Specialist FCA Regulated Advice

Defined Benefit Pension Transfer

Transferring your defined benefit pension is usually best suited to people from about the age of 50, although it can sometimes be suitable for younger people too. The question is, will it be suitable for you?

We can provide you with answers. Most people should remain in their current schemes but the answer for you will depend on many factors including your personal circumstances, the details of the pension you want to transfer and what it is you are looking to do and why.

Here are some of the main reasons why people transfer their defined benefit pensions.

However, transferring from a scheme like this involves giving up valuable guarantees.

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Flexible Retirement Options

You can take money out of your pension from the age of 55 and don’t have to take it all in one go.

Some people take a regular amount each month, others take a cash lump sum when they need it and some do a combination of both.

With more of us deciding to ‘phase’ our retirement, such as by reducing hours or moving to a more satisfying part-time role, we can make our pensions work harder for us.

By transferring, you can have complete flexibility and choice to take money from your pension when it suits you.

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Investment Freedom

You can take control of where your pension fund is invested. Most people invest in one of the well-known UK regulated pension funds managed by investment experts. You can decide if you want a low-risk fund, a high-risk fund, or something in-between.

You can choose a specialist fund that only invests in an ethical or green way or, if you have investment experience, you can choose a specific investment fund.

There is something for everyone.


Release a Cash Lump Sum Immediately

From the age of 55 you can release your entire pension fund as a single lump sum.

The first 25% is tax-free, the rest will be taxed at your marginal tax rate at the time you take it. Most people only release the 25% tax-free cash lump sum and leave the rest until a later date.

If you have a specific need for a large cash lump sum, using money from your pension might be your only option. Or if your old company defined benefit pension is very small and surplus to your retirement needs it could be used to clear an unmanageable debt.

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Improved Death Benefits

You can make sure that any money left in your pension is passed on to whoever you like after your death.

You can leave the money to one or more people such as your spouse, partner, children, grandchildren, a friend or even a charity.

You can leave a specific cash amount or a percentage of your pension fund value. You can add and remove anyone at any time, and if it is paid before you are 75, it is entirely tax-free.

Pension Transfer Consultation

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Free Pension Transfer Guide & Consultation
If you would like to find out if transferring your pension or taking a cash lump sum is suitable for you, we can provide a free initial Pension Transfer Consultation known as abridged advice.

Simply complete your details below, and we will send you our Pension Transfer Consultation Pack and Enquiry Form.

As part of the consultation we will look at:

  • What existing pension plans you have in place.
  • What your plans are for retirement.
  • Your needs for flexibility and control.
  • The likely cost of more in-depth advice.

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Defined Benefit Pension Transfer Warning

Transferring away from a defined benefit pension scheme means you will lose valuable guarantees.

Taking benefits early will almost certainly reduce your pension income in retirement and is only suitable for a limited number of people and circumstances. This should not be seen as an easy option for raising cash.

If you release all your money from your pension early you will not have anything left to provide you with income in retirement.

When releasing cash from your pension, usually up to 25% is tax free, the balance is taxed at your marginal rate at the time and could change in the future.

Watch the FCA video explaining the expectations of financial advisers when advising you on defined benefit pension transfers.

Grove Pension Solutions Ltd is authorised and regulated by the Financial Conduct Authority (Reference number 465051).

Defined Benefit Pension Transfer Explained

Defined Benefit Pension Transfer Explained

What is a defined benefit pension scheme?

Defined benefit pension schemes, also known as final salary pension schemes, are one of the best types of pension you can have because of the guarantees they provide.

You should think very carefully before transferring out of a defined benefit pension scheme and make sure you don’t make any rash decisions. Consider your options carefully and make sure you understand what the implication and costs are.

When you were working for your old company it was likely that you paid a fixed percentage of your income into the pension scheme, usually between 5% and 15%; your former employer also contributed into the pension although the amount they paid varied from year to year – in most cases it was significantly more than the amount you paid. Being in the defined benefit pension scheme meant you got the promise of a pension when you retired, which was dependant on how many years you worked for that employer and what your salary was.

The longer you worked for your old employer the bigger the percentage of your salary you would get as a pension in retirement.

When you stopped working for them and left the pension scheme they would have known how many years you were in the scheme and how much your salary was – from this they would be able to calculate how much pension you would be entitled to at retirement.

However; your retirement age could be many years away from when you left your employment, so the amount of pension they calculated would be increased each year from the date you left your old employer up to the date of retirement – the idea being that it would keep up with inflation so in real terms it was worth as much in retirement as it was when you left work.

Whatever the cost is for your old employer to pay you that pension in retirement, they must find the money. If there is a stock market crash or some other event that means the value of the pension fund reduces, it’s not your problem. They would have to find that extra money to ensure you receive the pension you’re promised at retirement.

If you transfer your defined benefit pension fund away from your old company scheme, you would then miss out on all the increases you might have otherwise got had you left this pension where it was in the first place and lose the benefit of your former employer taking on all the investment risk on your behalf. This is a very valuable benefit to lose and could mean you end up with a smaller pension in retirement.

What are the risks and benefits of defined benefit pension transfer?

If you are considering transferring your defined benefit pension to a private pension, known as a defined contribution scheme, you need to consider the pro’s and con’s carefully before you make your decision. Here we take a look at the pro’s and con’s.

