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    Five good reasons to transfer out of your company pension....and five good reasons not to

    This guide is designed to present you with options to consider when deciding whether or not transfer out of a DB Pension.

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    Transferring out of your company pension - what are the pros and cons?

    30 January 2021

    Transferring out of your company pension - what are the pros and cons?

    20 min read Share

    Growing numbers of people are being offered very large cash sums in exchange for giving up all of their rights in their defined benefit company pension scheme (where the amount of pension you get is guaranteed and based on how long you worked for the firm and how much you earned).

    The purpose of this guide is to provide some basic factual information about the pros and cons of making a transfer of this sort, so that you are better informed prior to seeking impartial and expert financial advice about your individual circumstances.

    You can navigate through the guide using the table of contents below, or if you'd like to read the guide end-to-end in full, you can download a PDF copy.

    Introduction - The changing world of pensions

    The current system

    Five reasons to transfer

    Five reasons not to transfer

    To transfer or not to transfer?

    Introduction

    In the past, many people who worked for private firms built up a company pension based on how long they had worked for the firm and how much they earned.

    The amount of pension they would get was guaranteed by the rules of the pension scheme, and so they were known as defined benefit or DB pensions. These defined benefit pensions have a number of advantages.

    Your pension lasts as long as you do, so there’s no danger of you running out of money.

    There is something for a surviving spouse after you die. The details vary from scheme to scheme but dependants' pensions of half of the scheme member’s pension are common.

    There is some measure of protection against inflation, which helps to maintain the spending power of your pension. Again, the exact provision varies from scheme to scheme, but there is a legal minimum which all schemes have to deliver.

    Your pension is unaffected by the ups and downs of the stock market.

    Despite all of these advantages, there are some downsides to having a pension of this sort, such as a lack of choice over when and how to take your pension. As a result, some people are considering whether to exchange their DB pension rights for a cash equivalent.

    The purpose of this guide is to provide some basic factual information about the pros and cons of making a transfer of this sort, so that you are better informed prior to seeking impartial and expert financial advice about your individual circumstances.

    However, it is important to stress that, because of the attractive features of DB pensions, the Financial Conduct Authority (FCA) tells financial advisers to start from the assumption that it is not in people’s interests to exchange their DB pension rights for a cash alternative1. The Pension Regulator (TPR) also believes it is likely to be in the best interests of the majority of members to remain in their DB scheme2.

    Growing numbers of people are being offered very large cash sums in exchange for giving up all of their rights in their DB pension scheme. These cash sums can be used in two main ways:

    for those who are still saving for their retirement, the cash sum can be transferred into a personal pension where it will be invested, or

    for those who want to start living off the proceeds of their pension, it can be transferred into a drawdown account, where some of the money is invested and some is taken out either in lump sums or as a regular income.

    In both cases, there is no guarantee as to the future level of income, and the only thing that is defined is the contribution going in to the scheme. For this reason, such arrangements are known as defined contribution or DC schemes. Two particular factors have led to a growing interest in converting DB pension rights into cash lump sums which can be invested in DC pension arrangements.

    First, in 2015 new pension freedoms were introduced which give you more choice over what you can do with your DC pension pots. Now it's possible to take a lump sum from your pension, as well as buy an annuity, or draw an income from your pension as and when you need it. As part of these reforms, the tax treatment of beneficiaries receiving proceeds from a DC pension on the member's death, was made much more attractive.

    Second, the low interest rate environment of recent years has meant that the transfer values being offered in exchange for DB pension rights have soared to record levels. This mainly reflects the fact that it is now costing DB schemes a lot more to meet the pension promises that they have made. For all of these reasons, interest in DB to DC transfers is increasing, with advisers and schemes reporting growing numbers of scheme members asking for valuations and seeking advice.

    There are a few things to be aware of at the outset.

    DB to DC transfers are irrevocable – you cannot change your mind a few months or years later even if you wish you hadn’t made the transfer.

    In general, once you have started receiving benefits from your DB pension scheme you cannot then give them all up in return for cash. However, occasionally a scheme will offer you a deal where some of your pension benefit can be given up in return for a lump sum.

