Defined benefit (DB) pension transfers

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Dealing with finances can become an incredibly confusing and complicated matter. From the legalese and jargon to understanding the exact terms of a defined benefit scheme, it’s easy to become bogged down and frustrated.

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If there’s something you’re not sure about and want help with, our financial planners are always there to help provide clarity and to guide you through things.

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In short, a defined benefit (DB) pension (sometimes referred to as a final salary pension) is a scheme that, in effect, guarantees a lifetime income that increases year upon year. This increase is designed to help protect you, the recipient, against inflation. In some cases, this may also continue to be paid to a partner or loved one after you die – although often at a reduced rate.

In most cases, you can choose to receive a tax-free lump sum in exchange for giving up some of the income when you start taking your pension. There aren’t actually any other decisions to make as a member of the DB scheme, because the employer and trustees are responsible for making the funds available.

Here at Equilibrium, providing advice on whether to transfer from a defined benefit scheme is just one of many financial services that we offer. If you want more information about defined benefit pensions and how they work, get in touch with us today.

In a lot of cases, you could end up worse off if you choose to transfer out of a defined benefit scheme as you are giving up a guaranteed income for life and increasing your investment risk.  

However, there are several reasons why a transfer may be in your best interests. Some of the benefits may include greater financial flexibility, better control of your own tax planning, better intergenerational financial planning and more.  

It can be incredibly complex to navigate the pros and cons, potential benefits and possible hurdles of transferring out of a defined benefit scheme pension. A lot of it comes down to your own individual circumstances when understanding whether a transfer is appropriate for you.  

The proper financial advice will help to make the entire process – and your suitability for a defined benefit transfer – much clearer. 

First of all, if you are in what is known as an unfunded public sector pension scheme, then you will not be able to transfer your pension. Some common examples of this kind of public sector pension include the NHS scheme and the teachers’ scheme.

However, you will be able to transfer your pension if you are in a private sector defined benefit scheme or a funded public sector pension scheme – such as the local government pension scheme.

Before considering a defined benefit scheme pension transfer, it is important to understand what potential risks you might face in order to make an informed decision. Of course, if you want more information and to speak to a regulated financial adviser, the team here at Equilibrium are well experienced in defined benefit pension transfers, so get in touch with us to find out more.

In short, some of the risks of transferring your pension include:

• Losing the guaranteed lifetime income from your defined benefit pension
• Seeing your pension pot fall in value
• Potentially having less income to enjoy in retirement if the value of your pension pot falls
• Losing the protections that your defined benefit scheme offers against inflation
• Having to make a decision about how best to invest your own money – or paying experts or investment managers to do this for you
• Losing the protection offered by the Pension Protection Fund (PPF).

It is incredibly important to remember that your suitability for a defined benefit pension transfer almost entirely comes down to your own personal circumstances. Each case is different, and making a decision requires a careful balancing of the benefits and potential downfalls of a transfer in your individual case. Our financial advisers will work alongside you throughout the process to deliver a service that has your very best interests at heart.

Generally speaking, some defined benefit scheme members who do not rely on their defined benefit pension to meet their income needs may benefit from a transfer. If you have other substantial sources of retirement income, then this can potentially increase your suitability for a pension transfer. For example, other sources of income such as pensions and investments can help ensure your finances are already secure. Alternatively, if you are managing your income for wealth and tax planning by taking your pension sooner or later in a manner that will not affect your ability to meet expenditure requirements during retirement, a pension transfer may also benefit you.

If you are someone who currently has a limited life expectancy, then it might be the case that the improved intergenerational planning offered by a pension transfer is an appealing option. If you are hoping to make your family more financially secure upon your death, then a defined benefit pension transfer may allow you to get more value for yourself and your family compared to staying in the scheme. It is important to balance this against the potential security your dependants might gain from the guaranteed (but usually reduced) income of your defined benefit scheme after your death. Also, if you die within two years of committing to a pension transfer, there may be extra tax charges that need to be paid.

There are also certain occasions when a pension transfer could protect you from serious financial difficulty – but this almost always means sacrificing long-term financial security for a short-term boost. Again, this will entirely depend on your own personal circumstances and situations.

Knowing whether you are suitable for a defined benefit pension transfer can be incredibly confusing and frustrating – especially for those who have never had to deal with similar financial matters before. That’s where we can help.

Our team is an experienced provider of high-quality financial advice on pension transfers in the UK. Get in touch with Equilibrium today to find out how we can help you.

Depending on your financial situation, you may need your pension transfer to be reviewed sooner rather than later. This can depend on a few different factors that are largely out of your control. A lot depends on your existing scheme and the timescales set in place for them providing not just the transfer value, but also processing the actual transfer itself. In our experience, the transfer process can often take around one – three months to complete, although it is often longer, and this is a very complex area which we will explain to you.

We expect our review of your pension scheme to take around two to four months. This is because there is a lot of information that we need to gather – both from you and from the scheme – and the analysis can be very complex. As part of our service, we will keep on top of things, chasing your pension scheme for updates, as this can be one of the slowest parts of the process. Our service is entirely transparent and very communicative, and we will keep you updated with the overall progress while answering any particular concerns or problems you have.