Should I move my UK defined benefit pension?
Do you have a UK defined benefit pension? Have you recently been contacted by your UK pension scheme about transferring your pension? Within this article, we will explore the current defined benefit pension market, the process of transferring out and the associated risks and potential rewards of doing so.
UK defined benefit pension
A defined benefit/final salary pension scheme is one that offers a guaranteed income for life. Often known as the “golden handcuffs” of schemes due to the employee perks and pension benefits. In recent times with interest rates being so low and the way the pension values are calculated, members are being offered very high transfer values. As such it raises the question of whether to transfer out of the existing scheme. This combined with the large number off schemes running huge deficits and subsequently raising the risk of the pensions not being able to sustain payments to members.
Options for a defined benefit pension member
Your scheme will offer you 3 options, they are:
- Upon reaching retirement age to enter in the schemes annuity. This will offer the member a guaranteed income for life such as £20,000 a year. Often with 50% of payment being passed to your spouse or children in death.
- Take PCLS (Pension Commencement Lump Sum) payment of 25% of the total transfer value and enter into a reduced annuity. i.e £100,000 tax free cash (in the UK) and an annuity for life of £15,000 per annum
- Transfer the full pension value to a personal pension giving you full control of your monies and ability to access and when require. i.e Transfer £400,000 to a SIPP ( Self Invested Personal Pension) or QROPS. (Qualifying Recognised Overseas Pension Scheme)
Most of the time the member is best to stay with the scheme and enter the annuity as it offers the required security for entering retirement and any guaranteed income is the staple of a strong foundation for retirement planning and income.
If however, you have substantial others assets such as personal pensions, state pensions, investment portfolio, and property then transferring out of your scheme may offer substantial benefits.
Key factors when considering a defined benefit pension transfer
- Do you have other sources of guaranteed income?
- Do you have other assets allocated to fund your retirement such as rental income. state pensions, other defined benefit pensions, investments and such
- Are you single or married with children? Do you wish to pass on most of the pension pot in your estate?
- Are you planning on returning to the UK?
- Is the scheme well funded?
If after considering the above you feel it may be beneficial to transfer out of your existing scheme then the benefits could be:
- Greater control over your investments and how they are managed within the pension fund
- Negating currency risk if planning to not return to the UK
- Ability to access your monies as and when needed via flexible access
- Ability to leave all or part of the total pension value to family or loved ones
Defined Benefit process
In line with UK pension legislation any final salary scheme over the value of £30,000 has to adhere to a strict process and rightfully so. You will need to have a UK, FCA (Financial Conduct Authority) regulated UK IFA assess your scheme. This includes pension benefits and your own personal circumstances, to advise whether it be suitable to transfer out of not. You have 3 months from the date of valuation to complete the transfer. If you do not meet this deadline you will need to request a new CETV and start the process again. From start to finish the process usually takes 7 – 8 weeks.
What are my options for transferring?
Depending on your position regarding residence and fund value there are 2 options. One being a QROPS and the other a SIPP. Which solution is best options depends on a number of factors such as pension value, residence and future plans. Within the pension wrapper you are then able to utlise an offshore investment platform offering multi currency funds and the ability to manage your pension in line with your requirements.
Should I move my UK defined benefit pension?
Seeking financial advice will allow you to start the process, gaining a full understanding of your total pension pot as part of your retirement income. This can be done before or after retirement age.
A good starting point is to speak to a Regulated Independent Financial Adviser such as ourselves at Harrison Brook. As stated it may well be the case that you are best off leaving your pension where it is, however, speaking to a financial adviser should be the first step.