    There are some types of DB pension schemes where cash transfers are not possible. These are mainly public sector schemes such as those for nurses, teachers and civil servants. The reason for this is that there is no pension ‘fund’ – the pensions of today’s retired workers are paid for out of the contributions by today’s workers and their employers.

    Source : www.royallondon.com

    Considering a pension transfer: defined benefit

    Read about defined benefit pension you cannot reverse it. Make sure you understand the risks and know how to make an informed decision

    Considering a pension transfer: defined benefit

    First published: 05/06/2020 Last updated: 19/07/2021

    This information from the FCA and The Pensions Regulator (TPR) will help you understand the value of a defined benefit (DB) pension and what to think about if you are considering transferring out of a DB pension scheme. Transferring a DB pension may give you more options for your retirement, but it’s not right for everyone.

    The FCA and TPR believe that it will be in most people’s best interests to keep their defined benefit pension. If you transfer out of a defined benefit pension, you cannot reverse it. Make sure you understand the risks to help you make an informed decision.

    Defined benefit pensions

    A defined benefit (DB) pension, sometimes called a final salary pension, gives you a guaranteed lifetime income that usually increases each year to protect you against inflation. It may also continue being paid to your partner at a reduced rate when you die.

    When you start taking your pension, you can usually choose to receive a tax-free lump sum in return for giving up some of the income. You don’t have to make any other decisions because the employer and trustees of the scheme are responsible for making sure there is enough money to make your payments. You pay no charges as a member of a DB scheme.

    Defined contribution pensions

    In a defined contribution (DC) pension, you invest funds to build up a personal pot of money. You can choose how to use your pot to give you allowable tax-free lump sums and your retirement income.

    The value of your pension pot is affected by changes in the value of the assets you invest in - such as shares, bonds and property - and it will go up and down in value. There are no guarantees that your pension pot will let you maintain your chosen level of income for the rest of your life, unless you chose to buy a guaranteed lifetime income, known as an annuity. You can say who you want to receive your remaining pension pot when you die. You or your adviser are responsible for managing the pot until it runs out. You need to pay charges to an adviser if you choose to take advice on how to invest. You will also pay charges to the pension scheme operator, platform provider and to the investment managers who manage the assets inside your pension.

    If you are considering transferring your DC pension, see our webpage for more information.

    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

    If you transfer out of your DB scheme because you think the employer who runs it might become insolvent, you will lose the protection available from the Pension Protection Fund (PPF) for eligible schemes. Visit the PPF website for more information.

    If you are considering a transfer because the employer who runs the DB scheme is changing or replacing the scheme, please read the information that they provide. This will help you understand the new arrangements, the timeframes involved and what you will 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

    you will 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

    You may be less suited to a transfer if you cannot accept a lower income. For example, you may be considering a transfer because some of the features of a DC pension scheme appeal to you, such as flexibility or control of your money or better death benefits. But having these features often means having to compromise in other areas, such as the level of income you can take. This means you might struggle to achieve the retirement you want, for example if you want:

    a higher tax-free lump sum you will have to take a lower income from your pension

    to retire early in a DC scheme, you will be responsible for setting a lower level of income so that your money can last for longer

    control of your money you will need to manage your investments and pay charges which will reduce the amount in your pension pot

    You may be less suited to a transfer if there are alternative options available to achieve the goals you want to achieve. For example, if you want your family to inherit your pot on your death, you need to remember that by the time you die, you may have spent a lot of the money. Most people near retirement today will live well into their 80s, with many surviving into their 90s. If you want to protect your family financially, you could consider buying life insurance instead.

    Who is best suited to a transfer? 

    Most DB scheme members who would benefit from a transfer do not rely only on their DB scheme to meet their income needs and will usually have other sources of retirement income. For example, they may have other pensions and investments. Alternatively, they may be managing income for wealth or tax planning by taking it sooner or later, in a way that does not impact on their ability to meet expenditure needs throughout retirement.

