Transferring Out Of a Defined Benefit Pension Scheme

defined benefit pension scheme

When you have a salary and you have been contributing towards a pension scheme, then you have been contributing towards a defined benefit pension scheme. When you transfer from such a scheme, you are in essence giving up all benefits that came with the scheme for cash. This cash is used to invest in another scheme. This is now what’s referred to as transferring out of a defined benefit pension scheme.

defined benefit pension scheme

For you to effectively transfer this pension, you have to be in either a private sector defined benefit scheme or a public sector pension scheme that’s funded. Transferring your pension will be much difficult if you’re in a supposedly unfunded public sector scheme.

If you’ve made the decision to go ahead with this transfer, the people who manage the pension scheme (trustees) will liquidate the benefits that you’ve built up over time, that is, convert them into cash. It’s referred to as a CETV (Cash Equivalent Transfer Value). After it’s been cashed out, it is imperative now that you invest it in either: a Section 32 contract (buyout contract); stakeholder or personal pension, or a pension scheme with another employer.

You would have to check if they accept such transfers since not all do.

There are times when you will receive incentives when doing a transfer. These incentives may be in the form of:

  • Incremental cash payments
  • An enhanced transfer value

These incentives, many at times, come from the employer, but a fair warning though that they are not always as good as they’re presented to be.  This is because you will be required to pay National Insurance and Income tax, and ultimately, you’ll be getting less pension. However, in many instances, you will not benefit at all even after being given such incentives.

Seeking a Financial Adviser

The wise action to take is to seek a financial adviser. They will look at your circumstances, finances, and your risk tolerance. They will be able to candidly determine the benefits you’re foregoing with the benefits you’re likely to get in your new scheme. They will also assess your employer’s pension scheme and how it is funded in order to determine the possible effect on transfer values. Lastly, they will give you the pros and cons of their recommendations for your further action.

Any incentive offer should be discussed with your financial adviser. This is true, especially where there are transfer values to the tune of 30,000 Pounds and amounts that exceed it.

With regard to risk, we can say that it will always be present if you stay in your defined benefit scheme. Some employers do not leave enough money to pay pensions. On the other hand, the risks associated with moving to a defined contribution scheme are uncertain. The benefits will be weighed down by the risks, costs, and losses.

Thus, it is imperative that in all these processes you seek specialist advice.

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