Transferring out of a defined benefit pension scheme
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
- What you can and can’t transfer
- How it works
- Transfer incentives
- Risks of transferring to a defined contribution scheme
- Risks of staying in your defined benefit scheme
- Getting help
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 financial adviser.
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.
You will be able to transfer your pension if you’re in a:
- funded public sector pension scheme (such as the local government pension)
- private sector defined benefit scheme
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:
- pension scheme with another employer
- personal or stakeholder pension
- buy-out contract (also sometimes called a ‘section 32 contract’)
Not all employer pension schemes, personal pensions or buy-out contracts accept the 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 may be:
- an enhancement to the calculated transfer value of your benefits in the scheme (‘enhanced transfer value’)
- a cash payment on top of the transfer value
This might not always be as attractive as it looks.
You may 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 may 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
So if you decide to transfer, it’s normally better to transfer the full enhancement.
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 must get financial advice first.
An adviser will take the cash payment or enhanced transfer value into account when comparing the benefits you’re giving up.
In most cases, it’s good practice for your employer to provide access to a financial adviser for free. You can choose another 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. This is also true with some buy-out contracts.
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 may be able provide compensation, but this may not be the full amount of the pension you’ve accumulated.
Make sure you get advice from a financial adviser.
If you do and things go wrong, 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 or a buy-out contract must usually have specialist knowledge in this area. You can ask them if they’re qualified in this field.
What to expect from an 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 may give up if you transfer out of your employer’s scheme with the benefits you may 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 may 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