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13 September 2018 | Comment | Article by Jason Lloyd

To transfer, or not to transfer? – What to consider before making this big decision

In a Freedom of Information request to the Pensions Regulator from Royal London, there were an estimated 100,000 transfers out of Defined Benefit (DB) pensions in 2017/ 2018, up from 80,000 in 2016/ 2017. The average transfer was around £200,000, suggesting around £20 billion in total was transferred out in 2017/ 2018.

A DB pension scheme (also known as final salary) provides you with an annual pension or a tax free lump sum with a reduced annual pension – based on how many years you’ve worked for your employer and the salary you’ve earned.

The figures show that a large number of people who choose to transfer their pension from a DB to Defined Contribution (DC) arrangement typically want to take advantage of the Pension Freedoms but for many people, a guaranteed salary-related pension that lasts as long as you do, and is unaffected by the ups and downs of markets, is likely to be the best answer.

Crucially the decision depends on your individual circumstances.

Five reasons why a Pension Transfer might be suitable

  • Flexibility – instead of taking a set pension on a set date, you have much more choice about how and when you take your pension. Many people are choosing to ‘front load’ their pensions, so that they have more money when they are more fit and able to travel, or to act as a bridge until their State Pension or other pension becomes payable.
  • Tax-free cash – some DB pension schemes may offer a poor deal if you want to convert part of your DB pension into a tax-free lump sum. Although the tax-free cash is in theory 25% of the value of the pension, you often lose more than 25% of your annual pension if you go for tax-free cash; in a Defined Contribution (DC) pension, you get exactly 25% of the pot as tax-free cash.
  • Inheritance – generous tax rules mean that if you leave behind money in a DC pension pot, it can be passed on with a favourable tax treatment, especially if you die before the age of 75. In a DB pension, while there may be a regular pension for a widow or widower, there is unlikely to be a lump sum inheritance to children.
  • Health – those who live the longest get the most out of a DB pension, but those who expect to have a shorter life expectancy might do better to transfer if this means there is a balance left in their pension fund when they die, which can be passed on. Please note that HM Revenue & Customs may challenge this for those who die within two years of a transfer.
  • Employer solvency – while most pensions will be paid in full, every year some sponsoring employers go bankrupt. If the DB pension scheme goes into the Pension Protection Fund (PPF), you could lose 10% if you are under pension age, and may get lower annual increases. If you have transferred out, you are not affected.

Five reasons why a Pension Transfer might not be suitable

  • Certainty – with a DB pension, you get a regular payment that lasts as long as you do; with a DC pot, you have to face ‘longevity risk’ (not knowing how long you will live).
  • Inflation – a DB pension has a measure of built-in protection against inflation, but with a DC pot you have to manage this risk yourself, which can be expensive.
  • Investment risk – with a DC pension, you have to handle the ups and downs of the stock market and other investments; with a DB scheme, you don’t need to worry – it’s the scheme’s problem.
  • Provision for survivors – by law, DB pensions have to offer minimum level of pensions for widows/widowers, etc., whereas if you use a DC pension pot to buy an annuity, it dies with you unless you pay extra for a ‘joint life’ policy.
  • Tax – DB pensions are treated relatively favourably from the point of view of pension tax relief. Those with larger pensions could be under the lifetime limit (currently £1.03 million) inside a DB scheme, but the same benefit could be above the limit if transferred into a DC arrangement.

Seek financial advice

Deciding whether to transfer your benefits from a DB scheme to a DC scheme is a very important decision which will affect the rest of your life. If your pension’s ‘cash equivalent transfer value’ (CETV) is greater than £30,000 you must seek advice from an appropriately qualified, FCA registered financial adviser.

For a free pension review, please contact us on 029 2066 0565 or email us at [email protected].

Author bio

Jason Lloyd

Independent Financial Planner

Since leaving the University of Chester with a degree in Business Studies (BA Hons) in 2010, Jason Lloyd immediately began work with Innes Reid Investments Ltd, one of the leading Independent Financial Adviser’s in the North East where he quickly developed to the role of Paraplanner. After a short time back in his home county of Pembrokeshire, Jason joined the Independent Financial Advisers team at Hugh James in July 2013.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.


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