Should I transfer my DB pension into my DC scheme?
08 July 2021
Question by Peter
I'm 55 and have a DC works pension with my current employer. I also have a DB pension from a previous employer. It is currently valued at £88k ish. I'm thinking of transferring it to my DC scheme. Is this a good or bad idea? Thanks.
Answered by Adam Green
Thanks for getting in touch with something that is a very hot topic at the moment in the financial planning profession.
Defined benefit pension advice is a highly complex and technical area of financial advice meaning that the answer is not as simple as saying yes it is a good idea or no it is a bad idea. It is important to understand that the default starting position for any defined benefit pension advice by the regulator (Financial Conduct Authority, FCA) is that a transfer is not in the best interest of the individual. As so many people have been mis-advised about leaving a defined benefit pension over the last 5 years’ or so, the FCA has tightened up its rules around the provision of defined benefit pension advice in an attempt to make sure that people have a better chance of making a properly informed decision about their defined benefit pension. That is not to say that a transfer out is always inappropriate, but the default starting position is that you should remain in the defined benefit scheme.
Where the transfer value of a defined benefit pension is over £30,000, it is a requirement that you take formal advice on transferring this to a defined contribution pension pot. Due to the risks involved with defined benefit pension advice, many firms do not offer this as a service anymore and it is really important that if you do want to seek formal advice, that you do so from an adviser that you trust and who has your very best interest at heart as if you are advised to transfer away from the pension, this is an irrevocable decision.
When considering defined benefit pension reviews, there are many factors that need to be considered around your wider circumstances and your financial objectives. Only once these are known and thoroughly understood, could you start to consider whether a transfer would be a good idea or not. These factors include:
What level of income you want to generate in retirement and how the defined benefit pot and provide for this?
When do you want to stop working and what other sources of income you may have in retirement?
You attitude to investment risk and capacity to withstand financial loss is?
What your personal circumstances are
What other savings and assets do you have?
What previous investment experience do you have and do you understand the guaranteed income that you would be giving up if you transferred out of your defined benefit pension?
There are many others too and a qualified adviser would be able to talk you through each of these.
I hope this answer gives you more of an idea of the size of decision this is and how there are many factors that need to be considered before it is possible to determine whether it is a good or a bad idea to transfer your defined benefit pension into a defined contribution pension. I would state again that the default starting position is that a transfer is not appropriate but that if this is something you would like to investigate further, you would need to speak to an adviser who has good experience in this area of financial advice.
I’ve been with Mazars since graduating in 2015 and being a Financial Planner means that I can use my Mechanical Engineering degree to great effect everyday – not! I trained as a Financial Planner as I wanted to be in a client facing role where everyday was different and that couldn’t be more accurate of my role at Mazars. I work with business owners and private individuals across Yorkshire to help them make better financial decisions for their future.