Find out what you need to consider if you are thinking about transferring your defined benefit pension, or if you are moving or combining your defined contribution pension.
Defined benefit pensions
Defined benefit (salary-related) pensions schemes give you a guaranteed pension income for life. Defined benefit (DB) pensions are valuable benefits so most people are best advised to keep them.
Sometimes employers may offer you an incentive to transfer out of your DB scheme. We call this a ‘pension transfer’.
A pension transfer from a defined benefit pension scheme means giving up your benefits in the scheme in return for cash. This cash could then be invested in another pension scheme.
Even if your employer gives you an incentive to leave, the cash value may be less than the value of the defined benefit payments to you and your eventual pension.
This means that in most cases you are likely to be worse off if you transfer out of a defined benefit scheme.
However, for some DB scheme members, transferring may be the correct thing to do.
For example, there are risks to staying too – the employer could go bust and not be able to pay the pension promised. While the Pension Protection Fund may compensate you in these circumstances, the benefits are likely to be less than you would have otherwise received.
Getting advice on your pension transfer
Deciding whether to transfer a DB pension is, even with the help of a financial adviser, one of the most complex financial decisions you will ever make.
If your pension assets in a DB scheme are worth more than £30,000, Government rules require your pension provider to ensure that you have taken regulated financial advice before allowing the transfer to proceed.
We have clear rules and guidance on how advisers deal with pension transfers.
Only firms with permission from us to advise on pension transfers may do so. You can check on our Financial Services Register which firms offer this advice.
Firms advising on pension transfers need to consider where their client’s funds will be invested. It is the responsibility of the firm advising on the transfer to take into account the risk and characteristics of these investments.
Reporting concerns about advice
If you have concerns about advice you received on transferring your pension, you should contact the firm that provided the advice in the first instance.
See our steps if you wish to make a complaint against a firm.
Transferring your defined contribution pension
A defined contribution pension means you build up a fund that you can access after the age of 55 and use however you want (depending on what your scheme permits). A defined contribution pension may be either in an occupational (work) pension scheme or a personal pension scheme.
There may be benefits to switching from one defined contribution scheme to another, but it depends on your individual circumstances and is a complex financial decision. So you should first get impartial advice from a firm authorised to give advice on pensions.
Our rules require firms or pension transfer advisers:
- To have specific permission for advising on pension transfers and opt-outs.
- To follow our training and competence rules.
- Have the appropriate qualifications.
Potential benefits of pension switching
- Combining a number of pension funds together in one place.
- Moving to a scheme that allows more flexible access.
- Reduced fees.
- Switching to a scheme that better suits your needs.
- Stopping ‘trail commission’, which is an annual payment to the financial adviser who set up your pension and which could eat into your pension savings (switching providers should cut the trail commission).
Potential risks of pension switching
- A new scheme may have higher costs but no more benefits than your existing scheme.
- You might lose valuable benefits offered by your current pension such as death benefits or a guaranteed annuity rate (GAR) option.
- Some pensions apply a penalty when you transfer, which can eat into any cost savings.
- It may be possible, and more cost-effective, to transfer all your pensions into one of your existing pensions rather set up a new one.
- If you change your mind about transferring, it is worth noting that although pension transfers usually offer a 30-day cancellation period, this does not mean your old pension scheme has to take your money back – it may refuse.
- Some pension providers offer bonuses or reduced charges if you stay with them a long time. If you leave, you will miss out on these bonuses.