Transfers from a defined benefit pension scheme are seldom in a client’s best interest and therefore are rarely recommended. These pension benefits are usually calculated by the salary they were earning at the time of leaving that employment and the number of years that they worked there.
The client’s former employer has the responsibility for providing the benefits irrespective of investment performance or current annuity rates.
In most cases the cost, potential loss of benefits and the risks of transferring from a defined benefit pension scheme to a defined contribution pension scheme often outweighs the advantages.
However, if an individual decides to transfer out of their final salary pension scheme the trustees must convert the benefits into a cash sum or transfer value (also known as a cash equivalent transfer value [CETV]).
Reasons why you might consider transferring out.
- Your pension scheme is being closed or wound up or there are concerns over the financial strength of the scheme and / or the employer.
- You have several small defined benefit schemes and want to amalgamate in to one pension scheme.
- Due to your ill health and the fact you may not be able to enjoy a long retirement and benefits payable on death may not be favourable.
- Taking early retirement benefits from age 55, which could be significantly reduced, usually by a set % for each year before the normal retirement date, again possibly because of ill health.
- You plan on taking early retirement benefits from age 55, which could be significantly reduced, usually by a set % for each year before the normal retirement date.
- You want to take a phased retirement where you require the tax free cash, but no pension. This might not be an option from your defined benefit scheme.
To work our your defined benefit take:
Your salary at the time of leaving and divide it 60.
Then multiply by the number of years service within the scheme. This gives you the value of your pension.
If you multiply that figure by 20 that will give you your approximate cash transfer value.