I transferred out my defined benefit pensions. This is why you shouldn’t
In this day and age, it’s imperative to think carefully before giving up a guaranteed income for life
A defined benefit (DB) pension has long been the holy grail of retirement.
With guaranteed payouts for life, often rising each year with inflation, they can remove that major worry of retirement: running out of money.
However, one of the few downsides of people living longer nowadays is the rapid rise in the cost of these pensions. They’ve all but disappeared from the private sector, and even though public sector workers still receive them, they’re less generous than they were.
But almost a decade ago, I did something I would never advise today: I cashed in three DB pensions.
When you’re considering such a move, you’re given a cash equivalent transfer value (CETV). This is the amount your scheme will pay into your defined contribution (DC) pension pot to discharge itself of any pension promises to you.
Simply put, once it’s done, it owes you nothing.
Cash equivalent transfer values (CETVs) are based on how much schemes estimate your pension will cost over your lifetime, and in 2018, the offers were exceptionally generous.
A DB pension promising to pay you £10,000 a year could generate a CETV of around £230,000. Now, following a collapse in rates, it might be just £130,000.
At the time, my thinking was centred on interest rates, which I believed had fallen too far because of continued quantitative easing by central banks. Long-duration bond yields were falling, which pushed up the transfer value of pensions.
In short, schemes estimated it would cost more to pay pensions, which increased their offer to buy you out. Alongside far higher quotes than I expected, no reductions were factored in despite schemes being in deficit.
I was convinced this wouldn’t last, so I took the plunge and transferred three of my six DB pensions into my own self-administered DC scheme, and I haven’t looked back.
There were many reasons why I went ahead. First, if one of my DB pension providers had gone bust, it would have entered the Pension Protection Fund (PPF). The PPF steps in to pay pensions, but my yearly payout and any inflationary increases I was entitled to would have been reduced in this event.
The 2015 pension freedoms were another reason to proceed. Announced by George Osborne, then chancellor, these gave pension savers much greater flexibility when accessing their DC pensions.
By moving them into my DC pot, I could invest the money myself and grow it over time, rather than locking in to a fixed pension promise. Having spent more than 15 years managing pension assets and analysing companies and markets, I was comfortable managing my own portfolio, allowing me to eschew ongoing management fees that can reduce returns.
In addition, I’d had some health problems, which I feared might have lowered my life expectancy. Taking a lump sum, rather than risking receiving my pensions for only a few years, suddenly became very attractive.
The tax regime also gave me comfort that, if I did die prematurely, my children could inherit my remaining DC pension fund without paying inheritance tax. They’d have received nothing from my DB pension.
This was suddenly and disgracefully changed by Rachel Reeves retrospectively in 2024, so I will now leave my pension to my husband if I die first.
Finally, as I planned to keep working into my 70s (assuming my health allowed), I knew I wouldn’t need extra income when the pensions became payable at age 60. I’d have lost 40pc of my income to income tax.
Almost a decade later, I’m very pleased with the outcome. My pot keeps building investment gains until I need the income. I also still have the three remaining DB pensions, all of which are inflation-linked, so I have a good basis of provision.
In the prevailing circumstances of a few years ago, it was certainly the right decision for me.
However, the current conditions are far less attractive, and aside from those concerned about their health or high tax rates, few people would be well advised to follow the same path.
First, interest rates have risen enormously, and quantitative tightening has seen Bank of England gilt sales driving long yields higher.
In short, it’s the reverse of what was happening in 2018, and DB schemes have moved into large surpluses as a result, lowering CETVs
Equities and other higher-than-expected return assets have performed very strongly. As a result, some international markets may well be overvalued now. This puts a correction on the horizon, which may damage prospective returns from DC fund investments.
In addition, if the worst happens and a DB scheme does fail, the PPF has even boosted its payouts.
Finally, the damaging retrospective removal of inheritance exemptions for unused pension funds means that when you die, much of your DC fund will go to the taxman, rather than your family.
The DB transfer heyday could well be behind us, so think very carefully before giving up a rare guaranteed, inflation-protected income for life.
You may live to regret it.
 |
| Baroness Altmann is a member of the House of Lords and was pensions minister from May 2015 until July 2016 Credit: Chris McAndrew / UK Parliament |
A defined benefit (DB) pension has long been the holy grail of retirement.
With guaranteed payouts for life, often rising each year with inflation, they can remove that major worry of retirement: running out of money.
However, one of the few downsides of people living longer nowadays is the rapid rise in the cost of these pensions. They’ve all but disappeared from the private sector, and even though public sector workers still receive them, they’re less generous than they were.
But almost a decade ago, I did something I would never advise today: I cashed in three DB pensions.
