A pension transfer from a defined benefit (salary-related) pension scheme means giving up your scheme benefits in return for a cash value which is invested in another pension scheme.
At a glance
In most cases you’re likely to be worse off if you transfer out of a defined benefit scheme, even if your employer gives you an incentive to leave.
Before you go ahead, you should seek advice from a regulated financial adviser.
In some cases you might have to.
What you can and can’t transfer
If you’re in what’s called an ‘unfunded’ public sector pension scheme, you won’t be able to transfer your pension.
Examples of an unfunded public sector pension scheme are the Teachers Scheme and the NHS scheme.
You will be able to transfer your pension if you’re in a:
- Private sector defined benefit scheme, or
- Funded public sector pension scheme (such as the local government pension)
There are certain safeguards in place for these schemes.
Beware of pension transfer scams
You can transfer your pension fund to a new pension arrangement to get cash from it if you’re 55 or over.
But claims that you can transfer to get cash before 55 or you can get a higher return than under your current scheme is risky at best or a scam at worst.
How it works
If you decide to transfer out of your workplace defined benefit pension scheme, the trustees who run the scheme convert the benefits you’ve built up into a cash sum.
This is called a ‘transfer value’ (also known as a ‘cash-equivalent transfer value’ or ‘CETV’).
You must then invest this in a:
- Personal or stakeholder pension
- Pension scheme with another employer
- Self-invested personal pension (SIPPs)
Not all employer pension schemes, personal pensions or SIPPs accept transfers, so check first.
A transfer incentive is when your employer offers you a financial incentive to transfer out of a defined benefit pension scheme.
This might be:
- A cash payment on top of the transfer value
- An enhancement to the calculated transfer value of your benefits in the scheme (‘enhanced transfer value’)
This might not always be as attractive as it looks.
You might get a choice about whether you want to transfer the whole of the enhanced value into another pension scheme or take the transfer incentive as cash.
If you take the transfer incentive as cash:
- You might have to pay Income Tax and National Insurance on it
- You’ll get less pension than if you had accepted the incentive as part of the transfer value
Incentives to change scheme benefits are also becoming more common.
For example, you might be asked to give up increases above the statutory minimum after you retire in return for a higher flat rate pension within the scheme.
This is called a pension increase exchange or pension increase conversion.
Get advice about incentive offers
You should take financial advice about any offer.
If you’re able to transfer out of your defined benefit scheme and this involves cash equivalent transfer value of £30,000 or over, you’ll be required to get regulated financial advice first.
The Trustees of the scheme can’t transfer any value of £30,000 or over unless this has been signed off by a regulated financial adviser with the required specialisms.
An adviser will take the cash payment or enhanced transfer value into account when comparing the benefits you’re giving up.
It’s good practice for your employer to provide access to a regulated financial adviser for free, however not all will.
You can choose your own financial adviser, but you’ll have to pay.
Risks of transferring to a defined contribution scheme
Any potential advantages of transferring from a defined benefit pension scheme to a defined contribution one are often outweighed by the costs, risks and loss of benefits involved.
Your future pension income can’t be predicted with any certainty if you transfer to a defined contribution scheme, regardless of whether it’s run by your employer or it’s a personal or stakeholder pension.
With a personal or stakeholder pension, you’ll give up any benefits you had in the former employer’s scheme.
Risks of staying in your defined benefit scheme
Staying in a defined benefit pension scheme is not risk-free.
If your employer is still in business, it usually has to make sure the scheme has enough funds to provide the full entitlement to members.
But some employers sponsoring these schemes have gone bust, not leaving enough money to pay the pensions promised.
If an employer is going out of business without enough funds in its pension scheme, the Pension Protection Fund might be able provide compensation, but this might not be the full amount of the pension you’ve accumulated.
If the value of your DB scheme is £30,000 or above you’ll have to take advice from a regulated financial adviser before you can transfer.
This rule is there to protect you and make sure you’re aware of all the pros and cons of transferring.
Even if the value of your scheme is below £30,000, it’s still a good idea to take advice, unless you’re absolutely sure this is what you want to do and understand the consequences.
If you do take regulated advice and things go wrong, or it ends up being the wrong choice for you, you’ll be able to use the complaints and compensation schemes available.
When you ask your pension scheme trustees about pension transfers, the information you get will be about pension transfers in general and won’t be specific to your needs and circumstances.
Firms advising on transferring your defined benefit pension to a defined contribution pension must have specialist knowledge in this area. You can ask them if they’re qualified in this field.
What to expect from a financial adviser
The adviser will discuss your personal circumstances and financial position with you, including the level of risk you feel comfortable with.
They should also:
- Compare the benefits you might give up if you transfer out of your employer’s scheme with the benefits you might get if you transfer into a new employer’s scheme or a personal/stakeholder pension.
- Assess the level to which your employer’s pension scheme is funded, the risk that your benefits might be reduced and the effect on any transfer value offered
- Check the difference between defined benefit and defined contribution arrangements
- Give you a summary of the advantages and disadvantages of their recommendation
- Ask whether you’ve discussed your decision with your spouse or civil partner as it probably affects them too
- Check your full range of options
It’s always a good idea to talk to more than one adviser as their costs and services might be different.
However, it’s vital that you only deal with financial advisers who are regulated and authorised by the Financial Conduct Authority (the financial services regulator).
The Money Advice Service has a retirement adviser directory you can use to draw up a shortlist.
All the advisers and firms on the directory are regulated and will also show whether they have advisers who are qualified to deal with transfers from DB schemes.
We suggest you contact at least three firms to find one that suits your needs.
The Directory splits out firms that will see you face to face and those that deal only by telephone or online.
You might find that firms who deal with customers by telephone have lower costs, and therefore the cost to you is lower.
It’s a good idea to include at list one firm that provides advice by telephone in your shortlist so you can compare.