What are the key benefits of a Defined benefit transfer?

There are many reasons to consider the transfer option. While transferring may not be for you, knowing your options is always the best way to make an informed decision. 

Please note if any of these scenarios are relevant to you, this does not necessarily make transfer suitable. It may however be worth reviewing your scheme benefits to see if they are appropriate to your circumstances.

Flexibility

One of the most often quoted reasons in favour of transferring out of a defined benefit scheme is to gain the flexibility of income and access to the pension fund that a defined contribution scheme offers, especially through drawdown. However, this alone is not a sufficient reason to transfer a client’s benefits as many clients do not require such flexibility. Conversely, for those wanting to retire in stages over many years, having a single fixed date of retirement may not work for them and transferring their benefits could be an option to manage this later financial need, with few defined benefit schemes allowing partial retirement.

Tax planning

Phased retirement for those still in part-time work can be a real benefit with regards to tax planning. If a pension is paid at the same time as earning a salary, this may well push the individual into a higher tax bracket or just mean that more tax is going to be paid overall. Having the option to take a flexible income, especially early on in partial retirement, gives the ability to take enough, but not too much, income in any one year.

Death benefits

One of the biggest changes that came into force with the pension freedoms is the ability to use pensions for intergenerational planning. Death benefits under a defined contribution scheme can now be channelled to a wide range of beneficiaries such as dependents, nominees and successors.

This flexibility is especially appealing to those without a spouse or registered civil partner because,

following the member’s death, there can be issues in paying benefits to anyone else.

For those without a dependent that would benefit from defined benefit scheme death benefits, it is very tempting to transfer out just to gain the enhanced options on death benefits. However, it should always be remembered that pensions are primarily designed to pay benefits in retirement and providing for the individual in their lifetime should still be the main priority. Indeed, death benefits become irrelevant if the fund has been depleted in the member’s lifetime. Separate protection cover could be a better option, if this is a priority objective for the client.

Ill health

Benefits paid from defined benefit schemes make no allowance for the health or longevity of the individual or their family, which could mean, in extreme circumstances, that the defined benefit schemes could be poor value for money. Those who are approaching retirement, are in ill health and want a secure income in retirement may benefit from an enhanced annuity that pays more than the scheme directly if they meet certain criteria set by the annuity providers. For those with serious health conditions that are not immediately life threatening, this could be a very good option to secure a higher income.

You Have No Spouse / Partner

If you are single, then it could be worth considering the transfer option. One of the benefits of a final salary pension is that a dependant’s pension is payable. If you have no qualifying partner, you will receive no benefit from the survivor’s pension. You may be able to secure a higher pension in your own name, or consider an option where the death benefits are brought in line with your requirements such as to pass on to your children.

What are the disadvantages of transferring away from a Defined benefit scheme?

The final salary pension is suitable for the vast majority of scheme members. It will pay you an index linked income (usually) throughout retirement where you are not responsible for the investment risk. 

The sections below provide more detail about why you should stay in a Final Salary Pension Scheme.

Investment risk

Defined benefit pension schemes in theory put all the financial risk on the employer, giving the individual certainty of the benefits they will receive at retirement. By transferring to a defined contribution scheme, the individual will be taking on this risk and will lose any certainty they had in the DB scheme. For those who have only ever been a member of a Defined benefit scheme this could be a real shock, and expectations need to be clearly managed. An individual who sees their fund drop in value due to a short-term fluctuation in the underlying investments may come back to complain if the risks have not been clearly explained and understood.

Inflation proofing

Defined benefit pensions generally have guaranteed increases in deferment and in payment. This gives at least some protection against inflation eroding the true value of the benefits. Guarantees like this are very expensive to purchase with an annuity and difficult to manage in drawdown. With drawdown, as there is no guaranteed income level, benefits could easily reduce in real terms if not carefully managed.

Simplicity

The guaranteed nature of the benefits from a defined benefit scheme mean that ongoing management of a pension after retirement and into old age is not necessary. However, if a transfer to a defined contribution scheme is made, the funds need to be monitored and investment choices made up to and into retirement. The individual will need to be engaged with the scheme and/or adviser up until the point of annuitisation, or age 75, or death. This may not be possible for some and advance safeguards will need to be put into place. One potential issue is to ensure that funds are not left in a drawdown fund without direction at a key point in time.

Do I need a CETV?

A CETV is required in circumstances where a pension member wishes to switch from a final salary scheme (also known as a ‘defined benefit’ plan) into a defined contribution scheme. Your pension scheme administrator will be able to provide you with a CETV statement. You will need a CETV in order to consider whether it is suitable to transfer a Final Salary Pension into an alternative vehicle such as a Personal Pension or a Self-Invested Personal Pension (SIPP).

The CETV and statement of benefits will usually show:

• Your pension at date of leaving the scheme
• The way that the pension will increase in value up until the point of retirement
• The way that your pension will increase in payment
• The transfer value available to you.

This means that CETV statement is a vital piece of information for any individual who wishes to consider transferring their final salary pension plan.

It is important that any individual seeking a CETV statement also seek additional financial advice. This will help to give you information on the implications of transfer, and an assessment of whether transfer is suitable for you.

How is a CETV statement calculated?

The CETV is calculated by working out the lump sum that will be required to provide an equivalent pension to the scheme pension at your retirement age. This lumps sum is then reduced (discounted) depending upon how far away from retirement that you are. The scheme makes various assumptions in order to calculate the cash equivalent transfer value.

Do I have a right to a CETV?

If you are in a funded Final Salary Pension Scheme you have a right to a Cash Equivalent Transfer Value if you are a deferred member but most schemes will provide you an Indicative Cash Equivalent Transfer value if you are still an active member. The scheme must provide this within 3 months of any request. You do not have a legal right to a CETV in the 12-month period before retirement (although some schemes will provide this.) You are entitled to one free CETV in any 12-month period.

Final Salary Pensions are suitable for the vast majority of members. Transferring from a final salary pension scheme is an irreversible decision and it could have a detrimental effect on your retirement planning. The detail on this website is for information purposes only and is not to be taken as a personal recommendation. Before taking any action, you should take financial advice from a suitably qualified professional financial adviser. Any potential advantages of transferring from a defined benefit scheme to a defined contribution scheme are often outweighed by the costs, risks and loss of benefits involved.