The FCA, the Pensions Regulator (TPR) and Pensionhelp believe that it will be in most people’s best interest to keep their defined benefit pension.
If you transfer from a Defined Benefit (DB) scheme to a Defined Contribution (DC) scheme you:
- Lose the guaranteed lifetime income from your DB scheme, for you and your dependants.
- Have to pay a DC scheme, and investment manager, to manage your pension and the investments in it, which will reduce the value of your pension pot.
- Have to decide how to invest your money, or pay someone to do it for you.
- May see your pension pot fall in value, as well as rise.
- May have less income in retirement, particularly if the value of your pension pot falls.
- May run out of money in your lifetime.
Who Is Least Suited To A Transfer
You may be less suited to a transfer if you cannot accept a lower income. For example, you may be considering a transfer because some features of a DC pension scheme appeal to you, such as flexibility or control of your money. But using these features often means having to compromise in other areas, such as the level of income you can take. This means you might struggle to achieve the retirement you want, for example:
- If you want a higher tax-free lump sum you will have to take a lower income from your pension.
- If you want to retire early, your money will have to last for longer so you will need to budget for a lower income over time.
- If you want to control your money you will need to manage your investments and pay charges which will reduce the amount in your pension pot.
A Transfer Is Probably Not For You If:
- This is your main or only pension.
- You will rely on income from this pension.
- Your DB pension meets your needs so you don’t need to take investment risk.
- You have dependants you might prefer some of the DB pension features, such as a guaranteed income rather than a lump sum.
- You want certainty: you don’t know how long you’ll live in retirement or how investment markets might perform. Transferring from a DB pension scheme to another type of pension arrangement means you’ll need to think about and manage these unknowns for yourself. A big upside of a DB pension scheme is that the employer providing it absorbs the risk of these unknowns and guarantees to give you a set income for life no matter how long you live or how investments perform. At least that’s the case where they stay in business. If they go bust, you would have to rely on the Pension Protection Fund to pay you compensation.
- You’re concerned about inflation: inflation reduces the buying power of your money over time. DB pensions often build in some protection for this by increasing your retirement income each year by a certain amount. Transferring, means you’ll have to manage this risk for yourself.
- You’re worried about how investments might perform or the charges involved in managing your own pension fund: if investment values go down, with a DB pension that’s the sponsoring employer’s problem to manage. They’ve guaranteed your income. If you transfer, it becomes your problem. You must be willing and able to accept the risk of investments going down as well as up and that potentially affecting the income you’ll get.
- You want to be sure your spouse is provided for if you die: since 1997, DB schemes have had a legal duty to provide a survivors’ pension for your spouse if you have one, and that duty was extended to civil partners from 2005. If this is important to you, you’ll need to make provision for this yourself if you transfer, and this may be expensive.
- Your service was long and your leaving salary high: if you worked for a sponsoring employer for many years and left when your salary was relatively high, when it comes to taking an income you may be more exposed to the risk of a high tax charge if you take a transfer to a personal pension instead. This is because of the pension Lifetime Allowance (more on this later). It is a very complex area that we can explain in more detail if you think it may affect you.
Who Is Best Suited To A Transfer?
Most DB Scheme Members Who Would Benefit From A Transfer:
- Do not rely only on their DB scheme to meet their income needs and will usually have other sources of retirement income. For example, they may have other pensions and investments.
- They may be managing income for wealth or tax planning by taking it sooner or later, in a way that does not impact on their ability to meet expenditure needs throughout retirement.
- If you have a limited life expectancy, you want your family to be financially secure on your death. If you transfer, you may be able to get more value from a transfer for yourself and your family than if you stay in a DB scheme. But you should also consider whether you and your dependants would be better off with the guaranteed income from a DB scheme. If you die within 2 years of a transfer, there could be extra tax charges to pay.
A Transfer Might Also Be Worth Considering If:
- Flexibility: you want or need greater flexibility in your arrangements overall than your DB pension scheme offers, for example you want to retire earlier than it will let you, or it offers benefits for a spouse or civil partner, but you are single and would like to leave benefits to another person.
- Tax-free cash: you need to optimise the amount of tax-free cash you can take from your pension and be as flexible as possible around how and when you can take it.
- Inheritance: you want any remaining pension savings to be left behind for your beneficiaries after you die. With a DB pension scheme, when you and any eligible survivor die (or reach a certain age for dependent children), your pension will cease.
- Poor health: you are in poor health that might limit your life-expectancy, in which case you might be able to get a higher income by transferring.
- Other sources of income: you have alternative, reliable sources of income for your retirement, which mean that you won’t be relying on the guaranteed income for life from your DB pension scheme to support your standard of living. An example might be if your spouse also has a DB scheme and their guaranteed income for life from this is enough to support both of you.
- You are concerned about the future of the employer who sponsors your scheme: you have good grounds to be seriously worried about the financial future of the employer who sponsors your scheme, and wonder if that might put your future benefits at risk. You may be concerned about the level of protection offered by the Pension Protection Fund (PPF). The PPF was set up to pay compensation to members of DB schemes should the sponsoring employer suffer an insolvency event. You can find out more about it at www.ppf.co.uk.
If your situation doesn’t fit with one or more of these it may well be the case that our service is not right for you because you’d likely be better off staying in your DB scheme. We’d be happy to explore this with you further before either of us make a commitment to each other.