When you’re considering such a move, you’re given a cash equivalent transfer value (CETV). This is the amount your scheme will pay into your defined contribution (DC) pension pot to discharge itself of any pension promises to you.
Simply put, once it’s done, it owes you nothing.
Defined contribution vs defined benefit
- Defined benefit scheme
- Defined contribution scheme
- Contributions
- Employer is responsible for managing and maintaining scheme, but employee may be able to make contributions
- Employee and employer contribute, and the more you put in, the better the chance of building a substantial retirement pot
- How it works
- Company manages the scheme and members receive annual payments based on either final salary or career average when they retire
- Pension pot is invested and final value depends on level of contributions and stock market performance
- Age of access
- Pension can't be accessed until plan retirement age, usually around 65. In some cases it may be earlier
- Withdrawals can be made from age of 55
- How retirement income is paid
- Guaranteed inflation-linked, annual income, paid once you retire
- Pension fund can be used to enter drawdown – where you can vary withdrawals – or purchase a fixed income with an annuity
Cash equivalent transfer values (CETVs) are based on how much schemes estimate your pension will cost over your lifetime, and in 2018, the offers were exceptionally generous.
A DB pension promising to pay you £10,000 a year could generate a CETV of around £230,000. Now, following a collapse in rates, it might be just £130,000.
At the time, my thinking was centred on interest rates, which I believed had fallen too far because of continued quantitative easing by central banks. Long-duration bond yields were falling, which pushed up the transfer value of pensions.
In short, schemes estimated it would cost more to pay pensions, which increased their offer to buy you out. Alongside far higher quotes than I expected, no reductions were factored in despite schemes being in deficit.
I was convinced this wouldn’t last, so I took the plunge and transferred three of my six DB pensions into my own self-administered DC scheme, and I haven’t looked back.
There were many reasons why I went ahead. First, if one of my DB pension providers had gone bust, it would have entered the Pension Protection Fund (PPF). The PPF steps in to pay pensions, but my yearly payout and any inflationary increases I was entitled to would have been reduced in this event.
The 2015 pension freedoms were another reason to proceed. Announced by George Osborne, then chancellor, these gave pension savers much greater flexibility when accessing their DC pensions.
By moving them into my DC pot, I could invest the money myself and grow it over time, rather than locking in to a fixed pension promise. Having spent more than 15 years managing pension assets and analysing companies and markets, I was comfortable managing my own portfolio, allowing me to eschew ongoing management fees that can reduce returns.
In addition, I’d had some health problems, which I feared might have lowered my life expectancy. Taking a lump sum, rather than risking receiving my pensions for only a few years, suddenly became very attractive.
The tax regime also gave me comfort that, if I did die prematurely, my children could inherit my remaining DC pension fund without paying inheritance tax. They’d have received nothing from my DB pension.
This was suddenly and disgracefully changed by Rachel Reeves retrospectively in 2024, so I will now leave my pension to my husband if I die first.
Finally, as I planned to keep working into my 70s (assuming my health allowed), I knew I wouldn’t need extra income when the pensions became payable at age 60. I’d have lost 40pc of my income to income tax.
Almost a decade later, I’m very pleased with the outcome. My pot keeps building investment gains until I need the income. I also still have the three remaining DB pensions, all of which are inflation-linked, so I have a good basis of provision.
In the prevailing circumstances of a few years ago, it was certainly the right decision for me.
However, the current conditions are far less attractive, and aside from those concerned about their health or high tax rates, few people would be well advised to follow the same path.
First, interest rates have risen enormously, and quantitative tightening has seen Bank of England gilt sales driving long yields higher.
In short, it’s the reverse of what was happening in 2018, and DB schemes have moved into large surpluses as a result, lowering CETVs
Equities and other higher-than-expected return assets have performed very strongly. As a result, some international markets may well be overvalued now. This puts a correction on the horizon, which may damage prospective returns from DC fund investments.
In addition, if the worst happens and a DB scheme does fail, the PPF has even boosted its payouts.
Finally, the damaging retrospective removal of inheritance exemptions for unused pension funds means that when you die, much of your DC fund will go to the taxman, rather than your family.
The DB transfer heyday could well be behind us, so think very carefully before giving up a rare guaranteed, inflation-protected income for life.
You may live to regret it.
Pension transfer decisions can have lasting financial and tax implications, so it's essential to seek professional advice before making any changes. Our experienced Accountants in Croydon, Accountants in Stratford, and Accountants in Ilford at SKZ Accountants can help you make informed decisions that support your long-term financial goals.
Reference: https://www.telegraph.co.uk/money/pensions/private-pensions/i-cashed-in-my-defined-benefit-pensions-why-you-shouldnt/
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