DC pensions are the most common form of pension in the UK.
The value of your DC pension at retirement is straightforward. It is a combination of how much you or your employer contributed and how well the underlying investments have performed. There are no other factors, other than fees and charges, to consider which makes them more straightforward. This is unlike Final Salary Pension Schemes which have guaranteed and safeguarded benefits.
Defined Contribution vs Defined Benefit Pension Plan
Defined Benefit and Defined Contribution Pension Plan are the most well-known employer-sponsored pension plans in the UK. While they are the most common, and have basic similarities, they are two very different pension schemes. The key difference between DB and DC is the way in which your benefits are determined. A DC pension is based on the total amount of contributions, and how those contributions have performed in the capital markets, net of any charges. The total amount you will receive in retirement is thus variable, and will depend on those factors, and can be very hard to accurately predict and plan for in the future.
In contrast, DB or Final Salary is a pension scheme where the amount you get when you retired is determined by the number of years you’ve been working for the company and the salary you’ve earned. They provide a guaranteed income for the rest of your life, which is typically indexed to inflation each year. Due to this, a Defined Benefit pension scheme is dubbed as the ‘gold-plated’ pension.
You should complete thorough due diligence, before reaching out to a financial adviser and/or Pension Transfer Specialist (PTS) to help you understand your DB Pension Advice options. At Cameron James, we have several qualified financial advisers, some of who also have the Pension Transfer Qualification, who are well experienced with DB Pensions. We also use independent 3rd Party Pension Transfer Specialists to facilitate any regulated advice on a Defined Benefit Pension.
What is a Defined Contribution Pension Transfer?
Transferring a company or stakeholder pot into a personal pension.
Most expats complete a Defined Contribution pension transfer into an International SIPP or QROPS (certain EEA residents). These transfers provide greater control of all of their DC pensions, as they are able to manage them together in one place. DC pension transfers are an essential area of financial planning. The costs of a DC pension transfer are lower than a transfer from a Defined Benefit pension, due to the relatively simpler nature of the advice process, although with recent changes in UK pension legislation, they are still complex, and require a well qualified adviser to assist to make sure that any decisions you make with them are suitable.
For UK-based pension members, transferring your DC pension can help you consolidate your pension pots from different employers into one place, making it easier to manage. This is particularly beneficial for individuals who have multiple jobs or have changed jobs frequently. It is also useful for those with older pensions, that do not have flexible access, and require a transfer to a new scheme in order to access benefits other than an annuity/lump sum.
What is a pension tax free lump sum?
Everyone is eligible to a 25% tax free lump sum
The technical term for this tax-free pension lump sum is a Pension Commencement Lump Sum (PCLS). You are permitted to take the first 25% of your pension without income tax in the UK. The remaining 75% will count as income and be taxed at your marginal tax rate. On Defined Contribution schemes, access to your pension is permitted from your 55th birthday, but this is increasing to 57 in 2028.
For example, an individual with a £250k DC pension would be able to draw their 25% (£62.5k) tax-free pension lump sum from age 55. The remaining 75% (£187.5k) would be taxed at their marginal income tax rate in their country of residence, as and when they access it.
Can I access my DC Pension at age 55 or not?
Since 2015, you are free to draw down on your pension from age 55
In 2015, the UK government confirmed that DC pensions would be accessible from age 55 instead of age 60 or 65. This change in legislation is referred to as UK Pension Freedom Rules. As such, if you are 56 you are free to withdraw all your DC pension retirement income. Unless you explicitly need this retirement income we would suggest caution with such withdrawals. You likely could be better off gradually drawing down your pension income on a regular basis to minimise your tax and maximise your total income/make the pot last longer.
Advantages of Defined Contribution Plan
Consolidate Pension Pots In One Place
While working in the UK it is likely you had numerous employers. Perhaps you were only employed with some for a few years. Each employer will have set up a company pension scheme for you though. For example, a client could have £200k spread across four previous employers (£19k, £100k, £20k, £61k). You can consolidate all these pensions together in one easy to manage location.
