Are you considering a Defined Benefit Pension transfer? This is a decision some investors may make ahead of retirement. This decision requires careful consideration, as there are valuable benefits in your current pension arrangement which you’d miss out on if you transferred out. A balanced view is required, and it is vital that you speak with a financial adviser.
What is a Defined Benefit Pension?
A Defined Benefit Pension is a pension linked to your job. This type of arrangement is designed to provide you with an income, lump sum, or combination of both in retirement. The level of benefit you are entitled to is based on several factors such as length of service, salary and age rather than investment returns which are usually attributed to a Defined Contribution or Money Purchase plan.
What is a Defined Benefit Pension transfer?
A transfer from this plan involves the movement of your Defined Benefit Pension in return for a lump sum (known as a Cash Equivalent Transfer Value or CETV) that can be invested in a Personal Pension plan. This means that the benefits of the Defined Benefit Scheme are given a cash value, meaning you are giving up an income for life in exchange for the cash value that you can then choose to be paid to a new scheme to be invested and in doing so become subject to market fluctuations.
Since Pension Freedoms were introduced in 2015, people have had more choice around pensions, and a Defined Benefit Pension transfer is an option some have decided to take in order to move into an arrangement which allows an individual to have more flexibility in retirement. However, due to the valuable benefits that are lost on transfer, you must receive financial advice prior to transferring if your CETV is more than £30,000.
Why would someone want to do a Defined Benefit Pension transfer?
People may choose to do a Defined Benefit Pension transfer as it means they can then have control of their pension, how it is invested, how they can take their money, and how they can name beneficiaries to leave the pension to the next generation, normally free of inheritance tax. However, there are advantages to staying in a Defined Benefit Pension, consider the fact that you may have an income for life and this will not run out regardless of how long you live.
Whilst there can be advantages to a transfer, you need to consider is that a Defined Benefit Pension transfer isn’t necessarily in your best interests and there may be costs and charges involved with a transfer. You may end up with a lower level of retirement benefits and there is a risk your funds will run out during your lifetime if you draw too much income. The Financial Conduct Authority and the Pensions Regulator believe that it will be in most people’s best interests to keep their Defined Benefit pension. Once you transfer out, you will forego your entitlement to your accrued benefits within the plan and you can’t transfer back in should you change your mind.
Speaking with a financial adviser and taking in consideration of all affecting factors is essential.
How does a Defined Benefit Pension transfer works?
Typically, a Defined Pension transfer can be done at any time. However, transferring requires careful consideration, ensuring that you are aware of the risks associated, your circumstances are appropriate for transfer, and you are getting a fair value from your scheme for your benefits.
When you transfer out of a pension, the trustees who run the scheme will convert the benefits to a cash value. This is known as the Cash Equivalent Transfer Value (CETV), the cash value placed on the total benefits of your pension. If you don’t have one of these, you can request one from your pension scheme.
What is the next step if you want to consider a Defined Benefit Pension transfer?
Speak with a financial adviser.
As you may lose benefits in your current scheme, you need a professional assessment from an adviser to ensure a transfer makes sense for your situation and your goals.
Getting advice is a legal requirement for any transfer value over £30,000, and not all schemes will accept non-advised transfers out for under £30,000. It is strongly recommended to get advice in all circumstances around Defined Benefit Pension tranfsers no matter what the value. An adviser will start their assessment with the assumption that a transfer won’t be the right course for most people, and they will then make a conclusion for or against transferring which will be explained in writing.
To learn more, get in touch with our dedicated Defined Benefit Pension transfer team at True Potential.
True Potential Wealth Management offers restricted financial advice. Our service is specifically designed for clients wishing to access their financial affairs online. With investing your capital is at risk. Investments can fluctuate in value and you could get back less than you invest. Pension eligibility and tax rules apply. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time.< Back to Blog