Transfer a defined benefit pension scheme
A pension transfer from a defined benefit (salary-related) pension scheme means giving up your benefits in the scheme in return for a cash value, which is invested in another pension scheme. It’s not usually a good idea.
Your pension’s transfer value
If you decide to transfer out of your workplace defined benefit pension scheme, the trustees must convert the benefits you’ve built up into a cash sum, 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
- A personal or stakeholder pension
- Or a 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), or
- A cash payment on top of the transfer value
Watch out as this might not be as attractive as it looks.
You may get a choice about whether to transfer the whole of the enhanced value into another pension scheme or whether to take the transfer incentive as cash. If you do this:
- You may have to pay Income Tax and National Insurance on it, and
- 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.
Seek professional financial advice
What to expect from Retirement Solutions
Firms advising on transferring your workplace pension to a personal or stakeholder pension or to a buy-out contract must usually have specialist knowledge in this area.
Our 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
Risks of transferring to a defined contribution scheme
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 will give up any benefits you had in the former employer’s scheme. The income you get in retirement will depend on:
- The amount you invest (the transfer value and any further contributions)
- The investments you choose and how well they grow
- The charges taken out of the plans, and
- The amount of retirement income your pension pot can provide for you at retirement
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.
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 of the employers sponsoring these schemes have gone bust leaving insufficient 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.