Pension transfers and retirement

At face value, transferring from a defined benefit (DB) scheme to a defined contribution (DC) scheme may give you a broader choice regarding how, and when, to take your pension benefits.

The difference for taking your benefits between a DB and DC scheme

 
DB SCHEMES

In a DB scheme you can typically start taking your pension without any reduction once you reach your Normal Retirement Age (NRA).

Your NRA depends on which section of the Fund you’re a member of, but is typically 55 or 60 years old for active members and 55 or 65 for preserved members.

You can also apply to take your benefits before your NRA, but they may be reduced for early payment.

In taking your benefits you can chose to:

  • Take part of your benefits as a cash lump sum and the rest as regular pension payments
  • Take your entire benefits as regular pension payments
  • Take your entire pension benefits as a cash lump sum if the rules of your specific pension section allow

 

DC schemes

In a DC scheme you can usually start taking your benefits when you reach your Normal Retirement Age (NRA), between the ages of 60 and 65. 

If you have invested in a Lifestyle Strategy you may have chosen a Target Retirement Age (TRA), instead. This is typically from age 55 up to the age of 75 (unless you have a Protected Pension Age of 50).

In line with pension freedoms introduced by the Government in 2015, you may be able access your DC benefits from age 55 even without a TRA, or as early as 50 if you have a Protected Pension Age.

You can also decide to delay taking your pension right up until your 75th birthday.

In accordance with pension freedoms, when it comes to taking your DC benefits you can chose to:

  • leave your Personal Retirement Account (PRA) invested until you need it. This is allowed up to the age of 75
  • get a flexible income, taking it a bit at a time. This is known as a drawdown 
  • get a regular, secure income known as an annuity
  • take all of the money in your PRA as a cash lump sum.  We call this total encashment
  • mix and match your options with a combination of the above

Whichever option you choose you could also take up to 25% of your PRA as a tax-free lump sum, and the rest of your PRA which will be subject to tax. Different rates of income tax apply depending on the type of income and how much it is.

The exact options available to you will depend on the rules of the scheme you’re a member of and/or what is available from your chosen provider if you transfer.

 

The risks of transferring your pension

Unlike a DB pension, the amount you receive from a DC scheme depends almost entirely on the performance of the funds your PRA is invested in.

This means if you transfer from a DB scheme to a DC scheme, you:

  • lose the guaranteed income for life for you and your dependents 
  • may see the value of your pension pot go down, as well as up 
  • may have less income in retirement, particularly if the value of your pension pot falls
  • may have to pay management fees to your pension provider
  • may run out of money in your lifetime.

For these reasons, the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) both believe that it will be in most people’s best interests not to transfer their DB pension.  You can read more about when a transfer may or may not be suitable on the FCA’s website here

 

The importance of getting advice

Transferring your pension is a big decision and one that would benefit from independent financial advice.

Liverpool Victoria (LV) has been chosen as the official partner to give BTPFSF members access to financial advice. LV can be contacted on 0800 023 4187.  

You are still free to choose your own Independent Financial Adviser (IFA). You can find an IFA in your area at unbiased.co.uk.

 

Watch out for scams

Pension transfers are one of the main routes being used by pension scammers.

Their tactics include:

  • contacting people out of the blue wanting to discuss their pension
  • offering ‘free pension reviews’
  • promising better returns on your savings
  • offering upfront cash or other incentives to transfer

If you fall prey to these fraudsters, you could lose your entire pension savings and be asked to pay a large tax bill too. 

You can find out more on our scams page here or via The Pension Regulator’s website here 

 

How to make the transfer

We recommend that you read and consider all available guidance before proceeding with a pension transfer.

If your pension benefits are valued at more than £30,000 then by law you must also seek financial advice before a transfer can go ahead. If your pension benefits are worth less than that, it may still be worth seeking help before making a decision.

You can read more about getting advice here or check the FCA website for more details

If you do decide to transfer out of your DB pension scheme, then the process will be as follows:

Step 1 – tell your employer that you want to opt out of your DB pension scheme.  This is important because a transfer can only be made once you have opted out and ‘preserved’ your benefits. It cannot happen if you are still actively paying in.

Step 2 – your employer will confirm your request to opt out with the Scheme administrator, RPMI.

Step 3 – you will receive a preserved statement, showing the current value of your pension benefits. The Trustee will convert the benefits you’ve built up into a cash sum. This is known as the ‘transfer value’ or sometimes the ‘cash-equivalent transfer value’ or ‘CETV. This reflects the value placed on your benefits that would ultimately be transferred to a new arrangement.

Step 4 – you decide on a new arrangement, to access options such as annuity or drawdown, and put that in place by applying directly to your chosen provider.

Step 5 – once the new arrangement is in place you apply to transfer out by returning all the necessary paperwork to RPMI.

Step 6 – RPMI will then disinvest your pension and transfer the funds directly to your new provider. Once complete, this transfer is permanent and cannot be reversed at a later date.