What is a defined benefit pension transfer?

Understand how transfers work, the rules that apply, and the key points to consider before you decide.

A defined benefit pension provides a regular income for life in retirement, based on your salary and how long you’ve worked for your employer.

In some cases, you can transfer this pension to a defined contribution pension, where your money is held in a pot that you manage yourself.

In this guide, we outline the transfer process, the rules that apply, and what factors you need to keep in mind.

 

Can I transfer my defined benefit pension?

It is possible to transfer a defined benefit pension; however, there are a few restrictions:

• Transfers are only allowed before you start taking any income from your pension.
• Some schemes set deadlines on how long transfer value quotations remain valid, so you’ll need to act within that timeframe.
• Defined benefit pensions from certain public sector schemes cannot be transferred, such as teachers’ or NHS pension schemes.

If you're unsure whether your pension can be transferred, it’s best to check with your pension provider.

Understanding defined benefit pension transfers

A defined benefit pension transfer involves moving your guaranteed income entitlement to a defined contribution pension scheme. With a defined contribution pension, your money sits in a pot that you control: you decide how it's invested and when you take it.

The key difference is that you'll be swapping guaranteed income for flexibility, control and the potential for greater returns. But this means you'll take on all the investment risk yourself, and there's a risk your money may not last throughout retirement.

Because this is such a significant decision, it's important to understand exactly what you're giving up and what you're gaining before proceeding.

What is the cash equivalent transfer value (CETV)?

The cash equivalent transfer value (CETV) is the amount your defined benefit pension scheme would pay into a defined contribution pension if you transferred.

Your scheme calculates this value based on multiple factors, including your age, life expectancy, expected pension income and current interest rates.

Although your CETV is shown as a lump sum, you wouldn’t receive that amount in cash. The money would be moved into a defined contribution pension, where it would be invested. From that point, the value can go up or down depending on investment performance.

Why do people consider transferring their pension?

There are various reasons why people consider transferring their pension from a defined benefit scheme to a defined contribution scheme. The most common reasons are:

• Wanting more flexibility over when and how they take their money
• Hoping to leave a larger inheritance for loved ones
• Needing to access a lump sum for specific purposes, such as paying off a mortgage or helping family members
• Aiming to achieve better returns by managing investments themselves

However, transferring means giving up guaranteed income that lasts for life. It's not something to rush into without speaking to a financial adviser.

Find a financial adviser
Read our guide to finding the right financial adviser, and tips for your first meeting.

Learn about financial advisers.

The risks of transferring your defined benefit pension

Transferring your defined benefit pension involves giving up several important benefits:

• Loss of guaranteed income: Your defined benefit pension pays a set amount for life, regardless of how long you live or what happens in financial markets. A defined contribution pension offers no such guarantee.
• No inflation protection: Most defined benefit pensions increase each year to help protect against rising prices. You'd need to manage this yourself with a defined contribution pension.
• Survivor benefits: Your spouse, civil partner or dependants would typically receive ongoing income after your death. These benefits may not be replicated in a defined contribution pension.
• Investment risk becomes yours: With a defined benefit pension, your employer or insurer manages all investment risks. After a transfer, you're responsible for ensuring your money lasts throughout retirement.

 

How a defined benefit pension transfer works

If you have a defined benefit pension and haven't started receiving payments yet, you may be able to transfer its value to another pension scheme.

Here’s an example of how the transfer process works with a Canada Life pension.

To start the transfer follow these three steps:

Step 1 - Request a transfer quote

• Log into Canada Life OneView or Contact Canada Life Pensions and select 'Transfer your pension'.
•  Generally, there’s no cost for a transfer quote. However, if you ask for multiple quotes, we may charge an admin fee – we’ll let you know if this is the case.

Step 2 - Receive the quote

• You should receive your transfer quote within 20 working days. If there’s a significant delay, we’ll always let you know.
  
• If you’re still accruing benefits in your defined benefit pension scheme, you can only get a non-guaranteed transfer quote. To receive a guaranteed transfer value, you must have stopped accruing benefits.

Step 3 - Accept the quote and proceed with the transfer

• To take advantage of the guaranteed transfer value, you must accept the quote within the guarantee period. Everything you need should be included with the transfer quote. Once you’ve completed the forms and have all the documents ready, you can submit everything on Contact Canada Life Pensions by clicking the ‘Transfer your pension’ option on the homepage.

Once we receive your instruction, we’ll follow these three steps to complete the transfer:

Step 1 - Review

•  We’ll check all returned documents to ensure everything's in place for payment and look for signs of potential scams.
• If we need any further information, we’ll let you know.

Step 2 - Disinvestment

• Once we have everything we need, we’ll disinvest the amount that represents your benefits.
• If needed, we'll also close any additional voluntary contributions (AVCs) or other pension savings you have.

Step 3 - Payment

• We’ll transfer the value of your benefits to your chosen receiving scheme and let you know as soon as the transfer is complete.

Note: If your defined benefit pension is with another provider, the transfer process may differ.

What a defined contribution pension offers

A defined contribution pension works differently from a defined benefit pension and offers certain advantages:

• Flexible access to your money: You can choose when and how much to withdraw from your pension pot, giving you control over your retirement income rather than receiving fixed payments.
• Potential for investment growth: Your pension pot remains invested, which means it has the opportunity to grow over time if your investments perform well, potentially providing higher returns than a fixed income.
• Inheritance for loved ones: Any money remaining in your pension pot when you die can be passed on to beneficiaries of your choice, giving you flexibility over who receives your financial support.

However, these benefits come with responsibilities and risks. Unlike a defined benefit pension, there’s no guarantee that your money will last throughout your retirement, so it’s important to consider whether the potential gains outweigh the certainty of lifelong income.

Do I need financial advice before transferring my pension?

If your defined benefit pension is worth more than £30,000, you are legally required to take regulated financial advice before you can transfer.

Even if your pension is valued below £30,000, taking financial advice is still strongly recommended. Transfers involve complex considerations, and an adviser can help you understand:

• What you'll be giving up by transferring
• Whether a transfer suits your personal circumstances
• The risks involved and whether you're comfortable taking them on

For many people, keeping their defined benefit pension is the right choice. An adviser can provide an objective assessment based on your individual situation.

Find a financial adviser

Here are a few reputable websites where you can start your search for a financial adviser:

• The Personal Finance Society (PFS) is a professional body for financial advisers in the UK.
• Society of Later Life Advisers (SOLLA) specialises in the needs of older people and their families.
• The Equity Release Council will help you find advisers who can recommend equity release products. Its members follow the Council’s rules and standards to help protect customers.
• Unbiased can help connect you to a financial adviser, mortgage broker or accountant.

Once you’ve found an adviser, you can look them up on the Financial Services Register to check they're regulated and approved by the Financial Conduct Authority (FCA). 

The FCA also has a helpful guide to what to expect from pension transfer advice.

Learn more about finding a financial adviser, from doing initial research to preparing for your first meeting.

Alternatives to transferring your defined benefit pension

Before deciding to transfer, it's worth considering if another option might better suit your needs:

• Keep your defined benefit pension: Take your guaranteed income at your scheme's normal retirement age, providing security and stability throughout retirement.
• Use other pensions or savings: If you need flexibility, you could while keeping your defined benefit pension for guaranteed income.
• Take a tax-free lump sum: Depending on your scheme's rules, you may be able to take part of your pension value as a tax-free lump sum when you retire, with the remainder providing reduced income.

A financial adviser can help you explore these alternatives and work out the best approach for your circumstances.

Learn more about defined benefit pensions