Transferring your defined benefit pension

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 true even 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 about considering a pension transfer on the Financial Conduct Authority (FCA) websiteOpens in a new window

If you’re in what’s called an ‘unfunded’ public sector pension scheme, you will only be able to transfer your pension to another defined benefit scheme (and nowhere else).

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
• a 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.

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

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 (57 from April 2028), 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 that don’t exist or are very 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 How to spot a pension scam guide.

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.

In a defined contribution scheme, any future income is dependent on the performance of the investments you put your cash in. Time matters as well. The investment will change between when the cash value is transferred and when you start taking an income and go into retirement.

If you transfer from a defined benefit scheme to a defined contribution scheme, you’ll be responsible for choosing where to invest your money or will need to pay someone to help you do this.

You’ll also have to pay the running costs of the pension and any investment charges. How your investments perform, and the costs you will pay, affect how long your pension and the income from it, might last.

And there’s a risk that the pension won't last as long as you need it to.

Transferring from a defined benefit scheme to a defined contribution scheme is an irreversible decision – so you can’t change your mind later if you wish you hadn’t made the transfer.

We strongly recommend getting advice for these types of transfer and in most cases the law requires you to.

Staying in a defined benefit pension scheme isn’t risk-free - some employers sponsoring these schemes have gone bust. But this type of scheme is usually protected by the Pension Protection Fund (PPF).

The PPF might step in and pay members' retirement income as compensation if employers become insolvent and the scheme doesn’t have enough funds to pay their benefits.

Find out more in our guide to The Pension Protection Fund.

Despite the security you get from defined benefit pensions, some people consider giving up their defined benefit pension rights in exchange for a cash value.

If you're considering transferring your defined benefit pension you should seek regulated financial advice.

A regulated financial adviser will look at your specific needs and help you understand how a transfer will or won't fit in with your stated objectives, overall retirement plan and your long-term well-being.

Be aware that financial advisers’ normal starting point is that it won’t be in most people’s best interests to give up their defined benefit pension for a cash equivalent.

But there are times when it can make sense, depending on your individual circumstances.

To help you understand the advantages and disadvantages of transferring, based on your specific needs, it is beneficial (and often required by law) to seek regulated financial advice.

With a defined benefit pension, you’ll get a guaranteed income for life, but the amount is fixed. This means you can’t take more or less money if your circumstances change. 

With a defined contribution pension, you can use your pension how you want – usually when you reach the age of 55 (age 57 from April 2028).

This means you could:

• buy a guaranteed income (annuity)
• set up a flexible retirement income and withdraw your money as and when you need it
• take lump sums
• use a mixture of these options.

Be aware that your money remains invested, so it can fall as well as rise in value.

Having more flexibility might also mean you have 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.

Flexibility isn't everything though. Unless you have other income you can rely on in retirement to meet your expenditure needs. Or you need to manage your income differently because of wider personal and financial circumstances, such as your health or for wealth/tax planning purposes. Transferring could be an option. But wanting additional flexibility is not a good reason by itself to consider a transfer.

If you have a health condition which means your life expectancy could be lower than average, then transferring out could be an option as you might not receive the same value from the pension as most people.

When the scheme calculates the cash equivalent transfer value (the amount you would receive if you transferred out), the cash value you’re offered should (broadly) reflect the life expectancy of an average person in good health.

This might be more money than it would cost the scheme to pay you a pension income each year if you remained in the scheme but died before the average life expectancy.

If you transfer the money to a defined contribution pension, it might be possible to take a higher income in view of your shorter life expectancy. And it might be possible to leave some money to your family.

But if you have financial dependants and they would qualify to receive a pension income after you’ve gone, transferring out could mean they would be worse off in the long run after you die.

Your defined benefit pension income will stop when you and any financial dependants die. In most cases this means that when you (and any financial dependants such as your widow/widower) die, your pension dies with you. And there will be nothing to pass on to your family.

But any money left in a defined contribution pension can be inherited by whoever you choose. This can be particularly appealing because if you die before age 75, anything left in your defined contribution pension can be passed on tax-free.

There is a risk that there will be no money left in the pension when you die, especially if the pension needs to provide an income to your widow/widower after your death. So passing anything on isn’t guaranteed.

A transfer incentive is when your employer offers you a financial incentive to transfer out of a defined benefit pension scheme.

This might be:

• a cash payment on top of the transfer value
• a boost to the calculated transfer value of your benefits in the scheme (‘enhanced transfer value’).

This might not always be as good as it looks. It’s important to think carefully about the long-term implications of a transfer incentive before accepting any offer.

You might get a choice about whether you want to transfer all the enhanced value into another pension scheme or take the transfer incentive as cash.

If you take the transfer incentive as cash:

• you might have to pay Income Tax and National Insurance on it
• you’ll get less pension than if you had accepted the incentive as part of the transfer value.

In each case, your employer is aiming to reduce the running costs of their workplace pension scheme by moving future liabilities (your future pension benefits) out of the scheme.

If your employer offers you a transfer incentive, they’re expected to follow a code of conduct. This is to make sure you’re able to make an informed decision about what is best for you, without being pressured by your employer to transfer.

