for early payment. If you think this might be relevant to you then you should obtain further details from the scheme.

Defined Contribution (DC) Schemes, sometimes known as ‘money purchase’ pensions:

  • You and your employer can both pay into the scheme – the size of your benefits at retirement will be influenced by the contributions made.
  • It is uncertain how much money you will have to retire on since the value of your pension will depend on how the investments you have chosen to invest your contributions into have performed over time.
  • You take on the investment risk associated with the scheme meaning your investment could go up or down over time and there are no guarantees.
  • There is a lot of flexibility around how you can take money out of your pension following the introduction of the pension freedoms. You can take all or part of your pension fund as cash from the age of 55 onwards albeit this may be subject to a tax charge. When you begin to take your benefits, you can choose to move your pension into flexi-access drawdown (to keep it invested) or to buy an annuity (which provides a guaranteed income for your lifetime).
  • If you take a transfer from a DB scheme to a DC scheme your fund is unlikely to be sufficient to buy an annuity that will provide the same guaranteed income.
Making the right decision for you

Ultimately, your own personal circumstances will determine whether it is advisable for you to transfer your benefits out of a DB scheme. Key considerations include:

Your health and potential life expectancy
Your health and potential life expectancy
Your marital status
Your marital status
Whether you have any children or dependants
Whether you have any children or dependants
The health of your spouse or dependants
The health of your spouse or dependants
Ongoing financial commitments, such as school fees
Ongoing financial commitments, such as school fees
Whether you are still paying your mortgage
Whether you are still paying your mortgage
Other income sources, such as part-time employment, or rental/dividend income
Other income sources, such as part-time employment, or rental/dividend income
Other pension provisions
Other pension provisions
Your investment portfolio
Your investment portfolio
How much money you will realistically need to live on in retirement
How much money you will realistically need to live on in retirement
Your experience of investing, including your attitude to risk and capacity for loss
Your experience of investing, including your attitude to risk and capacity for loss
Your plans for retirement
Your plans for retirement
What risks are involved?

One of the biggest advantages of a defined benefit pension plan is security. Provided you have a reputable and solvent sponsoring employer, a DB scheme will insulate you from risk. Even in the event that the sponsoring employer of your DB scheme becomes insolvent, and there are insufficient assets in the scheme to cover all of its pension commitments, you can still claim compensation from the Pension Protection Fund.

Once you move to a DC scheme, you personally take on all of the following risks:
1). Inflation risk - The risk that you have less money to live on in real terms because the cost of goods and services has gone up.
2). Longevity risk - The risk that you outlive your savings.
3). Sequence of return risk - The risk that your investments perform worse than expected.
4). Volatility risk - The risk that your investments change dramatically in value, down as well as up.

Finding out your cash equivalent transfer value (CETV)

If you are interested in transferring to a DC scheme you can ask your scheme provider to issue a statement of entitlement telling you your pension’s ‘cash equivalent transfer value’ . This is the lump sum the pension scheme will offer you in exchange for you giving up any future claims to your DB pension benefits. To calculate it, the scheme provider will consider factors like inflation, investment and longevity forecasts, as well as other assumptions. You should speak to an adviser before requesting your CETV.

Once a CETV has been issued, you generally have three months in which to accept it and to give notice to the scheme trustees of your intention to transfer. If the deadline is missed, the provider may charge you for issuing a new CETV within 12 months. The new CETV could be a different amount (it could be higher or lower than the previous CETV).

Seeking financial advice, what happens next?

Deciding whether to transfer your benefits from a DB scheme to a DC scheme is a very important decision, which will affect the rest of your life. So it is crucial that you research the decision fully and take qualified financial advice.

Your personal circumstances will determine whether it is a good idea to transfer your pension benefits. A Lowes Consultant will discuss your personal circumstances and financial position with you, including the level of risk you feel comfortable with.

A Lowes Consultant will invest a lot of time and effort in coming up with the recommendation that is right for you, so that they can make an informed recommendation about whether you should stay with your DB scheme or switch to a DC scheme. This may include requesting extra information from your DB scheme provider.

If your CETV is £30,000 or more the DB scheme trustees will not be able to release the CETV unless they see you have received financial advice from an appropriately qualified financial adviser.