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Defined Benefit Pensions

Defined benefit (DB) pension schemes, sometimes referred to as a final salary schemes, are pension schemes with safeguarded benefits.  They are a type of workplace pension that give you a guaranteed, index-linked, income for life, effectively a pension promise.  The pension income is usually based on a rate set by the scheme (the accrual rate) and typically is a percentage of your salary for the number of years you have been a member of the scheme.  A DB pension usually has a set retirement age of between 60 and 65 but you may be able to draw benefits earlier or later than the specified age.  Taking benefits early or late is likely to affect the income you receive.

Currently, DB pensions are most common among public sector and government employers, however, some private-sector employers still offer them.

However, the pension freedoms (providing flexibility to withdraw pension income as and when needed) have resulted in an increasing number of individuals transferring their DB scheme into a defined contribution (DC) pension.

Under a DC pension, there is no pension ‘promise’ at retirement, instead contributions into the scheme are invested with the aim of building a pension pot.  The value of the pot can fall as well as rise and you could get back less than the amount invested.  If the DC pension is a workplace scheme, it will usually benefit from employer contributions, as well as those you make personally.  Contributions to a DC pension scheme benefit from tax relief, subject to certain limits.  The accumulated pot can currently be accessed on or after your 55th birthday.  Please click here for more information on the retirement income options available from a DC pension scheme.

Can I transfer a defined benefit pension?

It is not possible for members of ‘unfunded’ public sector schemes such as the NHS, Civil Service or the Teachers Superannuation Scheme to transfer.

Other schemes can offer a transfer value. The Trustees will offer you a ‘Cash Equivalent Transfer Value’ (CETV) which is the value you can transfer to an alternative pension in exchange for giving up all your benefits under the scheme.

In order for you to have the statutory right to transfer, you need to have stopped accruing benefits in the scheme, and transfer more than 1 year before the scheme’s normal retirement date. In other circumstances the right to transfer is at the discretion of the Trustees.

It is a legal requirement you take regulated financial advice from a suitably qualified and authorised adviser before transferring a scheme with safeguarded benefits, if the transfer value is over £30,000.  Also, the Financial Conduct Authority (FCA) requires all advisers to start the advice process by assuming the transfer is unsuitable, unless it can be proved with evidence that a transfer is in your best interests.

The flexibility to withdraw pension income as and when needed has seen an increasing number of individuals transferring their DB pension into a DC pension.  Coupled with this, high transfer values have made it a seemingly more attractive proposition.

It is important to understand the advantages and disadvantages of DB pension transfers, as well as the associated risks such as giving up a guaranteed inflation protected income for life, in exchange for the CETV.  The investment of the CETV and the potentially volatile returns which might not be sufficient to support you throughout life.

Without the right support, it is likely that many individuals could make poor decisions.

Please see the below to learn more.

Our pension transfer advice

Your Adviser will be able to provide generic information in relation to DB schemes as well as other alternative pension arrangements. This information should allow you to decide whether to ask for a personal recommendation as to which type of arrangement is in your best interests. If you wish to receive a personal recommendation, a Pension Transfer Specialist will prepare a report for you; this is known as Pension Transfer Advice. Unless you receive this report, no advice or recommendation will have been given to you to remain in or leave a pension scheme which contains safeguarded benefits.

The Pension Transfer Advice is separate from any investment report you might receive from us and the fee for this advice is based upon the CETV of the scheme(s) under consideration (see ‘The costs’). It is important to remember that the outcome of the advice might be to do nothing and remain in the scheme.

Your Adviser will be able to help you understand the matters you should take into account when deciding whether or not you would like to receive a personal recommendation to transfer out of or remain in a pension scheme with safeguarded benefits.

As a guide, some general considerations you should take into account are:

  1. It is not generally considered to be in an individual’s best interest to leave a scheme with safeguarded benefits.
  2. The Pension Protection Fund (PPF) provides an element of protection to members of many DB (final salary) pension schemes where an employer becomes insolvent and there are insufficient assets to provide the benefits promised by the scheme. It should be noted that the government does not underwrite the scheme.
  3. Transferring out means that you are unlikely to have any certainty over future income and/or fund value.
  4. These schemes provide a known income for life and very often provide other benefits such as a widow/widowers pension on death as well as protection against the eroding effects of inflation.
  5. They place no personal investment risk on you, whereas under most alternative arrangements the investment risk is borne by you personally.
  6. They are generally inflexible in that you are unlikely to have any ability to vary the income or influence the pension fund investments.
  7. There are unlikely to be any capital sums paid out on your death whereas other schemes allow the fund value to be passed to beneficiaries (albeit these payments may be taxable).
  8. Personal circumstances such as health and marital status may influence whether or not a transfer is likely to be in your best interests.
  9. Transferring out of a pension scheme with safeguarded benefits is usually irreversible.

The advice criteria

We will be able to provide you with advice in relation to a pension transfer if you are resident in the UK for tax purposes and meet one of the following criteria:

  • You are at least 55 years old and your DB pension is surplus to meeting your retirement income needs.
  • You expect to access benefits within 18 months.
  • You are under age 55 and your life expectancy is severely limited.

The advice process

If you ask for a personal recommendation in relation to a scheme with safeguarded benefits, your Adviser will undertake a detailed fact-find to ascertain details of your;

  • Personal circumstances
  • Needs and priorities
  • Attitude towards the scheme benefits under consideration
  • Attitude towards investment risk
  • Capacity for loss
  • Previous knowledge and experience

This will allow the Pension Transfer Specialist to assess your attitude to risk in respect of making any transfer out.

We will also write to your scheme provider to obtain full scheme information before undertaking a detailed analysis to determine whether we believe a transfer is in your best interests. The Pension Transfer Specialist will then prepare a written report setting out the recommendation.

The timescales

Your pension scheme will provide a CETV quotation which is typically guaranteed for 3 months from the date of issue. Obtaining your scheme specific information may take some time because we are reliant on third parties to provide this. However, we will endeavour to undertake the relevant analysis and provide our advice within the guaranteed period. We cannot be held responsible if we are unable to complete the process within the guaranteed period due to delays with obtaining information from third parties.

The costs

We will charge a fee based upon the CETV.  The fee is calculated using the following scale:

For example, if your transfer value is £100,000 we will charge a fee of £2,400; if your transfer value is £300,000 we will charge a fee of £4,800.

  • The fee will be paid before beginning work.
  • The fee is non-refundable irrespective of the final recommendation.

Full details will be set out in a ‘personalised charges’ schedule, which you will need to agree to before we start work.

Conflicts of interest

There is a potential conflict of interest for us when considering transferring your safeguarded benefits as unless we recommend a transfer, we will not gain your assets into our management.

The way that we manage this conflict is as follows:

  1. Our Pension Transfer Specialists are not targeted, rewarded or put under any pressure to recommend a transfer.
  2. The recommendation is supported by detailed analysis and a report that is given to you which is open for your review and criticism.
  3. Before the report can be issued to you, an experienced member of our independent compliance department will review the content and must agree that the advice is suitable for you. Again, the compliance individuals are not targeted, rewarded or put under any pressure to agree with the Pension Transfer Specialist.

The Pension Transfer Gold Standard

When providing our recommendation, we fully adhere to the principals of industry best practice encapsulated in The Pension Transfer Gold Standard. You can request a copy of these by calling 0800 028 200 or you can review them online.