Transferring out of a defined benefit pension scheme
Defined benefit pension schemes were once the most common variety of retirement plan in the UK. They work by giving employees a portion of their final salary, based on how many years they worked at the business, each year after they retire.
Defined benefit plans were popular in the past, but have slowly been phased out of many workplaces as workforces' life expectancies began to lengthen considerably. They're considered one of the more valuable types of pension, but if you're wanting to transfer out of one, how do you do so?
Before we launch into how you can exit your defined benefit scheme, we should note that the overwhelming consensus across the financial landscape is that these plans are the best around – some even go as far as to describe them as "gold-plated".
The position will also depend if you are working for an employer offering a defined benefit scheme and you are building up benefits in that scheme. If so, leaving to allow a transfer will seldom be the best move as you may well be giving up the benefit of future employer contributions. If you have a defined benefit from an old employer – known as being a deferred member – then you are allowed to transfer that to another pension scheme if you wish.
Pension rates could go down in the future, but with a defined benefit scheme, you're assured a certain income for each year of your retirement.
Sometimes an employer will provide you with an incentive for transferring – a larger valuation of its worth for example. This can make the deal seem more attractive, but it's important to do your sums, especially as you may be taxed on these incentives.
Conversely, there is a reason why you might want to exit. Pension schemes run by companies can fail due to a lack of funds, or due to wider economic shocks, and while they're covered by the Pension Protection Fund, you could receive less than you would have done if you hadn't moved your money.
Defined benefit plans may also provide benefits that you don’t need. For example, a spouse’s pension might not be of interest if you are single. If you don’t want these benefits, you may be better off transferring to a more flexible pension plan which can be tailored to your needs.
Given the above points, it's very important to talk to a financial adviser – the costs of making the wrong decision could dwarf the small fee you'd otherwise pay. In fact, if your benefits have a transfer value of £30,000 or over, you must get financial advice by law before you transfer.
If you're in a funded public sector pension scheme, local government pension or private sector defined benefit scheme, you can transfer your defined benefit pension pot to another scheme. If you're in an unfunded public sector pension scheme, then you cannot transfer to a defined contribution arrangement.
How to transfer
You can get a transfer value from your scheme – the amount your benefits are worth – to help you make a decision. This value is normally guaranteed for three months. Once you've decided to transfer, contact the scheme and inform them of your decision. If you want to transfer your benefits away from the existing scheme you are legally obliged to put it into another employer pension scheme, a personal or stakeholder pension, or a buy-out contract (an old type of personal pension).
Think long and hard over whether you want to transfer out of a defined benefit pension scheme, and be sure which pension product you'll replace it with when you move your money.
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