Defined Benefit: Should I Transfer My Last Salary Pension?

Feb 21, 2024 By Susan Kelly

If you have a defined benefit pension, you may be offered the opportunity to move it into the more popular kind of pension (defined contribution) (defined contribution). This is a huge choice and an irrevocable one, so it's crucial to understand what this implies and what the advantages and downsides for you could be.

What Is A Final Salary-Defined Benefit Plan?

A defined benefit or DB pension (sometimes known as a final salary pension) is a unique employment pension. Instead of building up a pension pool over time, it gives you a fixed yearly income for life, depending on your final or average wage (thus the name) (hence the name).

DB pensions are most typically supplied by the public sector (health, education, etc.) and government employers. Some private-sector businesses do still provide them, though. Historically they have been viewed as a highly appealing sort of pension.

What Is A Final Salary Pension?

When you are a member of a DB / final salary pension system, your employer pays into a central fund on your behalf (unless the taxpayer directly supports your scheme) (unless the taxpayer directly funds your scheme). The amount you're paid will depend on various circumstances - find out more about last salary pension income.

What Are The Advantages of A Defined Benefit Pension?

Defined benefit (DB) pensions have a reputation for being more generous since an above-average defined contribution pool is required to purchase an annuity that pays the same amount as a DB plan.

In addition, a DB pension's distributions are guaranteed for the remainder of one's life. Regardless of how long you live, your pension is guaranteed to be paid out as long as the pension plan is solvent.

What Are The Downsides of A Defined Benefit Plan?

Despite the advantages of a DB pension, it is not as flexible as a DC pension pot in several respects. If you want to accept a greater lump payment, you can't do so.

While your spouse will receive some financial support if you pass away early, your children will receive nothing from your estate if you die without a will. If your pension plan isn't appropriately financed in the future, you run the danger of it failing (e.g., if the employer goes bust).

The PPF, which protects DB pension systems, will continue to pay out pension payouts in most circumstances. However, the PPF may have a maximum guarantee.

What Is A DB Pension Transfer?

A defined benefit (DB) pension can be exchanged for a defined contribution (DC) pension with a predetermined amount. This is referred to as a pension transfer at retirement (or defined benefit pension transfer).

You may be offered a sum of money in return for giving up your lifetime pension in a last salary pension transfer. The 'Cash Equivalent Transfer Value,' rather than actual cash, will be the medium of exchange for this sum (CETV). From the time you turn 55, you can begin drawing a pension from the money you've saved.

An Illustration of The Transfer Value in Cash (CETV)

Here are some examples of how the CETV value may be applied in the real world. The following is a useful rule for estimating transfer values from one supplier to another.

If you are now 55 and have a final salary pension that is expected to pay you £12,000 a year from the age of 65, how much money would you need to live on?

According to a conservative estimate, a CETV of roughly £300,000 might be obtained by multiplying this anticipated revenue by 25. According to this approach, the CETV might rise to above £360,000 with a factor of 30 or higher.

Is My CETV A Wise Investment?

Would this 'poor' value of £300,000 CETV compare to your initial final salary pension of $12,000 per year? That is to say, how long can you expect to live off your pension?

If no growth occurs at all, you can see that over 25 years, you may withdraw £12,000 every year from £300,000. If your pension fund grew by 1% annually, you could take out £12,000 per year for the next 28 years before running out of money.

At the same pace of spending, your money would last for 34 years if you achieved a 2% annual growth rate. Alternatively, you may accept a larger yearly salary, such as £15,000 for twenty-five years.

However, there is a significant caveat to this good news: When you accept your pension in this manner, there is no assurance that your pot will increase, and there may even be occasions when it declines in value owing to dips (or crashes) in the stock market.

How to Transfer A Pension

The procedure of transferring the last salary pension might belong. Once your money is in your hands, you'll need to decide on an investment plan that will help you maximize its value.

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