Defined Benefit Transfer

A defined benefit (DB) pension scheme – sometimes called a final salary or career average pension scheme – is one that promises to pay out an income based on how much you earn when you retire.

Unlike defined contribution (DC) pensions, the amount you'll get at retirement is guaranteed, and it will be paid directly to you – i.e., you won't have to use your pension pot to decide your next move.

There are two types of defined benefit pension.

• Final salary schemes, which are based on how much you're paid when you finally retire
• Career average schemes, which are based on an average of your salary across your career.

Both types of DB pension provide valuable benefits, the biggest of which is something called 'index-linking'. This means that your pension income is guaranteed to rise each year so it can keep up with rising prices in the future.

The most common type of scheme that benefits will be transferred from is the Final Salary Scheme. The timeline of a transfer, and the requirements for a transfer (including when a transfer will be rejected) are covered below.

• A guaranteed income for life, so there’s no risk of you running out of money in retirement.
• Usually provide an income for your financial dependants after you die. Scheme rules vary, but they'll usually receive a proportion (for example half or two thirds) of the pension income you were receiving before you died.
• Income that usually increases over time, helping to protect the spending power of your money against inflation. Again, scheme rules vary but there are minimum increases all schemes have to provide.
• Your pension income isn’t affected by the ups and downs of the stock market. The scheme’s investments are managed by professionals and even if they perform poorly, your guaranteed income must be paid in full.

These guarantees are valuable to a member’s retirement and as such in most cases a member will likely be worse off transferring out of a defined benefit scheme to a defined contribution scheme. This is true even if your employer gives you an incentive to leave.

The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) believe that it will be in most people’s best interests to keep their defined benefit pension. If a member transfers out of a defined benefit pension, it cannot be reversed.

To transfer a DB scheme, the member will need to obtain a Cash Equivalent Transfer Value (CETV) from the pension provider.

This calculation is based on what the scheme actuaries believe is a reasonable estimation of what the pension is worth, however, some scheme transfers are more generous than others.

The CETV figure is guaranteed for three months from the date it was calculated.

Where the CETV figure is more than £30,000, professional advice from a fully qualified Pension Transfer Specialist (PTS) authorised by the FCA must be sought. With specialist advice required it is important that any transfer paperwork is provided to SS&C within good time, as if this is left close to the deadline there is no guarantee that we will be able to complete the transfer before a new CETV will be required.

If the member is thinking about transferring a defined benefit pension into a more flexible personal arrangement and the Cash Equivalent Transfer Value (CETV) is worth £30,000 or more, they must get professional advice from a fully qualified Pension Transfer Specialist (PTS) authorised by the Financial Conduct Authority.

For transfers to the SS&C Hubwise SIPP there are three categories of transfer – those we’ll normally accept, those we can sometimes accept, and others which we can’t accept.

We'll normally accept a transfer if:

Either all the following are satisfied:

• the advice has been provided or checked by a pension transfer specialist, 
• the transfer is submitted by an adviser firm with the appropriate transfer and opt-out permissions, and
• we receive a copy of the formal letter of advice showing the specialist advice is in favour of the transfer.

Or

• the value of benefits is below £30,000.00

We may accept a transfer where:

• the ceding scheme doesn’t support partial transfers, and the intention is to re-transfer some of the pension away once we’ve received the full transfer (we’ll ask for more information before we accept the transfer if this is the case)

We won't accept a transfer in cases where:

• the adviser firm doesn’t have the appropriate permissions, whether or not the advice has been checked by a pension transfer specialist, or
• the transfer will only be with us for a short time before it’s re-transferred elsewhere, or
• the transfer is non-advised or execution only, or
• the client is an insistent client.

If a transfer is not completed by the Guarantee Date, the figures will need to be recalculated, and the scheme administrator may charge you a fee for this. This fee will vary from scheme to scheme.

In addition to being potentially charged a fee, it is also likely the transfer value will change, and it could go down or up in value. If it does go down, this will mean there will be less money if a transfer proceeds, and the advice given may change meaning that the process needs to start again.

If the transfer does not proceed nothing has been lost from the original scheme.

If the member is in ill health while requesting a transfer HMRC may take the view that transferring pension benefits from one scheme to another is a transfer of value for IHT. This is regardless of whether the pension benefits in both the original and the new scheme are outside the estate for IHT.

As of the date of revision, there is still uncertainty surrounding HMRC guidance following High Court rulings against HMRC in the cases of Staveley and Parry and others. If you are aware of any terminal illness, additional checks should be made to ensure IHT would not be triggered.

The following are the key points to consider when looking at transferring a Final Salary/DB scheme to the SS&C Hubwise SIPP

1. A Cash Equivalent Transfer Value (CETV) must be requested.
2. Advice is required if the value of the benefits is over £30,000.00
3. Advice must be from an adviser with appropriate transfer permissions.
4. The receiving scheme will need to see the letter positively advising the member to transfer before beginning the process.
5. The transfer value is only valid for three months from the date of the calculation.
6. Time needs to be given for the receiving scheme to request the transfer.
7. Care is needed if the member is in ill health.