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    How to calculate the value of a Defined Benefit Pension

    Understanding Defined Benefit Transfers

    If you have a Defined Benefit Pension, you may be tempted to transfer into the more common Defined Contribution pension. This is an irreversible change. Find out how much your Defined Benefit pension is worth, and whether it’s the right choice for you.

    What is a Defined Benefit pension?

    A Defined Benefit (DB) pension is a type of workplace pension, based on your salary and years of service. Instead of contributing to your pension pot over time like a Defined Contribution (DC) pension, your employer pays into a central fund on your behalf.

    How does a Defined Benefit pension work?

    DB pension schemes typically have a retirement age of 65, when your employer will stop contributing and start paying you an income. This will depend on your scheme. Although there are options to transfer with these types of pensions, you should always consider how this will affect you and your financial future. This is where Independent Financial Advice can help.

    DB pensions can provide valuable guarantees that come at considerable open-ended costs to employers. As such, some are closing to new members and offering alternative workplace pensions in DC schemes.

    Remember, a Cash Equivalent Transfer Value (CETV) is the potential cash value of your scheme benefits, which may fluctuate during your process of transferring out of the scheme.

    If your CETV is above £30,000, then you will not be able to transfer your DB pension without independent financial advice. The Government has made this a legal requirement, to ensure that retirees are not losing out in the long run. Your adviser will consider the implications of a transfer, and will offer their recommendation about whether a transfer is suitable for you.

    Calculating your Defined Benefit pension value

    To understand what your DB pension is worth, you will need to find out your CETV. This will vary but the main factors that will affect your CETV are:

    • Your salary
    • Length of service with the company
    • Any rules about how your pension will increase, and any other benefits from the scheme
    • Assumptions on future annuity/interest rates
    • The value of gilt yields (these are bonds issued by the government, and many DB schemes are heavily invested in these assets)

    Every scheme is different, so you will need to contact your Scheme Actuary to get your CETV/DB pension transfer value.

     

    Benefits of a Defined Benefit pension

    There are pros and cons to DB and DC pensions, but neither is good or bad. They simply meet different needs.

    If you’re considering transferring out of a DB Scheme, remember that once you’ve done so, you can’t reverse the decision. Valuable benefits from the scheme could be lost. Speaking to a Pension Transfer Specialist can help you learn whether you could be better off in the long run by remaining or transferring away.

     

    Drawbacks of a Defined Benefit pension

    DB pension plans do have some downsides – chiefly the lack of flexibility in how scheme members are able to draw on their funds.

    Can I transfer my Defined Benefit pension plan?

    Anyone (with funds) under £30,000 can transfer away without needing financial advice. Self-administering can have its own challenges as few people will be used to filling in pensions paperwork. The process is the same whether your pension is worth £30,000, £300,000 or £30,000,000.

    The transfer process begins when you receive your cash equivalent transfer value. The majority of providers will now want to see evidence of financial advice before accepting a transfer into a Defined Contribution or Self-Invested Personal Pension (SIPP), even your DB pension is valued at less than £30,000.

    Transferring to a DC pension may give you more flexibility, but it won’t necessarily leave you better off. Your adviser will need to know more about your financial situation, and can make a recommendation about whether or not to transfer. If your Wren Sterling adviser does not believe you will be better off transferring away, we will not be able to assist you further.

    We understand that it can be difficult to pay for advice, only to be told that its in your best interest to remain in the scheme.

     

    What to consider when transferring your Defined Benefit pension

    Transferring your DB pension plan is an irreversible decision. If you choose to transfer away from the scheme, you will not be able to reverse this choice or re-enter the scheme. It is also important to consider:

    • Declining choice for advice. In the course of three years, suppliers of DB advice in the market have halved, to around 1,500 firms.
    • Impartial advice. You may take advice, only to be told it’s best to stay in the scheme. This is a difficult message to hear but advisers have to remain impartial.
    • The cost of advice. The cost of advice in this market has become more expensive because of the cost of providing the service, including the public liability insurance (PI) premiums required to operate
    • Pension scams. An increasing prevalence and sophistication of pension scams means individuals can receive many unwanted approaches, challenging trust in the industry

    How can Wren Sterling help with pension advice?

    Wren Sterling have qualified Pension Transfer Specialists who can help you consider your retirement options. Together, you’ll look at the ‘whole picture’ of your finances and how you can make the most of your money. If you choose to take regulated DB pension transfer advice, we’ll present our recommendations in a clear and balanced way, so that you can feel confident about your financial decisions.

    Considering a DB transfer? Talk to us today

    FAQs

    • When can you take your Defined Benefit pension?

      When can you take your Defined Benefit pension?

      This will depend on the particular scheme rules of your Defined Benefit Pension plan. The ‘normal retirement age’ is usually 65 (or your State Pension age). Some schemes may begin paying your pension early if you suffer with serious ill health.

    • How much will I get from my Defined Benefit pension plan?

      How much will I get from my Defined Benefit pension plan?

      All DB schemes can have varying terms and benefits which will effect how much your DB pension is worth. While there are Defined Benefit pension transfer calculators online, you can only truly find out your CETV from your Scheme Actuary.

    • Is a Defined Benefit pension the same as a final salary pension?

      Is a Defined Benefit pension the same as a final salary pension?

      There are actually different types of Defined Benefit pension.

      • A Final Salary pension is based on how much you’re paid when you retire or leave the scheme.
      • A Career Average pension is based on an average of your salary during your employment.

    • Is a Defined Benefit pension a private pension?

      Is a Defined Benefit pension a private pension?

      DB pension schemes are known as ‘private schemes’ because they are arranged by your employer.

    • Should I transfer my Defined Benefit pension?

      Should I transfer my Defined Benefit pension?

      It depends. Without discussing your DB pension with you, we will be unable to recommend whether or not a transfer is suitable for you. Transferring to a DC pension may give you more flexibility, but it won’t necessarily leave you better off. Our Pension Transfer Specialists can discuss various scenarios with you to help you make the most of your assets for the retirement you deserve.

    • What is a CETV?

      What is a CETV?

      To understand what your DB pension is worth, you will need to find out your ‘Cash Equivalent Transfer Value’ (CETV). Every scheme is different, so you will need to contact your Scheme Actuary to get your CETV.

    • Are all Defined Benefit pensions transferrable?

      Are all Defined Benefit pensions transferrable?

      Some public sector schemes cannot be transferred away (such as the NHS pension) as they are ‘unfunded’ and paid from general taxation rather than a specific fund.

    • Defined contribution pension vs Defined Benefit pension

      Defined contribution pension vs Defined Benefit pension

      Transferring to a DC pension may give you more flexibility, but it won’t necessarily leave you better off. We’ve covered some of the pros and cons of Defined Benefit pension schemes in this page, but ultimately, whether or not you’d be better off will depend on your personal circumstances and will require bespoke financial advice.

    IMPORTANT: Accessing pension benefits early is not suitable for everyone and may affect your entitlement to certain means tested benefits. When investing your capital as at risk.

    A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.