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Do you have a defined benefit (DB) pension in which you’re no longer building up benefits? These pensions are sometimes known as a ‘final salary’ pension. This is because the salary you earned when you leave, and how long you were a member, impacts the amount you're paid.
There are quite a few things to think about when transferring your pension and whether you have the option of transferring out of your DB scheme depends on which scheme you’re in. It’s not possible to transfer out of most public sector DB schemes, but if you are in the Local Government Pension Scheme or a private sector DB scheme, then it’s likely you’ll be able to transfer.
But how do you know if transferring out of your DB scheme is in your best interests?
Transferring a DB pension might give you more options, but it isn’t right for everyone. The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have said “it will be in most people’s best interests to keep their DB scheme”1. However, for some people, transferring their DB pension to a DC pension scheme may be a good option. And advice is key. Anyone wishing to transfer DB benefits valued over £30,000 must take financial advice before doing so.
Our guide to transferring out of your pension highlights the main reasons for and against transferring. Reading it before you speak to a financial adviser might help you feel more informed.
Four reasons not to transfer
Certainty
One great advantage of having a DB pension is that it lasts as long as you do. By contrast, if you transfer your DB pension, you’re taking on the uncertainty about how long you’re going to live.
One big unknown is how quickly you can safely withdraw your money.
After a transfer, you might worry about running out of money, so you choose to withdraw your money slowly. This might mean you don’t enjoy the full benefit of your retirement savings. You could try to overcome this uncertainty by buying an income for life (an annuity). But if you want a guaranteed income for life, it’s hard to see why you would leave your DB scheme in the first place.
A financial adviser can help you review your investment choices and your withdrawal rate. They can make adjustments and give advice if you’re running down your pot too quickly.
Inflation
It’s easy to forget that your retirement could last 20 or 30 years, or more. Over this time, you'd expect prices to rise. The value of receiving an income with some protection against these price rises could be considerable. How much protection your DB pension offers depends on the rules of the scheme. It also depends on when you became a member.
Inflation protection could be important. Let’s assume that inflation runs at 2% a year, that your entire DB pension rights are guaranteed to rise by this much, and that you’ll have a 20-year retirement. If your starting pension at retirement was £100 a week, it would be £148.59 by the end of your retirement.
Without this inflation protection you’d still just be getting £100 a week – a pension nearly one third lower.
Investment risk
Your DC pension savings are invested. The value of which can go down as well as up. This, in turn, could affect the amount of money you end up with when it comes to taking your pension.
If you have a DB pension, these ups and downs will make no difference to the amount of pension you receive. The scheme must pay your pension and the scheme owner bears the investment risk. You are, in effect, insulated against this volatility.
Provision for dependants
If the pension owner has reached the scheme pension age, the scheme must, by law, provide a pension for the widow or widower. (There are complex rules about survivor benefits for same-sex married couples, cohabiting partners etc. Some schemes will do more than the statutory minimum in these cases.)
You shouldn’t disregard this valuable benefit when deciding whether to transfer. It’s a benefit you might not consider to be too important if you’re single, but one you would lose if you transferred.
Four reasons to transfer
Flexibility
Some might consider a DB pension as being rigid and inflexible. For example, unlike a defined contribution (DC) pension, you can’t take out more money in the early years before you receive your state pension and then reduce it when you do. You also can’t withdraw more than your annual pension from a DB scheme to pay for debts, like your mortgage.
Furthermore, if you take a DB pension before the schemes normal pension age, then the annual income will normally be reduced.
By contrast, a DC pension can be taken from normal minimum pension age (currently 55 for most people rising to 57 from 6 April 2028). But, if you decide to take your DC pension benefits at age 55, your money will need to last longer than if you start taking it when you’re older. And the responsibility for making sure it lasts as long as you need it to, will sit with you.
Potential for access to more tax-free cash
Income from a pension is subject to income tax. However, most pensions allow you to withdraw up to 25% in the form of tax-free cash.
If tax-free cash is important to you, there may be some advantages to transferring out.
You might be able to draw a larger tax-free cash lump sum from a DC pension than from a DB pension. However, the amount of tax-free cash might only be bigger if you take your 25% immediately following the transfer. Investments can go down as well as up so, in the time between your transfer and when you take the lump sum, fund performance will impact your tax-free lump sum.
Your pension savings when you die
Your decision to stay in a DB scheme may depend, in part, on who you leave behind when you die. Both DB and DC pensions can provide survivor benefits, but they usually do so in different ways.
If you’re in a DB scheme and married or in a civil partnership, then your spouse or civil partner will receive a guaranteed pension for the rest of their life when you die. Children under 23 would often receive a pension too. But survivor pension rights could be more limited with a DB pension if you aren’t married to your partner. This varies from scheme to scheme and may be at the discretion of the scheme trustees.
By transferring your DB pension into a personal pension, you might be able to pass assets onto beneficiaries that you couldn’t in a DB scheme - but only if there’s money left when you die.
You should discuss inheritance matters with your financial adviser. They'll be able to consider your individual circumstances.
Health
One of the advantages of a DB pension is that it lasts as long as you do. But what if you have reason to believe you have a reduced life expectancy?
If this is the case, transferring out of your DB pension could be appealing. This is because the value offered for your DB pension should (broadly) reflect the average life expectancy.
If you have a reduced life expectancy, you might also be able to consider an enhanced annuity. By taking a shortened life expectancy into account, this product generally offers a slightly greater income for life than you could get from a standard annuity.
Should I transfer my pension?
As you’ll have read, there are quite a few things to think about when transferring your pension.
We can help improve your knowledge on pensions with our range of pension webinars. Our pension experts host these easy to digest videos, each giving you more information on pension topics. However, seeking professional advice should always be key to your decision-making.
1 – Financial Conduct Authority, Considering a pension transfer: DB - Considering a pension transfer: DB | FCA
2 – Gov.uk, Tax on your private pension contributions, January 2023