An important element of the code of conduct is that your employer should offer you access to regulated financial advice. This is to help you decide whether to transfer your pension benefits to a new scheme. Your employer should pay for this financial advice.

Incentives to change scheme benefits are also becoming more common.

For example, you might be asked to give up annual pension increases above the statutory minimum after you retire in return for a higher flat rate pension within the scheme.

This is called a pension increase exchange or pension increase conversion.

If you accept the offer, your pension will be paid at the new rate for the rest of your life – but without, for example, any future annual increases. This could reduce the purchasing power of your money due to inflation.

Your employer doesn’t have to offer you access to regulated financial advice if the offer meets certain minimum standards set out in the code of practice and you’re offered some guidance.

The Pensions Regulator has set out five key principles that it expects to be followed in any transfer incentive or pension increase exchange exercise. Find out more about the incentive exercise scheme for employersOpens in a new window

The first step is to find out your cash equivalent transfer value (CETV). This is the cash value the scheme will offer you an exchange for you giving up your defined benefit pension rights.

You can get this by asking your scheme administrator or pension provider. They might ask you to ask in writing and give you a form to complete.

If you qualify for a CETV, this must be provided within three months of you asking for a transfer value.

The scheme administrator or pension provider will then give you a Statement of Entitlement. This is a written document that sets out:

• your transfer value
• details of the benefits you’ve built up under the scheme
• information that your new scheme will need if you decide to proceed with the transfer.

There might also be extra forms to fill in to start the transfer process.

The transfer value is guaranteed for three months. You must have left your scheme and no longer be an active member for this to apply. If you’re still an active member, the guaranteed transfer value won’t apply.

If you decide to transfer to a new scheme, your scheme administrator or pension provider needs proof you’ve taken regulated financial advice if:

• your pension is worth over £30,000, and
• you’re transferring to a defined contribution scheme.

But they might still insist you get advice before accepting a transfer, even if your pension is worth less or you’re transferring to a different defined benefit scheme.

Because of the timelines involved it's a good idea to speak with a regulated financial adviser before you start the process of getting a transfer value. This will help make sure any financial advice can be given in a timely manner and allow you enough time to consider the advice without being rushed. 

When all the paperwork that the scheme requires is received, they must pay the benefits across to the new scheme within six months from the start of the transfer process.

If you don’t complete the transfer process within the three-month period that the CETV is guaranteed for, you might have to apply for another CETV. There might be a cost for this. This could delay the transfer and the CETV could be higher or lower than the amount before. This could mean that any advice that has been provided will need to be re-assessed.

When you’ve transferred to a new scheme, you’ll usually have given up all benefits under the old scheme. Some schemes will let you transfer only a part of your benefits. You’ll need to check with your provider to see if they offer this option.

You can usually transfer a defined benefit pension to a new pension scheme at any time up to one year before the date when you’re expected to start taking your pension.

When you start taking your pension, you can’t usually move your pension elsewhere.

Not all workplace pension schemes, or personal pensions accept transfers. So, it’s important to check first. It might also be possible to transfer your benefits to an overseas pension arrangement.

If you’re considering transferring your defined benefit pension or assessing an incentive offer, it’s important to get financial advice. Some schemes won’t accept transfers unless you do.

If you get regulated advice and things go wrong, or it ends up being the wrong choice for you, you’ll be able to use the complaints and compensation schemes available.

If your employer has asked you to consider an incentive, it’s good practice for them to provide access to a regulated financial adviser for free. However, not all will do this.

You can choose your own financial adviser, but if you do, you’ll have to pay.

When you ask your pension scheme trustees about pension transfers, the information you get will be about pension transfers in general. It won’t be specific to your needs and circumstances.

Firms advising on transferring your defined benefit pension to a defined contribution pension must have specialist knowledge in this area. You can ask them if they’re qualified in this field.

If you have questions around the transfer process, talk to us. But we can’t give you advice about whether you should transfer or not, or where you should invest.

The adviser will discuss your personal circumstances and financial position with you, including the level of risk you feel comfortable with.

They should also:

• Compare the benefits you might give up if you transfer out of your defined benefit scheme with the benefits you might get if you transfer into an existing workplace or an existing or new personal/stakeholder pension.
• Assess the level to which your defined benefit pension scheme is funded, the risk that your benefits might be reduced and the effect on any transfer value offered.
• Check the difference between the defined benefit and defined contribution arrangements.
• Give you a summary of the advantages and disadvantages of their recommendation.
• Ask whether you’ve discussed your decision with your spouse or civil partner as it probably affects them too.
• Check your full range of options.

It’s always a good idea to talk to more than one adviser before you commit to using them, as their costs and services might be different.

But it’s important you only deal with financial advisers who are regulated and authorised by the Financial Conduct Authority (the financial services regulator).

These companies will ensure you're given information upfront and ‘at arms-length’ so you're not under any undue influence. This lets you make an informed decision whether or not to seek professional financial advice on the transfer or conversion of your pension benefits before you incur any costs.