Specialist FCA Regulated Defined Benefit Pension Adviser
Can I transfer my defined benefit pension?
If you are aged 55+ and not currently paying into or receiving your defined benefit pension,
you can cash in 100% of your pension early as a cash lump sum – up to 25% Tax Free*
What is a defined benefit pension scheme?
Many company pension schemes are called Defined Benefit Pension Schemes or Final Salary Pension Schemes.
These types of scheme are universally considered to be the best sort of pension you can have. If you have one of these schemes you should therefore only consider transferring or releasing benefits early as a matter of last resort.
One of the reasons why they’re considered to be such good pension schemes is because there isn’t any investment risk borne by you, the member; all the investment risk is the liability of your (former) employer. However, this doesn’t mean there isn’t any risk to you at all. If your employer goes bust then the scheme will almost certainly go into the Pension Protection Fund (PPF). The PPF is a compensatory arrangement set up by the government and pays 90% of the benefits you have accrued within the scheme at your retirement date.
Because of this defined benefit pension transfer is only suitable for a limited number of people and circumstances. Although we are not necessarily saying it’s not suitable for you it is important you make sure you are in possession of all the facts before making any final decisions – we always recommend you take your time and do not act in haste.
How Defined Benefit Pension Schemes Work
The following is a guide as to how these schemes work, assuming the scheme is a previous employer’s scheme:
When you were working for your old company it was likely that you paid a fixed percentage of your income into the defined benefit 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 pension scheme meant you got the promise of a pension when you retired, which was dependent on how many years you worked for that employer and what your final 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 for and how much your leaving 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 their employment, so the amount of pension they calculated you would get in retirement would be increased each year from the date you left your old employer up to the date of retirement (usually on a fixed date once a year) – 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.
The point is that your former employer doesn’t know exactly how much it’s going to cost them to provide you with the pension you should get at retirement age.
Whatever the cost is for your old employer to pay you that pension, 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. You’ll receive the defined benefit pension you’re promised at retirement and your old employer must pay it, as long as they have not gone into liquidation (see note about the PPF above in If you have one of these schemes).
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.
Defined Benefit Pension transfer
There are strict rules about the types of defined benefit pensions you can transfer, due to the benefits they provide you at retirement.
Defined Benefit Pension Funds you can transfer:
- UK Personal Pension Fund Holders – either individual or employer funded
- UK Employer Funded Final Salary Pension Schemes (Defined Benefit Pension Schemes)
- Funded public sector pension scheme such as Local Government Pension Schemes (LGPS)
Unfunded Public Sector Defined Benefit Pension:
Since April 2015 you are not allowed to transfer an unfunded public sector pension.
Unfunded Public sector pensions are pensions that have no funds. They are paid for by the taxpayer as you take your pension. Teachers, firefighters, NHS workers, police and armed forces are all unfunded public sector pensions which means it’s not possible to transfer.
You can not transfer State Pensions
FCA ReGulated Defined Benefit Pension Transfer Advice
If your defined benefit pension fund is worth £30,000 or over, the law states you have to take advice from a FCA regulated financial adviser, such as ourselves before you can transfer a defined benefit pension.
The regulations are there to protect your pension and make sure you’re aware of all the pros and cons of transferring a define benefit pension.
Grove Pension Solutions are defined benefit pension transfer specialists. We have adopted the Personal Finance Society’s Pension Transfer Gold Standard initiative.
The Gold Standard is a voluntary code of good practice for Safeguarded and Defined Benefit Pension Transfer advice, based around a set of principles. Financial advice firms can adopt and promote this standard by adhering to these principles, so consumers can be more confident they are dealing with a firm that is going beyond minimum requirements when giving financial advice and a personal recommendation as to whether to transfer their pension.
This service only applies to pensions in the UK.
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.
Defined Benefit Pension Transfers – Benefits & Risks
When you transfer a defined benefit pension there are many risks and benefits that need to be weighed up before you make your decision.
- Investment Freedom: Unlike your old defined benefit scheme, you take control of your money and invest it in the way you want to.
- Flexible Retirement Options: You no longer have to take all of your pension in one go, you can now have more choice and flexibility in how much you take and when you take it.
- Improved Death Benefits: Unlike an old company defined benefit pension scheme, by transferring to a new arrangement you can make sure that 100% of your pension fund can be paid to whomever you like.
- Cash Lump Sum: You can take a 100% cash lump sum – the first 25% is tax free. The rest is taxed at your marginal tax rate applicable at the time you take it, which could change in the future.
- Release Cash Early: You can release cash from your pension at the age of 55 and continue to work whilst taking your pension
- Loss of Pension Benefits: Taking benefits early will almost certainly reduce your pension income in retirement and is only suitable for a limited number of people and circumstances.
- Cash Lump Sum: Cashing in your Defined Benefit Pension should not be seen as an easy option for raising cash. If you release cash from your pension early you will not have anything left to provide you with income in retirement.
Defined Benefit Pension Transfer Regulations
Transferring Defined Benefit Pensions is heavily regulated by the Financial Conduct Authority (FCA) who have set out clear runs and regulations on who can transfer their defined benefit pension. This is because in the most cases you will be better off leaving your pension where it is, rather than transferring it or cashing it in early.
The FCA require you by Law to take professional advice from FCA regulated firms such as ourselves if your pension fund is worth more than £30,000.
The FCA also heavily regulates our firm. We have to adhere to a strict set of regulations when advising people to transfer their defined benefit pension fund. We are obligated by law only to recommend transferring a defined benefit pension if it will be to your benefit. If the FCA decide we have not given the correct advice we can lose our FCA authorisation.
FCA Defined Benefit Pension Transfer Advice Video
Below is the FCA video aims to help consumers better understand financial advice on transferring out of a defined benefit pension. View video on FCA website.
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Defined Benefit Pension Transfer
Cash-Equivalent Transfer Value
When you transfer a workplace defined benefit pension scheme, the pension fund trustees will convert all your pension benefits and offer you a ‘cash-equivalent transfer value’ or ‘CETV’ or ‘Defined Benefit Pension Transfer Value’.
Once you have received your defined benefit pension transfer value you must transfer the pension into one of the following
- Self-invested personal pension (SIPPs)
- Personal or stakeholder pension
- Another Employers pension scheme
Your transfer value guarantee will have a time limit, which is very dependant on the pension fund trustees
Defined Benefit Pension Enhanced Transfer Value and Incentives
Many defined benefit pensions fund trustees are now offering enhanced transfer values and incentives to encourage you to transfer your pension out of their defined benefit pension schemes. 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.
Defined Benefit Pensions Safeguarded Benefits
Transferring a defined benefit pension with any safeguarded benefit guarantee’s 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 guaranteed how much income you 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 as is currently the case.
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.
Need defined benefit pension transfer advice?
It’s free to find out your options
Grove Pension Solutions Ltd is regulated by the Financial Conduct Authority.
We are financial advisers specialising in helping people transfer their defined benefit pensions early and have been doing this for many years now, long before the Pension Freedom changes came into effect.
We have provided professional advice to thousands of people over the years.
Our service allows you to evaluate your Pension Freedom options without paying a penny. It’s only if you decide to go ahead with releasing all or part of your defined benefit pension fund that you pay a fee. You are under no obligation to go ahead if you don’t want to.
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The advisor explained everything and took time to make sure I understood what he had said. Service provided prompt information clear and easy to understand. Staff polite at all times. Everything they said would happen did in time frame told.
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