Transferring out of a defined benefit (DB) pension scheme is a big decision and isn’t right for everyone. Find out what you need to think about, and the risks involved.
Defined benefit pensions
A DB pension is sometimes called a final salary pension. It gives you a guaranteed lifetime income that usually increases each year to protect you against inflation.
A DB pension is different to a defined contribution (DC) pension. This is where you build up a pension pot. You’ll need to choose how to invest the money in your pot and how to take a retirement income from it. The value of the pot can go up or down depending on how the investments perform.
You can find out more about DB pensions[1] and DC pensions[2] from MoneyHelper.
The FCA and The Pensions Regulator[3] (TPR) believe it’s in most people’s best interests to keep their DB pension. You can’t reverse a transfer, so you need to make sure you understand the risks so you can make an informed decision.
Risks of transferring
If you transfer from a DB scheme to a DC scheme, you:
- Lose the guaranteed lifetime income from your DB scheme, for you and your dependants.
- Lose the inflationary protections offered by your DB scheme.
- Have to pay a DC scheme, and investment managers, to manage your pension and the investments in it, which is deducted from your pension pot.
- Have to decide how to invest your money, or pay someone to do it for you.
- May see your pension pot fall in value, as well as rise.
- May have less income in retirement, particularly if the value of your pension pot falls.
- May run out of money in your lifetime.
You’ll be able to make an informed decision if you get advice[4] before transferring. Depending on the value of your pension, you may have to do this by law.
Find out more about transferring a DB pension from MoneyHelper[5].
If you’re considering a transfer because the employer who runs the DB scheme is changing or replacing the scheme, please read the information they provide. This will help you understand the new arrangements, the timings involved and what you’ll be giving up if you transfer.
Who is least suited to a transfer
A transfer is probably not for you if:
- This is your main or only pension, or you can’t live off a lower income.
- You’ll rely on income from this pension throughout your retirement.
- Your DB pension meets your needs, so you don’t need to invest in assets that might go down in value.
- You have dependants who might prefer some of the DB pension features, such as a guaranteed income rather than a lump sum.
- There are alternatives to what you are trying to achieve with a transfer, such as providing death benefits for your family.
Who is best suited to a transfer
Under certain circumstances, a transfer may be suitable for your needs if:
- You won’t rely only on your DB scheme to meet your income needs but will have other sources of retirement income.
- You have a limited life expectancy and you want your family to be financially secure on your death. If you transfer, you may be able to get more value from a transfer for yourself and your family than if you stay in a DB scheme.
- On rare occasions, if you’re in serious financial difficulty, you may benefit from a transfer. But this will generally mean sacrificing long-term security for short-term gain.
Do's and don'ts
- Don't rush – take your time and understand the risks.
- Don't transfer just because your colleagues are doing the same.
- Don't talk to companies who contact you out of the blue offering to talk about your pension options.
- Be on your guard against scams and learn how to spot the warning signs of a pension scam[7].
- Be aware that if you're overseas and using non-UK firms to advise you, you may not have the same level of protection, and there may be extra charges or commissions.
