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Should you transfer your Defined Benefit pension of £1 million+?

By Sam Instone - August 02, 2017

More senior international professionals are taking their pensions out of the UK than ever.

But just because every other person you know is transferring their pension doesn’t mean you should.

If yours is a defined benefit pension scheme, you need to do your due diligence before making a decision.

Here's why.

As a senior international professional, you probably have many pension pots. 

Some of these may be in Defined Benefit schemes, which have been viewed as the gold standard for pensions as they are much more secure and generally more generous than Defined Contribution pensions.

They also pay an income that increases in line with inflation.

But people’s views on what to do with DB pensions have changed.

Does it make sense to transfer your scheme?

Take a look.

In the past, many people who worked for private firms built up a company pension based on how long they had worked for the firm and how much they earned.

The pension amount they'd receive was guaranteed by the rules of the pension scheme, and so they were known as defined benefit or DB pensions. These defined benefit pensions have a number of advantages.

  • Your pension lasts as long as you do, so there’s no danger of you running out of money.
  • There is something for a surviving spouse after you die (the details vary from scheme to scheme). 
  • There is some measure of protection against inflation, which helps to maintain the spending power of your pension. 
  • Your pension is unaffected by the ups and downs of the stock market.

Despite all of these advantages, there are some downsides to having a pension of this sort, such as a lack of choice over when and how to take your pension. As a result, some people are considering whether to transfer them.

Growing numbers of people are being offered very large cash sums in exchange for giving up all of their rights in their DB pension scheme. These cash sums can be used in two main ways:

  • For those who are still saving for their retirement, the cash sum can be transferred into a personal pension where it will be invested, or
  • For those who want to start living off the proceeds of their pension, it can be transferred into a drawdown account, where some of the money is invested and some is taken out either in lump sums or as a regular income.

Royal London estimates that 10 million people with defined benefit schemes have the right to transfer.

It’s no wonder so many international professionals are wondering what to do.

However, it's important to stress that it's an irreversible decision and should not be taken lightly. 

A case study - when it makes sense to transfer

In 2016, a UAE-based British national reached out to us for help with his DB scheme.

His scheme's normal retirement age was 65 but he could draw from age 55 with a punitive reduction factor and reduced pension.

The DB scheme offered a lump sum on commencement of just 3 times the annual pension and he was offered an enhanced transfer value on top of the standard transfer amount (CETV).

Combined, it was worth just under £1m.

However, he had health issues and was concerned that the death benefits offered by the scheme were of little value to his family.

He intended to retire at 55 and draw a lump sum to pass to his daughter so she could finish university and buy her first home.

All things considered, he wanted to know whether a pension transfer would be his best solution so he sought an expert opinion.

Here's how we helped:

A comprehensive financial plan was put in place using a cash-flow model to help him visualise his financial future.

He transferred his pension benefits to a QROPS before the introduction of the Overseas Transfer Charge in 2017 and when he reached age 55, he drew his PCLS.

We assisted him in utilising the recently established Double Tax Agreement between the UK and UAE, allowing him to draw an additional sum completely tax-free from his pot.

Part of this sum helped his daughter pay off her university fees while having enough leftover for a down payment on an apartment.

The remainder was kept in the pension to act as a shelter against UK Inheritance Tax (as he is deemed a UK domicile despite not living or working there).

Since the pension will not be required to draw down a significant regular income and, instead, be used as a vehicle to pass wealth to his next generation, the pot is reinvested with a high equity split.

The pension will therefore grow significantly and likely exceed the UK’s pension Lifetime Allowance in the next few years but will not be subject to LTA charges as he transferred to a QROPS.

The pension fund can now be passed to his beneficiaries free of UK Inheritance Tax and potentially free of Income Tax.

The client achieved exactly what he was looking to do and the performance has exceeded his expectations, ensuring that his beneficiaries will be taken care of even if he dies prematurely.

For him, a pension transfer made sense.

But, for others, it may not.

Here's what to keep in mind if you're considering a transfer...

1. Speak to an expert

Pension transfers are complex.

They are inherently risky, none more so than defined benefit pension transfers.

You have a lot to potentially lose and therefore need expert handling. 

2. Understand the risks and benefits

There can be multiple reasons why you may want to transfer your pension.

It is up to you and your financial planner to have a comprehensive and detailed conversation about the risks and benefits before you make a decision that impacts your ideal future.

3. Transfer value minimums

If the transfer value of the pension being given up is more than £30,000, it has to be signed off by a regulated financial planner with the required specialisms.

Hence, by law, you are required to speak to a financial planner.

4. DB pension specialists

Ensure you choose an FCA pension transfer specialist.

And ensure you’re not dealing with an unqualified broker. 

5. Search the FCA register

When you find a planner to help, by law they need to hold FCA CF30 to give you pension transfer advice.

CF30 is an FCA controlled function.  

Search the FCA register to see if an individual is registered with them as an approved person first.

Then see which controlled functions (CFs) they hold. 

6. Do your research

The firm your adviser works for also needs to have the correct permissions from the FCA.

Examine their permissions on the register, you’re looking for Advising on Pension Transfers and Opt-Out.

  7. Reach out and verify

Contact the company in question directly, using the details the FCA has on its register.

This will ensure you get through to the legitimate firm. 

Ask them to confirm that the named planner has CF30 and is a pension transfer specialist. 

8. Value of qualified specialists

There are huge sums of money involved in international pension transfers which inevitably attracts the wrong sort of interest.

If you want to avoid the risk of being mis-sold, only deal with a qualified adviser.

I hope this provided invaluable information on the next steps to take should you want to transfer.

If you'd like a second opinion on whether a DB pension transfer is the best solution for you and your goals, reach out.

I'm passionate about having senior international professionals like yourself who need proper guidance on how to maximise their investments.