Important Considerations of a DB Pension Transfer

Friday, 8 July 2022

Deciding on the best course of action when it comes to transferring to a different pension plan requires having access to all the information you need to ensure you select a pension scheme that’s going to benefit you long-term. 

Michael Reed Wealth Management has put together the below blog to provide you with a reliable and comprehensive guide that will help you make the best possible decision.  

What does DB pension mean? 

A DB (defined benefit) pension provides individuals with a guaranteed lifetime income, which increases each year based on inflation.  

The amount you are paid with this type of pension scheme usually depends on factors such as the number of years you’ve been working for your employer, your salary and your accrual rate, which is the proportion of earnings you’ll receive for each year you’ve been part of the scheme. 

It is the employer who contributes to a defined benefit pension scheme, making sure there is enough money to cover the payments for the employee, but depending on how the scheme works, you may also be required to contribute yourself. 

Is a DB pension better than DC? 

Accounting for a defined benefit pension scheme entails specific requirements, and understanding the relationship between employer and employee contributions is particularly important.  

Defined benefit pension schemes offer a considerable risk for employers, who will need to ensure they will be able to pay exactly what’s due to their employee once they retire. These pensions schemes are much less common now and are usually provided by large employers within public sectors, due to the expenses required to run them.  

However, these are secure and usually more generous than DC (defined contribution) pensions, making them a great option for employees. In contrast, defined contribution plans are primarily funded by the employee, with the employer also making contributions to an extent. These plans tend to cost less and be less risky for employers, as the responsibility associated with the value of the fund does not lie with the employer.  

Can you transfer a DB pension into a SIPP? 

SIPP pensions are particularly flexible, allowing individuals to make their own investment decisions, and they can be very tax efficient. As they are a type of DC pension, individuals with DB pensions are usually able to transfer to these plans.  

Should I transfer my DB pension? 

If you are considering a DB pension transfer, you should first examine the requirements and information provided by your employer in your existing plan. 

While it is generally not considered beneficial to transfer out of your DB scheme and give up the guarantee of a secure lifetime income, there are many factors to consider before making a final decision. Let’s dive deeper into the reasons why a DB pension transfer may or may not be right for you. 

The pros and cons of DB pension transfer 

It is important to remember that pension transfer decisions are irreversible, so exploring your options as thoroughly as possible should be your first step.  

You may want to transfer to a DC scheme if you want flexibility around how your pension is managed, and if you feel confident, you will be able to take advantage of potential investment options in the market.  

There may also be high transfer values for defined benefit pensions, as well as increased control, eliminating the potential concerns of your employer’s DB pension scheme going insolvent. 

As previously mentioned, DB pensions offer a stable source of income until death, which would no longer be a guarantee should you choose to switch to a DC pension plan - though a DC pension may also pay out the entirety of your pension pot as a lump sum.  

You should generally avoid transferring if this is your only pension, or if you and your dependants need a stable source of income as opposed to a lump sum, as a DC pension entails a certain amount of uncertainty as your pension pot may rise and fall in value, potentially causing you to run out of money. 

There are also tax implications – as you might be liable for a tax charge if you transfer out of a defined benefit pension if your lifetime allowance (LTA) rises above the tax-free pension saving limit. Transferring to a defined contribution pension also means losing any increases in contribution deriving from inflation.  

DB pension scheme transfer value  

If you have opted for a defined benefit transfer, you may have questions regarding DB pension scheme transfer value. Transfer value (CETV), is the amount of money your employer will pay you to transfer out of your DB scheme, essentially becoming your pension fund value.  

There is a lot to consider when it comes to calculating the amount of money you will receive should you choose to transfer to a different scheme, and there are potential transfer incentives provided that may be beneficial for you. 

Why is it so hard to transfer a DB pension? 

Due to the substantial risks of losing a DB pension, transferring to a different plan can be a particularly long and complex process. 

The more your defined benefit pension is worth, the more difficult this procedure becomes, particularly in the case of a DB pension whose value is above £30,000, which will legally require you to enlist the help of a financial adviser. 

How long does it take to transfer a DB pension? 

It is estimated that DB transfers take on average slightly longer than DC transfers – around six months - as pension advisers need to ensure you are fully aware of the implications of leaving a DB scheme when giving out DB advice. 

Does it cost to transfer a pension?  

There may be costs associated with transferring to a different pension scheme, and these will depend entirely on what pension scheme you are currently part of and the size of your pension pot.  

Fees are usually calculated in percentages, but you will be able to pay these fees by using your pension’s existing balance.  

Is it a good idea to transfer my pension? 

When it comes to making life-changing decisions concerning your pension, taking into account factors such as your pension-protected rights, whether to consolidate your pensions, and what type of pension scheme would work best for you is essential.  

If you still have questions or concerns after reading the above guide, you should consider consulting defined benefit pension advisors who will be able to provide reliable and expert DB transfer advice. 

As a defined benefit pension transfer specialist, Michael Reed Wealth management can help you make informed decisions on a variety of wealth management issues. Get in touch today to find out more. 

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Michael Reed

Michael Reed is a Chartered Financial Planner with years of experience, providing financial advice with both conviction and empathy.

Dedicated to maximising wealth, minimising tax and protecting individuals and businesses against financial risk, Michael has expertise in specific areas of wealth management including pensions, ISAs, investment planning and shareholder protection.