When it comes to your retirement you need to make sure you’re making financial decisions that help you achieve the lifestyle you want in later life.
If you're in a defined benefit pension (final salary scheme), you can potentially transfer out of it and into a defined contribution pension (money purchase pension) if you haven’t started taking an income from it.
But is this the right thing to do? Should you even consider it?
Getting financial advice on your pension is essential as a defined benefit transfer isn't suitable for the majority of people and you can’t change your mind once it's complete.
This article will help you understand what a defined benefit transfer is, the key considerations and the impacts it could have on your retirement.
What is a defined benefit pension?
A defined benefit pension scheme is a type of workplace pension that gives you a guaranteed income for life. Your income is usually based on a rate set by the scheme, such as a percentage of your salary for the number of years you’ve been a member of the pension scheme.
Subject to the scheme rules, you may receive other benefits such as regular income increases, or an income to your dependants after your death. Currently, defined benefit pensions are most common among public sector and government employers, however, some private-sector employers offer them.
How is it different from a defined contribution pension?
Unlike a defined benefit pension, your final income isn’t guaranteed with a defined contribution pension. Money paid into the plan is invested, normally into funds, with the aim of making it grow in value. The value of a defined contribution pension pot can fall as well as rise and you could get back less than the amount invested.
You can currently access your defined contribution pension on or after your 55th birthday (57 from 6 April 2028 unless you have a protected retirement age), whereas most defined benefit pensions usually have a retirement age of between 60 and 65 depending on the scheme. If you have a defined benefit pension, you may be able to take benefits earlier or later than the specified age, however this may affect your income.
How to find out what type of pension you have
You should contact your pension provider or employer if you have any questions about your pension or if you’re unsure what type of pension you have.
Can I transfer my defined benefit pension?
Some defined benefit schemes like the Teachers, Civil Service and NHS schemes can't be transferred.
Others may allow it and you can check with the scheme provider/trustees or employer. However, by transferring you would give up any benefits including your right to a guaranteed income.
When considering if transferring out of your defined benefit pension could be right for you, you must first be aware that:
- The FCA require all advisers to start advice assuming the transfer is unsuitable for the majority of people. Advisers may only recommend a transfer after a full investigation of your personal and financial circumstances so that they understand your retirement goals and can show it’s clearly in your best interest.
- The trustees running your defined benefit scheme will convert your accumulated benefits into a Cash Equivalent Transfer Value (CETV) which can be transferred to a defined contribution scheme if your adviser recommends a transfer and you decide to go ahead with it.
- The Financial Conduct Authority (FCA) requires you to take financial advice before transferring if the CETV of your defined benefit pension is over £30,000. We still recommend getting advice for anything below £30,000.
- You can't transfer if you're already taking an income from the scheme.
- An adviser will confirm their recommendation and reasons in writing whether a transfer is right for you or not. You must pay the agreed charge for their recommendation regardless of the outcome.
Considerations of a defined benefit transfer
If you’re debating whether to look into transferring your defined benefit pension or not, below are some general advantages and disadvantages you should consider.
Their importance depends on your circumstances, so we recommend you think about how they could apply to you and how you feel about them.
| Potential advantages | Potential disadvantages |
| Flexible income Defined benefit pensions give you a guaranteed amount of income for life, meaning you can’t take more or less money if your circumstances change. A defined contribution pension, however, gives you full flexibility once you turn 55 (57 from 6 April 2028 unless you have a protected pension age). You can use your savings to buy a guaranteed income (annuity) for life, withdraw your money as and when you need it, or get an income from it leaving the balance invested, or a mix of these options. Remember, money still invested can fall as well as rise in value. A financial adviser can help you understand your retirement options. | Uncertain income Most defined benefit pension schemes give you a guaranteed rising income for life, no matter how long you live. Even if your scheme’s investments perform poorly, your employer must pay your guaranteed income in full. With a defined contribution pension you'll need to decide what to do with the money paid into it. If you use it to provide a retirement income, you could get more or less income from it than from your defined benefits pension. Also, depending on what you decide to do, your retirement fund could run out. |
| Potentially bigger tax-free cash lump sum Defined benefit pensions usually let you take a 25% tax-free cash lump sum in exchange for getting a lower income, and the conversion rate of pension to cash is dependent on the scheme's rules. However, you may have to give up a large amount of your income compared to the amount of tax-free cash you'll get. A defined contribution pension, on the other hand, normally allows you to take a tax-free cash lump sum up to 25% of the value of your pension pot, which could be more than you'd get with your defined benefit scheme. But remember, this also means you’ll have less money in your pension. | Taking on investment risks By transferring to a defined contribution pension, you must choose where to invest your money, monitor the performance regularly and make appropriate investment decisions. If your investment performs poorly, you may risk running out of money. A financial adviser can help you with this. |
| Pass on money to your loved ones Your defined benefit pension payments will stop when you and any dependants pass away, meaning any remaining funds can’t always be passed onto your children or estate. All schemes differ, so please check with your scheme. However, any money left in a defined contribution pension can be passed on to others, as set out in the scheme rules/plan terms and conditions. | Pay more for costs You must pay the running costs and any investment charges with a defined contribution pension. This reduces the value of your pension pot. On the other hand, your employer pays all the costs associated with a defined benefit pension scheme. |
| You may potentially pay more tax At age 55, (57 from 6 April 2028 unless you have a protected pension age), you can take money from your defined contribution pension pot whenever you want to. This could push you into a higher tax bracket, meaning you may pay more income tax than under your defined benefit scheme. Of course, the income from your defined benefit pension would also be taxable. Also, keep the lump sum allowance in mind. The lump sum allowance is how much you can be paid from all your pensions tax-free during your lifetime and in 2024/2025 it’s £268,275. The lump sum and death benefit allowance is the tax-free limit for payments during your lifetime and on death – it’s currently £1,073,100. UK Income Tax is payable on any benefits taken above these limits. Benefits payable from defined benefit and defined contribution pension schemes are valued differently for lump sum allowance purposes. You may have to pay an extra tax charge if you transfer. Bear in mind that tax treatment might change in the future and is dependent on individual circumstances. |
How does defined benefit advice work?
You’re now up to speed on some of the pros and cons of defined benefit transfers. Where do you go from here?
We'd always recommend you get financial advice to check if transferring is beneficial for you and your circumstances as in many cases, it isn't. An adviser can also explain any charges that may apply.
Aviva Financial Advice offer a range of services and solutions to meet all your financial planning needs and can provide access to advice for a defined benefit pension transfer via Succession Wealth Management, an Aviva group company. Find out more about defined benefit pension advice.
Succession Wealth Management are an independent financial advice company, authorised and regulated by the Financial Conduct Authority Financial Services Register number 588378.
Alternatively, you can find an adviser in your area at unbiased.co.uk.
