Article Summary

How you go about achieving your goal—and how realistic it is—will be entirely dependent on your personal circumstances, but those with a Defined Benefit pension should pay special attention. If you want to access your entire pension at once rather than receive it as income, as has been possible since the pension freedom rules went into effect in 2015, you must first convert it to a defined contribution pension. If the value exceeds £30,000 (or €30,000),

Inflation may erode the purchasing power of your income if you are not careful. While 2% inflation may appear insignificant, it can be devastating to a fixed income over a 20- or 30-year retirement. 

For example, a £10,000 income in 1998 would only be worth £6,000 today; the income would have needed to increase by 2.8% per year to keep up with the cost of living. That is why the inflation-linked benefits provided by final salary pensions are so important. If you transfer away, you must carefully consider how the effects of inflation can be mitigated.

Watch one of our YouTube video where we discuss the matter and learn how a pension transfer can ruin your retirement.

Can a Defined Benefit Pension Transfer Ruin Your Life & Retirement?

The Effects of Pension Transfer on Your Future

Pension transfer will, in fact, alter or influence the member’s retirement life. But how will this affect their lives? We summarize three scenarios in which a pension transfer can alter your retirement lifestyle.

Negative Scenario

Pension transfers can have negative consequences if the asset value of your transferred scheme remains stagnant or even falls below the value of your current DB pension.

Remember that when you transfer a DB pension asset, you lose indexation and inflation protection, as well as your safeguarded asset or guaranteed lifetime income. This may prevent you from receiving the gold-plated benefit of the scheme.

When you transfer your final salary pension to a SIPP, for example, you are exchanging your guaranteed lifetime income for another tax wrapper vehicle with a higher value of the pension asset. However, if the value of your SIPP remains constant over time, you will incur high costs, particularly for portfolio management fees.

Assume you transfer your DB pension to a SIPP, and the market remains flat for the next twenty years. Many charges, such as IFA and portfolio management fees, will erode your SIPP, costing you 1 to 1.5% of your assets annually, costing you a significant amount of money over the course of 20 years while the value of your pension asset has remained stagnant since the day you transferred it.

This may appear to be an impossible situation, but if you do your own pension transfer, it is possible that this will happen to your pension asset. If you worked with an IFA, such as Cameron James, your IFA would most likely run a number of simulations based on the data and advise you not to transfer your DB pension.

Neutral Scenario

The second instance is a neutral situation in which the DB pension member does not notice a significant difference. The growth within your SIPP is likely to be the same as the growth of your assets in your final salary plan. 

Assume your final salary asset has 2-3% inflation protection, you transfer your pension to a SIPP, and your SIPP asset grows 2-3% over time. It will be a negative outcome for your retirement. It won’t make much of a difference in your retirement. Obviously, the SIPP scheme provides a lot of flexibility, such as flexible drawdown or flexible NRA.

Positive Scenario

The third set of circumstances is a positive shift toward a more adventurous portfolio (approximately 60% equity) to (approximately 80% equity). In general, a portfolio with a 60–80% equity weighting may outperform your DB scheme. 

No one can guarantee that your SIPP will outperform the market over time because the market is volatile, and past performance is no guarantee of future performance. However, in our experience, over the course of 20–30 years, the balance of the SIPP portfolio outperforms the asset under the DB scheme.

What to Consider Before Transferring Out Your Pension

Keep in mind that performance is not the only compass to use when making a pension transfer decision. There are several indicators that must be met in order to transfer your final salary pension scheme to another tax-sheltered investment vehicle, such as a SIPP.

Plan Your Retirement

Every person has a unique set of circumstances as well as a unique life purpose. There is no set retirement age in general, but if you believe 60 is the ideal age, then it is. The best time to retire, on the other hand, will be determined by the pension or other assets on which you will rely during your retirement. Some clients want to retire as soon as possible, so they can spend more time with their families and children or pursue other interests. Others want to work in retirement, perhaps taking on contract work until they are 60-65 or even 75.

In the United Kingdom, however, the government has established a normal retirement age (NRA). The state pension age for men and women will rise from 67 to 68 between 2044 and 2046, according to the Pensions Act 2007. The Pensions Act of 2014 mandates that the state pension age is reviewed at least every five years.

So, what does it all mean? You can withdraw from all of your pension plans, including the state pension, workplace pensions, and personal pension plans, once you reach a certain age. You will not be taxed on contributions or asset growth within your plan, but you will be taxed on distributions. 

The foundations of a successful retirement plan are your current age and expected retirement age. The more time that passes between now and when your pension plan kicks in, the more risk your portfolio can withstand.

Before Making Any Decisions, Discuss Them With An Independent Financial Advisor

No matter how much research or due diligence you conduct, you will never fully comprehend a financial plan better than your financial adviser. You may discover that a financial adviser makes decisions that differ greatly from your own.

A financial adviser looks at your income, long-term goals, purpose, and market conditions. As a result, they can help you choose the best investment options and products based on your risk and return objectives. They will help you monitor the performance of your investment portfolio after you have completed these investments.

A Defined Benefit (DB) pension is the most common type of pension scheme, providing a fixed income in retirement. If you have a defined-benefit DB pension, you can access your entire pension at once if it is worth less than £30,000; if it is worth more than £30,000, you must provide proof that you have requested financial advice from an independent financial adviser in order for your pension transfer to be processed.

Book a free initial consultation with one of Cameron James’ FCA-regulated IFAs today to learn how our IFA can help you plan your retirement and make the best decisions when it comes to your Defined Benefit pension transfer.

Our Founder & CEO -
Dominic James Murray

I have been in the UK Pension Transfer industry for over 11 years, and have witnessed seismic changes in the UK Pension rules over the course of that decade. Most to the benefit of the UK Chancellor or to Chequer!

My 5 years as CEO of Cameron James, have certainly been the most rewarding. My goal, has been a simple one. Provide clients with transparent financial advice on a low-cost basis, for them to make informed decisions to protect their families best interests.

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