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Summary

Defined Benefit Pension Scheme Transfer: Why Having a Holistic Financial Planning Approach Could Maximize Your Retirement Income

Planning financially for your retirement is an important thing to do. Especially if you are a UK expat who will withdraw your UK pension schemes to the country you are residing in, and you hold a Defined Benefit pension scheme, you will have a hard time withdrawing your pension due to the Defined Benefit pension transfer process that is quite challenging from time to time.

Moreover, suppose you have more than £30,000 in your Defined Benefit pension scheme. In that case, you must be going through financial advice from an IFA-qualified independent financial advisor. The process of transferring your Defined Benefit pension scheme is harder from time to time.

The DWP’s new regulations, the CETV values that go up and downs, and the time spent before you can transfer your pension pots could drive you crazy. At a glance, the government will say that it’s “a safeguarded” benefit. Why would you transfer it?

All these processes can make you out of focus and forget other retirement assets, such as Defined Contribution pension schemes. This article will discuss how a holistic financial planning approach can help you maximize your retirement benefits.

But before that, tune in to one of our YouTube videos to understand the holistic financial planning as explained by our CEO and Independent Financial Advisor, Dominic James Murray.

Defined Benefit Pension Scheme

As we all know, the Defined Benefit pension scheme is one of the major UK pension schemes that will give you multiple benefits in your retirement. The advantages of the Defined Benefit pension scheme are the following:

  • Guaranteed monthly income (annuity)
  • Linked to inflation (it will have the same buying power)
  • Death benefits (passed to your beneficiaries)
  • 25% tax-free PCLS
  • PPF protected (protects you against the company’s bankruptcy)

While the Defined Benefit pension scheme has multiple employee benefits, it puts much of a burden on the company side. This is why, in this late decade, companies have decided to enrol their employees with the Defined Contribution pension scheme. They see the Defined Contribution pension scheme provides more flexibility and less burden for the companies.

Speaking of flexibility, the number of employees transferring their Defined Benefit pension scheme is also increasing from time to time. Even though the process is getting harder, some of our clients insist on a transfer due to the level of flexibility and control they get compared to their Defined Benefit pension scheme. 

The Defined Benefit pension transfer scheme is affected by several factors. The Cash Equivalent Transfer Value (CETV) is one of the most important.

CETV

The CETV is the transfer value of your Defined Benefit pension scheme. It determines the amount of money you will receive after the transfer process. Your UK ceding scheme uses these several factors as a basis for calculating your CETV:

  • Age
  • Normal Retirement Age
  • Living costs
  • Life expectancy
  • Investment scheme
  • UK bank rate
  • Marital status

Last year, the CETV value increased to its peak level due to the negative correlation between the UK bank rates that are going down resulting from the pandemic. Now that the UK bank rate is going up, the value of your CETV would go down. Now the question is, is it the right time to transfer?

There is no straightforward answer to the question. You need financial advice from an FCA-qualified IFA and a holistic financial planning approach to your Defined Benefit pension scheme transfer.

Holistic Financial Planning Approach

In Defined Benefit pension scheme transfer, you should not only focus yourself on how to complete your Defined Benefit pension transfer process. Putting an analysis on your total assets and investments, such as Defined Contribution pension schemes (SIPP or QROPS), is the definition of a holistic financial planning approach.

Many clients come to us and want a straightforward process of transferring their Defined Benefit pension scheme while forgetting the other assets they possess. A holistic approach can help you realize how to maximize your Defined Benefit pension scheme transfer and have a better outcome for your financial planning for retirement.

Do not underestimate the value of your Defined Contribution pension as well. Transferring your DB pension into a SIPP or QROPS (if you’re based in Europe) means effectively transforming your DB pension into a Defined Contribution pension scheme. Here are some reasons to transfer your DB pension scheme:

  • CETV values going down following the bank rates going up
  • Lower cost compared to its earlier 
  • Better fund selection compared to its earlier
  • Good default funds compared to its earlier
  • The current Defined Contribution pension scheme is far better than its predecessor

The reasons above are why you should consider taking good care of your defined contribution pension scheme. Younger people not enrolled on the final salary pension scheme should take their financial planning seriously and consider how their investment can positively grow throughout their careers.

Key Takeaways

One of the ways to grow the investments is by maximizing the ISO allowance each year using a general investment account. The younger person will struggle more than the older person who already has the safeguarded defined benefit pension scheme.

The most important thing in your retirement plan is to carefully think about your financial planning in the future. In the past year, we have had many clients who are focusing on transferring their final salary pension scheme due to the hysteria in the market and the CETV value that was reaching its peak.

So many people were focusing on transferring their Defined Benefit pension scheme back then even though the rules were strict, tons of due diligence, plenty of reports, and also a new regulation (statutory rights removal) set up by the FCA and DWP that could take away their statutory right to transfer their Defined Benefit pension scheme. Yet, they still insist on doing it anyway. Clients forget their other pension pots, such as Defined Contribution pension scheme, QROPS, and SIPP.

When doing financial planning for your retirement, you have to look at all areas surrounding you. You have to consider all of your assets, such as pension pots, investments, ISAs, GIAs, and other assets. You also have to consider the importance of having a deposit access account (emergency fund, which should be three or even twelve times more than what you have in your annual income.

Importance of Financial Advice from IFA

All those reasons above are just underlining the importance of financial advice from the Pension Transfer Specialist, Cameron James. Our qualified IFAs can help you with the holistic financial planning approach that will help you to maximize your retirement income and financial planning. Hit the button below to speak with one of our IFA for a free initial consultation at your convenient date and time.

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