What is a defined benefit pension review?
DB scheme members will receive regular updates from their pension administrators or trustees. Make sure you ask for the latest information about your plan if you’ve not received your statement.
If you live abroad, use our pension scheme database to find the electronic contact details for your scheme. Most schemes now accept requests via email. Our free research toolkit contains a draft letter to use to make sure you ask the same questions a pension transfer specialist would.
What does a defined benefit pension review involve?
A UK FCA regulated Pension Transfer Specialist can conduct a comprehensive review of your DB benefits.
When a pension transfer specialist conducts their analysis, they will use professional tools to financially assess the CETV (transfer value) against the preserved benefits (i.e. annual the income you hold for retirement). The adviser will also discuss your personal objectives, current wealth and financial plans for the future.
If your existing DB pension fits with your future plans and financial needs, you will be advised to keep it. An adviser will also conduct an income projection analysis for your existing benefits so that you understand what you can look forward to in retirement.
Below, we’ve taken the key aspects of a defined benefit pension statement and CETV pack to help you understand how it works before you consider a transfer.
Understanding your DB pension statement
Scheme sections and rules for your relevant years’ service
The pension scheme was originally designed by your former employer. That means, at some point they sat down and designed the plan. Typically, the early members of a plan get the best benefits. Over time, schemes have reduced their benefits citing affordability issues.
Many companies underestimated the long-term costs of providing pensions to their employees. With people living longer, and death benefit promises needing to be kept, schemes are struggling. This all results in schemes stopping and starting scheme ‘sections’. You may see this referred to on your pension statement.
Scheme sections can differ in terms of their benefits, often also linking to different accrual rates when you built up your pension. For example, some schemes may have a ‘Pre 2008’ section where the scheme retirement age was different to the ‘Post 2008’ section. It’s very important to understand the sections of your benefits and how they will work together to provide you with an income.
Inflation linked income is one of the most valuable parts of a DB pension. Upon leaving service, you will have ‘preserved’ an income amount under the DB scheme. This means that income per annum is honoured, and usually linked to inflation. This ‘pre retirement’ inflation is called revaluation.
Once in retirement, and taking income, most DB schemes also provide inflation uplifts each year. This is called escalation.
Death benefits & nominated spouse
Most schemes offer in-built death benefits. Historically, this has been to a spouse only, but was widened to include civil partners. Some schemes offer provision for a nominated long-term financial dependent such as an unmarried partner.
Children’s pensions are sometimes provided for claim in the event of death for those children aged up to 18 years, or sometimes 23 if in full time education. If you have a long-term financial dependent such as a disabled child, they may be entitled to lifetime death benefits. Children’s pension benefits are usually much lower than a spouse and capped by number of children and percentage.
It is important to understand what your loved ones will get if you die, and nominate them directly with the scheme for your peace of mind.
Preserved income is typically termed ‘frozen’; income benefits are preserved at the point you left employment and kept preserved for your retirement.
Pension statements usually quote income at your ‘date of leaving’ – which means you must account for inflation rises when calculating potential income in retirement.
Pension Commencement Lump Sum (PCLS) options and commutation factors
DB pensions can offer a Pension Commencement Lump Sum (PCLS), but not normally automatically. In pension statements, you may have seen options for full income against options for a lower income and PCLS.
You will have the option at retirement to convert, “commute”, some income in exchange for a lump sum, and you may ask for various calculations of this to suit your plans.
Partial transfers are a new feature, and not all pensions offer this. If your plan offers a partial transfer, that means you could keep some benefits with the scheme, while taking a CETV (transfer value) to a private plan.
DB pensions valued under £30,000 may be eligible for full withdrawal. This is known as taking trivial commutation of scheme benefits.
Early retirement options & penalties
Your scheme benefits will carry a ‘normal’ retirement age. That means your DB pension income will be available in full from that age. If that doesn’t fit with your plans, you can ask for an early retirement quote.
Taking benefits earlier than scheme retirement age will usually involve a penalty. This can be 3-10% pa dependent on the scheme. Ask your scheme for an early retirement quote or early retirement factors to find out what they offer.
Late retirement options & enhancements
Some retirees find out too late that their scheme doesn’t offer enhancements for late retirement. If you don’t claim your pension from the scheme retirement age, you could simply be losing years of income.
If you want to defer your pension income, ask the scheme if you’re entitled to an enhancement to make it worthwhile.
Scheme solvency & qualification to the Pension Protection Fund (PPF)
UK defined benefit schemes are regularly audited to ensure close monitoring of their financial health. If you receive communication to say your scheme is underfunded, it has been deemed to not be able to afford to pay members pensions for their lifetime.
Schemes ‘underfunded’, or ‘in deficit’ are at risk of failing and applying to the PPF. Defined benefit pension income is protected under the Pension Protection Fund, but is subject to a cap. The PPF can also limit death benefits and inflation linking for those schemes offering higher than statutory minimum.
CETV calculation and option guarantee period (typically lasting 3 months)
The Cash Equivalent Transfer Value (CETV) is the amount you would be able to take away to the scheme. This can’t be fully withdrawn from the scheme into your hands, but instead places into your own private pension plan such as a SIPP. Following a transfer, you would have control over your funds and pension withdrawals under a new plan.
A CETV calculation is guaranteed for a period of 3 months. This is to allow you time to evaluate your options, take advice and decide whether to transfer. Schemes allow one calculation per year, but if yours expires they will usually provide a recalculation for a small fee.
Find out more
Find out more about DB pensions and the pension transfer opportunity in our free guide.