Defined benefit pension transfer: is it right for you?

If you're a member of a defined benefit (also called final salary or career average) pension scheme, you may have been approached about a defined benefit pension transfer, or you might simply be wondering whether it's worth looking into before you retire. A defined benefit pension transfer means giving up your guaranteed income for life from your scheme, in exchange for a cash lump sum that's moved into a flexible defined contribution pension you manage yourself.

That lump sum is called your Cash Equivalent Transfer Value (CETV). It's calculated by your scheme's actuary and represents the cash value your trustees place on the benefits you've built up, based on factors like your age, how long you're expected to live, and current market conditions.

Once you transfer, the guarantee is gone. Your income in retirement then depends on how the transferred pot is invested and how much you draw from it, rather than on a fixed formula set by your scheme.

Whether you can transfer a defined benefit pension depends on your scheme and your own circumstances. As a general rule, you can usually only transfer before you start taking an income from the scheme. Once you've begun drawing your pension, the option to transfer disappears.

Your scheme will typically only guarantee a transfer value quote for a limited period, often three months, so if you're seriously considering a transfer, timing matters. Ask your scheme administrator for a statement of entitlement to get your current CETV, and check how long the quote remains valid.

Not every defined benefit scheme allows a transfer at all. The scheme types below set out which typically allow it and which don't.

If you're not sure which category your own scheme falls into, our guide to types of pension explained covers the differences between defined benefit and defined contribution arrangements in more detail. Your scheme administrator can also confirm your specific transfer options.

Your Cash Equivalent Transfer Value is calculated by your scheme's actuary, not chosen by you or your advisor. Several factors feed into the calculation, and they can move the figure significantly even for two members with similar benefits:

• Your age - transfer values are generally higher the further you are from your scheme's normal retirement age, since there's more time for investment growth to make up the difference
• Your scheme's accrual rate - how quickly you built up pension income for each year of membership
• Life expectancy assumptions - the actuary's assumptions about how long you and any dependants are likely to live
• Gilt yields and market conditions - the assumptions the scheme actuary uses to work out the present-day cost of paying your future income, which can change your CETV considerably from one quote to the next

Because of this last point, transfer values can rise or fall by a significant amount within months, even if nothing about your personal benefits has changed.

These figures are illustrative examples only, not a quote, and not a substitute for your own scheme's calculation. Actual transfer values vary significantly between schemes, individuals, and the point in time your scheme calculates your figure. Ask your scheme for your own statement of entitlement to see your real CETV, and speak to an advisor before treating a rough example range as anything more than a starting point for the conversation.

A defined benefit pension transfer isn't simply a better or worse option in general. It's a trade-off between security and flexibility, and what matters is how that trade-off lines up against your own circumstances, health, and other savings.

Potential advantages

• Flexible access to your pension from age 55 (rising to 57 from 2028), rather than a fixed scheme retirement age
• Potentially a larger tax-free lump sum than your scheme would otherwise pay
• The ability to pass your remaining pot to beneficiaries, rather than benefits reducing or ending on your death
• Control over how the money is invested, rather than a fixed formula set by your scheme

Potential disadvantages

• You lose a guaranteed, usually inflation-linked, income that lasts for the rest of your life, whatever happens to investment markets
• Survivor and dependant benefits your scheme would have paid automatically are no longer guaranteed in the same way
• Investment risk transfers from your scheme to you - if investments underperform, your income is affected
• Your fund could run out during your lifetime, particularly if you draw down more than it can sustain
• Ongoing product and investment charges apply to a defined contribution pension, which your defined benefit scheme didn't charge you directly

Weighing these against each other is exactly what regulated advice is designed to help with, since the right balance depends entirely on your own situation rather than a general rule.

Most content written about defined benefit transfers focuses on the potential benefits. It's worth being just as plain about who this usually isn't right for, because the Financial Conduct Authority's starting position is that a transfer is unsuitable for most scheme members, and that assumption exists for good reason.

Transferring out of a defined benefit pension likely isn't right for you if:

• You're relying on a guaranteed income to cover your essential retirement spending, such as household bills and everyday living costs
• You don't have other savings or assets to absorb investment risk if a transferred pension underperforms
• You've already started taking an income from your scheme, in which case transferring usually isn't an option regardless
• You want a spouse or dependant to be automatically provided for after your death, without needing to manage an inherited pension pot themselves
• You're relying on your defined benefit income to keep up mortgage or other secured borrowing repayments in retirement, since additional investment risk could make those repayments harder to maintain. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

None of this means transferring is never right. A minority of members, often those with significant other pension provision, no dependants relying on survivor benefits, health conditions that shorten life expectancy, or a clear need for flexibility, may be genuinely better off transferring. The point of regulated advice is to work out which group you're actually in, rather than assuming either way.

Defined benefit transfer advice follows a specific, regulated process. If you'd like a broader look at how regulated pensions advice works beyond just transfers, our main pensions guide covers the full range of options. Here's what the transfer-specific process typically involves.

Defined benefit transfer advice isn't optional once your CETV reaches £30,000 - it's a legal requirement, and that advice has a cost regardless of whether you go on to transfer or decide to stay put.

Firms typically charge either a fixed fee or a percentage of your transfer value, and some use a combination of both. You pay for the advice itself, not for a particular outcome, which is part of why the recommendation you receive isn't tied to whether you ultimately transfer.

If cost is a concern, it's worth asking any firm you speak to for a clear breakdown of how they charge before you commit to anything. Access expert advice with no pressure to proceed, and compare how different firms structure their fees before deciding who to use.

If you do go ahead with a defined benefit pension transfer, your CETV is usually moved into a Self-Invested Personal Pension (SIPP) or, in some cases, a workplace defined contribution scheme. Both are examples of money purchase pensions, where the eventual income you receive depends on how much is paid in, how it's invested, and how markets perform, rather than a fixed formula.

A SIPP gives you, or your appointed investment manager, more control over how your pension is invested, alongside more flexibility over when and how you draw an income. That flexibility is one of the main reasons people consider transferring in the first place, but it comes with the investment and longevity risks covered earlier in this guide.

If you're weighing up how a pension fits against other ways of saving for retirement, our guide to how pensions compare to other savings looks at the wider picture beyond defined benefit transfers specifically.

Defined benefit transfer advice is a heavily regulated activity, and there are protections in place if something goes wrong with the advice you receive, not just with your underlying investments.

You can check whether a firm is authorised using the Financial Conduct Authority register before you commit to anything. For more on how transfer protections work in practice, MoneyHelper and The Pensions Regulator both publish independent guidance on transferring out of a defined benefit pension.

For free, impartial pensions guidance before you speak to a regulated advisor, contact MoneyHelper at moneyhelper.org.uk or call 0800 138 7777.

A defined benefit pension transfer is a significant, usually irreversible decision, and it suits a minority of scheme members rather than most. If you're planning more broadly for retirement, it's worth looking at how a transfer would sit alongside other decisions, such as your likely state pension amount, what happens for pension inheritance tax purposes, and which of the best pension providers suit a transferred pot if you do go ahead.