Defined Benefit  

What makes a good or bad pension transfer?

  • Explain the FCA's approach to DB transfers
  • Identify examples that would make a good DB transfer
  • Identify examples that would make a bad DB transfer
CPD
Approx.30min

Here are the possible reasons a transfer could be in a client's best interests:

Reduced Life Expectancy. This point is fairly explanatory. If you have a short life expectancy and do not have a spouse or would benefit from your income for life, then you may take more benefit from your DB pension by transferring it and accessing the capital or buying an impaired life annuity. 

Facing Financial Difficulties. Ironically, if you are ‘less comfortable’ in your finances, and by this I mean facing serious financial impairment if you are unable to meet your obligations, then a DB pension transfer and accessing your capital may be a suitable cause of action. Financial difficulty does not mean being unable to afford that new car, however.

Income Flexibility. Final Salary pensions provide an income for life typically from the normal retirement age (NRA) of 60 or more commonly 65.

This is great, but it leaves clients with no flexibility over their income payments. For example, should they continue to work in a high paid position or do lucrative contractor work, any income for life from their final salary pension will be added onto their annual income and thus taxed at a higher tax band.

This is unlike transferring to a personal pension where from the age of 60 or 65, they could defer any income until later in life when their annual taxable income is significantly reduced.

Marital status

Divorced or no spouse. Typically, 50 per cent of an individual's income for life would pass to their spouse in the event of their passing. A valuable protection. For individuals who are divorced or who have no spouse these espousal benefits of their DB pension plan provide little or no value. 

Nominating Beneficiaries. A further complaint from clients is that their final salary scheme does not allow them to nominate their beneficiaries. As mentioned above, espousal benefits are in place as a standard, but what if they wish to nominate their children or other family members? 

In the small print, DB schemes typically have in a place a process where ‘dependents’ can make a case to receive the income for life in the event of the policyholders passing.

However, this is not a simple or enjoyable process for a grieving individual. Furthermore, the outcome is normally solely at the discretion of the trustees' and might take some weeks or months for a decision to be made. 

LTA

Avoiding additional life time allowance (LTA). For individuals who have amassed significant wealth in their UK pensions pots and are approaching or have surpassed the current LTA allowance of £1.073M, transferring a final salary to a QROPS (Qualified Recognised Overseas Pension Scheme) and triggering a BCE8 (Benefit Crystallisation Event) can help them avoid paying 25 per cent tax on any further growth above their lifetime allowance.