    Source : www.fca.org.uk

    Transferring your defined benefit pension

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    Transferring your defined benefit pension

    A pension transfer from a defined benefit (final salary or career average) pension scheme usually means giving up your income for life in return for a cash value. This cash is then moved and invested in another pension scheme. In some cases you might be able to transfer from one defined benefit pension scheme to another.

    What’s in this guide

    At a glance

    What you can and can’t transfer

    Be wary of pension scams

    What you can get from defined benefit schemes

    Risks of transferring to a defined contribution scheme

    Concerns about defined benefit schemes

    Reasons people consider transferring out of a defined benefit scheme

    Transfer incentives Other incentives

    How does it work if I want to transfer?

    Getting advice

    What to expect from a financial adviser

    At a glance

    In most cases, you’re likely to be worse off if you transfer out of a defined benefit scheme to a defined contribution scheme. This is even the case if your employer gives you an incentive to leave.

    The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) believe that it will be in most people’s best interests to keep their defined benefit pension. If you transfer out of a defined benefit pension, you can’t reverse it.

    Make sure you understand the risks to help you make an informed decision.

    Find out more on the FCA website

    Need more information on pensions?

    Call us free on 0800 011 3797 or use our webchat. One of our pension specialists will be happy to answer your questions.

    Our help is impartial and free to use, whether that's online or over the phone.

    Opening times: Monday to Friday, 9am to 5pm (helpline), 9am to 6pm (webchat). Closed on bank holidays.

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    What you can and can’t transfer

    If you’re in what’s called an ‘unfunded’ public sector pension scheme, you won’t be able to transfer your pension to anything other than another defined benefit scheme.

    Examples of an unfunded public sector pension scheme are the Teachers’ Pension Scheme and the NHS Pension Scheme.

    You'll generally be able to transfer your pension to any type of scheme if you’re in a:

    private sector defined benefit scheme, or

    funded public sector pension scheme (such as the Local Government Pension Scheme).

    There are certain safeguards in place for these schemes. If you're still working for the employer of the pension scheme, you won't normally be able to transfer your pension. You might also not be able if have less than one year before you would normally be entitled to begin receiving an income from the pension.

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    Be wary of pension scams

    Your pension might be one of your most valuable assets, and for many it offers financial security throughout retirement and for the rest of your life.

    But pension scammers are clever and know all the tricks to get you to hand over your savings. They can target anyone, pressuring you into transferring your pension savings, often into a single investment.

    The Government has now banned cold calling about pensions so, if someone contacts you unexpectedly and says they can help you access your pot before the age of 55, it’s likely to be a pension scam and you should ignore them.

    Pension scammers are clever and know all the tricks to get you to hand over your savings. They can target anyone, pressuring you into transferring your pension savings, often into a single investment.

    You could lose all your money and face a tax charge of up to 55% of the amount taken out or transferred plus further charges from your provider.

    The investments might be overseas, where you have no consumer protection, and might promise you a high guaranteed rate of return (typically 7 or 8% or higher). These are often false investments which often don’t exist or are extremely high-risk with low returns. They could, for example, be in luxury products, property, hotel developments, environmental solutions or storage, and parking.

    Be aware that when you’ve transferred your pension into an investment being used as part of a scam, it’s often too late.

    Find out more in our guide How to spot a pension scam

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    What you can get from defined benefit schemes

    A guaranteed income for life, so there’s no risk of you running out of money in retirement.

    Usually provide an income for your financial dependants after you die. Scheme rules vary, but they'll usually receive a proportion (for example half or two thirds) of the pension income you were receiving before you died.

    Income that usually increases over time, helping to protect the spending power of your money against inflation. Again, scheme rules vary but there are minimum increases all schemes have to provide.

    Your pension income isn’t affected by the ups and downs of the stock market. The scheme’s investments are managed by professionals and even if they perform poorly, your guaranteed income must be paid in full.

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    Risks of transferring to a defined contribution scheme

    If you transfer to a defined contribution scheme, you’re giving up a guaranteed income for life that usually increases to help protect against the effects of inflation, for a future income that can't be predicted with any certainty.

    Source : www.moneyhelper.org.uk

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