If you are one of the dwindling few to have a gold-plated defined benefit (DB) final salary pension you are fortunate indeed. The standard advice is that if you’ve got a DB pension, keep it. But is that always the best choice?
The dangers of transferring money out of a defined benefit pension
A guaranteed salary for life is a blessing offering a level of financial security which many retirees can only dream of. There needs to be extremely compelling reasons to give it up.
Given the dangers of transferring out of a DB scheme, this complex and potentially dangerous decision is not one to be taken without the advice of a professional who knows what they are doing. It’s worth pointing out that this is an irreversible decision – once action is taken there is no going back.
So great is the risk of transferring out that the Financial Conduct Authority (FCA) in the UK has drawn up strict guidelines for individuals seeking advice on transfers and made it surprisingly difficult to achieve.
The FCA has issued a
Is it ever a good idea to transfer your defined benefit pension?
There are certainly valid reasons why an estimated 50,000 people choose to give up a guaranteed pension each year in exchange for a lump sum, a figure which increased during the pandemic. These are some of them:
1. To have greater control over the money
A defined benefit pension is paid out via regular monthly amounts throughout retirement. However, some people wish to gain greater control over when they access the money.
Take the example of one of my client’s John, whose wife and himself were both chronic type 1 diabetics and in their early 60s. They decided that they wanted to make the most of the time they had left and travel while they were still well enough to enjoy it. John decided to unlock the cash to have the funds to do so in comfort and style.
He was able to move out of his defined benefit pension, into a UK SIPP, he took out the maximum pension commencement lump sum and then invested the rest, and decided to draw down £65,000 per annum which was a considerable amount more than he would have received with his final salary pension, which freed up cash to spend in the short term to create lifetime memories with his wife while they were both still active.
2. To pass a pension pot on to loved ones
A defined benefit pension usually passes from one spouse to another but the trail ends there. It typically cannot be passed to children or grandchildren unless it is transferred into another kind of pension scheme. There are pros and cons to doing this – with the FCA highlighting the cons in particular – so do not even think about doing this without taking the advice of a professional who can talk you through them all. That said, it can benefit future generations if structured in the correct way.
3. To get a guaranteed income and a lump sum
In certain cases, partial transfers are possible enabling you to continue to receive a guaranteed annual income, albeit a reduced one, and free up a lump sum to use as you please. Some people feel this gives them a greater level of control over their money, particularly as they can choose how a part of their pension savings is invested, personalising this to their own needs rather than keeping it all in a pot managed by the pension company tailoring investments to the greatest common good. This strategy can offer the best of both worlds but it certainly isn’t suitable for everyone. Again, take professional advice from a regulated and qualified adviser.
Transferring your defined benefit pension is not the right choice for the majority of people but it is absolutely the right choice for some. If you are an expat with a UK final salary pension and would like to find out whether or not this is a viable and advisable option for you, I’d be happy to set up a call to discuss your situation.
You can email me directly at cturner@infinitysolutions.com
A leading provider of expat financial services and wealth management services across Asia.