Risks of transferring a defined benefit pension:

  • A guaranteed pension income for life is the gold standard for pensions and should not be given up lightly.
  • You will be giving up a pension that is guaranteed to increase each year.
  • You will be giving up a pension where you have no investment risk, it is all borne by the scheme.
  • Taking out a cash lump sum early will mean you will have less money in your pension for the future.
  • Transferring your pension will require advice, which you will have to pay for.
  • You must have a clear understanding of the risks of swapping safeguarded benefits for flexible ones.
  • The value of your pension pot may go down due to poor performing investments.
  • You will lose the benefit of the Pension Protection Fund

Benefits of transferring a defined benefit pension:

  • You can access your pension fund from the age of 55.
  • You can take 100% as a cash lump sum – the first 25% tax free.
  • Improved death benefits. You can leave your entire pension pot to your loved one, free of inheritance tax.
  • You can draw down on your pension pot as and when you like, similar to a bank account.
  • Freedom to invest your pension fund where you want.
  • If your pension fund investments perform well you will end up with more money.

Can I cash in my defined benefit pension early?

If you are aged 55 or older and not currently paying into or receiving your defined benefit pension, you can transfer most arrangements into a new plan that will give you immediate access.

You can release up to 100% of your fund, 25% is tax-free and the balance is taxed at your marginal rate at the time and could change in the future.

What is a Cash Equivalent Transfer Value (CETV)?

When you transfer a an old defined benefit pension scheme, the pension fund trustees will convert all your pension benefits and offer you a Cash Equivalent Transfer Value or CETV.

This calculation is based on what they believe is a reasonable estimation of what you pension is worth, however, some scheme transfers are more generous than others.

Your CETV figure is guaranteed for three months from the date is was calculated.

What are the risks of missing a guarantee date?

If a transfer is not completed by the Guarantee Date, the figures will need to be recalculated and the scheme administrator will charge you a fee for this, usually around £350, however, some charge more. You can decline to proceed at this stage and therefore a recalculation fee will not be charged.

In addition to you being potentially charged a fee, it is also likely your transfer value will change, and it could go down or up in value. If it does go down, this will mean you’ll have less money if a transfer proceeds and where we may have previously made a positive recommendation, with a drop in value our recommendation could become negative.

However, this will only affect you if you go ahead with a transfer of your pension. If you don’t go ahead and decide to leave your pension benefits where they are, your retirement benefits, as they stand now, are not diminished in any way. In other words, losses will not be crystallised and therefore no loss suffered.

What are defined benefit pension and safeguarded benefits?

Transferring a defined benefit pension or any with safeguarded benefits carries additional risk, which must be weighed up carefully. A safeguarded benefit within a pension could broadly be defined as any form of guarantee or promise that could be beneficial to the member (or their survivors). The main types of safeguarded benefits are:

  • Defined Benefit or Final Salary schemes
  • Pension policies with Guaranteed Annuity Rates (GAR’s)
  • Pension policies with Guaranteed Minimum Pensions (GMP’s)
  • Pension policies offering a promised level of income in the future or guaranteed minimum level of income.

A policy with a GAR means that the accumulated fund at retirement will be converted to a guaranteed lifetime income (or ‘annuity’) at a certain rate which is often, although not always, higher than that available on the ‘open market’. As the underlying fund can still go up and down in value, there is no guarantee of how much income you will get. In addition, the GAR might be restrictive in only allowing certain pension options. Nevertheless, this type of guarantee can be very valuable – particularly during times where pension rates are very low.

A policy or scheme with a GMP means that you will receive a guaranteed amount of income at retirement age, irrespective of the value of the pension. If there is a shortfall e.g. the cost of providing the GMP is more than the value of the fund, then the pension scheme / company will have to make up the difference and it is this circumstance where a GMP can be particularly valuable. This can also sometimes restrict the ability to transfer this type of pension.

Equally, if there is more in the fund than the cost of providing the GMP, then additional benefits – in the form of a tax-free lump sum and / or income – would be available. However, the GMP benefit must be secured first.

Some older personal pension policies offer a promised level of income (or guaranteed minimum level of income) calculated by reference to the contributions or premiums paid. Much like a GAR, these policies may restrict the choice of income being paid.

The advantage of these type of guarantees is that like a GMP, you know what you will receive, and the pension company carries the risk of how much it will cost them to provide this pension. Also, if the value of the pension fund at retirement is enough to purchase a higher level of income you can still do so – so this is generally not restrictive.

What is an Enhanced Transfer Value and Incentive?

Some companies with defined benefit pensions offer enhanced transfer values and incentives to encourage you to transfer your pension out of their scheme. This is because companies are finding it increasingly more difficult and costly to fund the pension as people live longer in retirement. Many public sector companies are finding their Defined Benefit pension schemes are underfunded and do not cover their liabilities. This is also the reason why many companies have stopped offering Defined Benefit pensions to their employees.

If you are considering transferring your pension out of a defined benefit pension scheme it is advisable to find out if you are entitled to an enhanced transfer value or incentive.

Why do I need advice from a qualified Pension Transfer Specialist?

If you are thinking about transferring a defined benefit pension into a more flexible personal arrangement and the Cash Equivalent Transfer Value (CETV) is worth £30,000 or more, you must get professional advice from a fully qualified Pension Transfer Specialist (PTS) authorised by the Financial Conduct Authority.

The rules surrounding pension transfers are complex, so our job is to help translate and explain the options that are available, into plain, easy to understand English.

The regulations are there to protect you and your pension, making sure you’re aware of all the pros and cons before you decide to transfer.

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