UK Defined Benefit Pension Plans – Should You Transfer Out?

Types of Pension PlansRetirement Planning

Relative to defined contribution pension plans, defined benefit pension plans are complex investment vehicles.

A defined benefit plan is a type of pension in which an employer or sponsor promises a specific payout upon retirement. The payout is calculated on a variety of factors such as length of employment, salary history and age at retirement and the investment risk is borne by the plan sponsor, who is ultimately responsible for ensuring that the pension plan has adequate assets to pay its liabilities.

In recent years, individuals aged 55 and over in the UK with private sector defined benefit pension plans have had the option of transferring out of their pensions. The funds are allowed to be transferred to a personal or stakeholder pension, a pension scheme with another employer or a self-invested personal pension (SIPP).

With ‘transfer values’ surging higher on the back of low interest rates and gilt yields, an increasing number of investors have been looking into this option. Indeed, according to the Pensions Regulator, 80,000 UK defined benefit transfers were made in the first three months of 2017 alone. So is transferring out a good idea?

An important decision

To transfer out or not is a complicated decision that cannot be answered without a thorough review of your personal circumstances. There’s likely to be both advantages and disadvantages of transferring out, and the decision could have important consequences for your quality of life in retirement.

For example, while benefits of transferring out of a defined benefit plan could include a more flexible retirement income and the possibility of passing on wealth to future generations, you could be giving up risk-free income and inflation protection. While a cash boost from a transfer may seem like a good idea now, switching to a defined contribution plan could leave a financial shortfall in the future.

For this reason, it’s a legal requirement that any defined benefit transfer over £30,000 must be signed off by a regulated financial adviser. This rule has been put in place to protect investors, ensuring that the pros and cons of transferring are fully understood.

How an independent financial adviser can help

This is where an independent financial adviser (IFA) can assist you, as an IFA will be able to provide detailed, specific advice that is relevant to your personal situation.

For instance, an IFA can compare the transfer value you’re likely to receive with the guaranteed benefits you’ll be giving up, in order to ensure you receive maximum value from your pension. The adviser could also assess the level to which the existing defined benefit scheme is funded, or discuss the full range of options available when transferring.

Transferring out of a defined benefit pension plan is a big decision. With that in mind, don’t be afraid to speak with an independent financial adviser, even if your pension is under £30,000.   This way, you can make your defined benefit pension transfer decision with confidence.