Transferring out of a defined benefit (DB) pension scheme

If you decide to transfer out of a defined benefit (DB) pension scheme (that is related to your salary), this essentially means that you intend to give up your DB scheme benefits for a cash sum that can be invested in another pension scheme.

Pension schemes can be complicated to understand and it is important to seek financial advice. If you require financial advice regarding your pension, Financial Advisor UK offers a national network of FCA-registered approval pension experts and can match you to a financial advisor who can give you the specialist advice you need, along with the best pension deals around.

If you decide to transfer out of a DB pension scheme, the administrators operating that scheme will need to covert the various benefits you have as part of that scheme into a cash fund. This is otherwise known as ‘cash equivalent transfer value’. Once you receive this sum of money, you’ll then need to transfer this into a stakeholder pension, a personal pension with a third-party company of your choosing, a pension scheme with a different employer, or a self-invested personal pension (SIPP).

Generally speaking, it is common for people to be financially worse-off when they transfer out of a DB pension scheme, therefore it is important to consider your options carefully. Always seek advice from a financial advisor before taking action. With Financial Advisor UK, we can take the hassle out of searching for an advisor, and use our matching service to find one who suits your needs.

What can I transfer?

If you have a public sector pension scheme because you work for an organisation such as the NHS, or you are a teacher in the education sector, it is likely that you won’t be able to transfer your pension. You will only be able to transfer your pension if you have a local government pension (or other funded public sector pension), or a private sector DB pension.

Financial incentives offered by employers

An employer may offer you a financial incentive to transfer out of a DB pension scheme. Your employer may offer you extra cash on top of your transfer value, or a boost to the overall value of the benefits in your scheme (called an enhanced transfer value). You must however think whether accepting such offers will benefit you overall. If you take the extra cash sum, you could be taxed on it (and pay National Insurance), and you may end up with a reduced pension fund when you retire.

If you decide to transfer out of your DB pension and the equivalent transfer value comes to over £30,000, you will need to seek help from a regulated financial advisor. With Financial Advisor UK, we can match you with an approved and FCA-registered advisor who can offer you helpful guidance for your circumstances. Any value of over £30,000 that needs to be transferred out of a DB pension scheme must be approved by a regulated financial advisor. In some instances, your employer may pay for an advisor, but not all companies do, so you’ll need to take this expense into account.

The risks of transferring from a DB pension scheme

It is worth bearing in mind that any benefits of transferring from a DB pension scheme can be subject to fees, charges, losses and risks. If you transfer out of a DB scheme, your final pension income is uncertain. If you decide to take up a stakeholder or personal pension, you’ll lose the benefits you previously had in your DB pension scheme with your previous employer. Always consider advice from a regulated financial advisor so that you can weight up your options.

Transferring out of a defined contribution (DC) pension

Transferring out of a defined contribution (DC) pension depends on your circumstances and your financial goals for the future. If you are thinking of transferring a current pension into a self-invested personal pension (SIPP), stakeholder pension or a personal pension with a third-party company, you will need to ask the administrator of the scheme (pension provider) for a transfer value. This is the sum that your pension scheme will pay to your new pension provider when you transfer. Once you have made the switch, you will not have the benefits of your old pension scheme, and could lose important benefits such as life insurance, health insurance and so on. Always check any charges that may be incurred from transferring, and seek help from a financial advisor if in doubt.