Defined Benefit Pension Transfer
Specialist FCA Regulated Advice
If you have an old defined benefit (DB) pension scheme, you might be thinking about transferring it into a more flexible personal arrangement, so that you can take greater control of your pension regarding when and how you access it.
If this is the case and the Cash Equivalent Transfer Value (CETV) of your old pension is worth £30,000 or more, then the regulations stipulate you must get professional advice from a fully qualified Pension Transfer Specialist (PTS) who is authorised and regulated by the Financial Conduct Authority (FCA).
The rules surrounding pension transfers are complex, so our job here at Grove is to help translate and explain to you the options that are available, into plain, easy to understand English.
What are the risks & benefits of defined benefit pension transfer?
When you transfer a defined benefit pension there are many risks and benefits that need to be weighed up before you make your decision.
- Loss of guarantees: A defined benefit pension guarantees you a pension income in retirement.
- Inflation: Once your defined benefit pension scheme starts to pay you an income, it will increase every year thereafter.
- Investment risk: There is no investment risk borne by you, it is all borne by the trustees of your defined benefit pension scheme.
- Loss of Pension Benefits: Taking benefits early could reduce your pension income in retirement and is therefore only suitable for a limited number of people and circumstances.
- Cash Lump Sum: If you release cash from your pension early you will not have anything left to provide you with income in retirement.
- 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 must 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.
- Death Benefits: Unlike an old company defined benefit pension scheme, by transferring to a new arrangement, 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.
Can every Defined Benefit pension scheme be transferred?
Nearly every defined benefit pension scheme can be transferred, so long as it is UK employer funded.
Even funded Local Government Pensions Schemes (LGPS) can be transferred.
What can’t be transferred are:
- State Old Age pension
- Un-funded LGPS – these are pensions that don’t have any funds, they are paid for by the taxpayer as you take your pension. They include Teachers, Firefighters, NHS workers, Police and Armed Forces.
Since our inception in 2007, Grove Pension Solutions have over 7,000 defined benefit pension scheme details on our database and have dealt with every major scheme there is.
What is the Pension Transfer Gold Standard?
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.
Grove Pension Solutions are defined benefit pension transfer specialists. We have adopted the Personal Finance Society’s Pension Transfer Gold Standard initiative.
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 releases all your money from your pension early you will not have anything left to provide you with income in retirement. Usually 25% of your pension can be released tax-free, the balance is taxed at your marginal rate at the time of release, this marginal tax rate could change in the future.
FCA Defined Benefit Pension Transfer Advice
Defined benefit pension transfer advice is heavily regulated by the FCA and they have set out thorough and detailed regulations surrounding it.
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 it.
Here is the FCA video, which aims to help consumers better understand what defined benefit pension transfer advice should look like.
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Defined Benefit Pension Transfer – FAQ’s
Defined Benefit Pension Schemes Explained
Defined benefit pension schemes, also known as Final Salary 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.
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 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.
What are defined benefit pension 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.