Defined Benefit Pension Transfer

A defined benefit (DB) pension (sometimes referred to as “final salary pension”) is a type of pension plan where an employer promises to provide a certain amount each year when you retire. The benefits of these pension schemes are usually based on the employee’s historical earnings, length of service and their age.

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What are Defined Benefit pension plans?

Defined Benefit (DB) pension plans are valuable workplace pensions that are becoming rare.

The UK Pensions Regulator says there has been a decline in DB pension membership of 46% since 2010, and only 14% of DB pension plans were open to new members in 2018.

The alternative to a DB pension is a Direct Contribution (DC) pension in the workplace. Personal pensions and SIPPs are also forms of DC pension.

With workplace pensions, DB pensions tend to favour the employee, and DC pensions tend to favour the employer.

If you have a Defined Benefit pension, you should think very hard before letting go of it. That’s because, amongst other benefits, “Defined benefit pensions pay out a secure income for life which increases each year.” (moneyadviceservice.org.uk)

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Why transfer a Defined Benefit pension?

It may suit your unique financial circumstances to transfer out of your Defined Benefit (DB) pension. But generally the advice given to clients in the sector is to stay put – unless you have a very clear plan for your financial future.

DB pension schemes are considered to be valuable. If you transfer out, you are likely to give up guaranteed benefits – with no going back. That’s why it is critical to make the right decision. Seek as much professional advice as you can.

There are many factors to consider with a DB pension transfer. Whether it will work better for you to transfer or leave the policy alone depends on if, for example, you are planning to leave the country on a permanent basis.

Be aware that some UK public sector DB pension schemes do not allow you to transfer out.

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Are Defined Benefit pension plans good?

One advantage of Defined Benefit pension plans is that the onus is on the employer – and not you – to pay for the cost of key aspects of the plan, including investment risk. For example, pensionwise.gov.uk states that “Your provider guarantees a certain amount each year when you retire.”.

Is your DB pension plan good enough to stay put with?

DB pension plans offer another huge advantage over the alternative Direct Contribution (DC) plans. Your payout is guaranteed by the employer, whereas with a DC pension, there is no guaranteed payout.

Also, DB pension plans usually pay out on the basis of your final salary or career average salary. DC pension plans, on the other hand, pay out on the basis of how much you, the government and your employer have contributed to the plan.

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Are Defined Benefit pension plans safe?

Many Defined Benefit pension plans are protected by the UK’s Pension Protection Fund (PPF). The PPF say: “It’s our duty to protect people with a defined benefit pension when an employer becomes insolvent.”.

If a DB pension goes bust and it is covered by the PPF, pensioners often receive at least 90% of what they would have done if their scheme still existed. Over 230,000 people currently receive payouts from the PPF. You can search the PPF database to see if your DB pension is covered – but you will need to know the name of the scheme to do so. Otherwise, ask your employer.

How to calculate Defined Benefit pension value?

Holders of Direct Benefit (DB) pensions often want two questions answered:

How much will I receive when my DB pension starts to pay out?

This depends on:

    • How much you have earned over your career
    • How long you have been with the DB pension scheme
    • Which definition of pensionable earnings is used
    • The accrual rate (the proportion of your final salary that you get for each year you are a member of the scheme)

One formula used to arrive at your yearly DB pension income is to multiply the number of years you have been with the scheme by your pensionable salary and multiply that number by the accrual rate.

Ie. If you had been in a scheme for 10 years with a pensionable income of £24k per year and an accrual rate of 1/60, the calculation would be:
(10 x 24,000) x (1 / 60) = £4,000 a year DB pension income.

How much is my DB pension worth if I want to transfer out of it?

Find out the Cash Equivalent Transfer Value (CETV) of your DB pension by asking your employer or your financial advisor.

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