Whether an International SIPP or QROPS is the best advice you, both pensions are internationally flexible. As such, if you move country again in your expat career, your pension planning will likely remain in place. There is likely no need to change it every time you move. Much like our service, we can continue servicing you internationally as your career progresses.
For UK-based pension members, consolidating your DC pension can help you manage your retirement savings more effectively, regardless of where you live in the UK.
Each of your UK pension pots has its own set of charges and fees. Few people read p.34 of their pension contract when starting a new job. These charges can be excessive though, particularly on older schemes. Consolidating your pensions allows you to eliminate duplicate charges. However, fees might not be lower with a pension switch, and any advice given will explain all the charges, and if higher than your existing scheme, the adviser must document why the transfer is stil suitable.
Online Access 24/7
Consolidating your DC pension also allows you to have full online access, much like your online banking, which your existing scheme may not offer. Helping you monitor your investments more closely at a time that suits you. As DC Pensions are a long-term investment, we do not advise checking them daily, but you always have full access.
Ongoing Financial Planning Review
At Cameron James, all clients receive at least an annual review. This allows their Financial Adviser to update them on the portfolio and provide a general review of their financial planning. It also provides an opportunity for our clients to update us on any changes in their situation. Such as moving employer, returning to the UK, or anything else that might affect their finances. Many clients opt for an in-depth annual or bi-annual review once they feel more comfortable working with us. Our reviews focus on financial and cash flow planning, and are always goals based. Relatively little time is spent reviewing the portfolio, as it is likely to still be a suitable portfolio, and we prefer to focus on the things that we can work with our clients to control, like their spending, income, future plans etc.
Planning Your Retirement
With your pension pots consolidated together in one place, your Financial Adviser can provide an accurate estimate of what your pensions will be worth at retirement. In contrast, estimating the growth of four different pension pots with various fees and charges is not an easy task and introduces more complexity and opportunity for error.
Tailored Investment Choice
Depending on where your DC Pensions are currently located, a DC Pension transfer can provide access to a broader range of investments. Our Advisers are on hand to advise on the portfolio best suited to your needs from a whole of market analysis. This may be different from your existing DC provider who may offer a limited in-house range of model portfolios.
Low Cost & Straightforward
As DC pensions typically have no guaranteed benefits you are likely not giving up any safeguarded rights in transferring then. This is different from Final Salary pensions where a more thorough analysis of your options is required. FCA stipulations on DC pensions transfers are less onerous which removes an additional layer of costs for our clients. View our Transparent Charging Schedule to learn more.
Disadvantages of Defined Contribution Plan
Cost Of Advice
We are only looking to work with clients where we can add value to their financial planning. If you already previously consolidated all your pensions in the UK then you are one step ahead of most people. The costs of transferring your pension to us might not outweigh the benefits. We will always happily review this for you but will be honest if we cannot add any value for you. You may be better off keeping your DC pensions where they are.
How do I obtain my DC pension transfer valuation?
Your UK DC pension provider will supply this Obtaining the transfer value for your DC pension is always the best practice. This allows us to see all possible information pertaining to your policy. However, if you already have the latest valuation this will provide a very accurate estimation of your transfer out value. Remember there are likely no safeguarded or defined benefits so your transfer value is normally the same as your current value. Also, if you are transferring to an International SIPP in many cases we no longer require physical forms as transfers are completed electronically.
Simply complete our Letter of Authority and send to our info email in the header and we will gather all the required information on your behalf. Including your transfer value, your existing costs and much more. Completing our letter of authority is not transferring your pension or agreeing to do anything. It simply allows us to collect the information for a limited time period. If you have any questions about the form book yourself in for an appointment below.
Are Defined Contribution pension schemes benefits guaranteed?
Pension Benefits are not guaranteed.
A DC pension offers no form of guarantee as to the pension benefits that you will receive at retirement. Your retirement income and tax-free lump sum are only related to the performance of your portfolio (Gov.Uk). This is why DC pensions are considered more straightforward as there are no complicated calculations. Your pension plan value is your transfer value. However, there are a few schemes that might have some form of safeguarded benefit, such as a Guaranteed Annuity Rate (GAR), but these schemes are typically older legacy pensions, and you will be made aware of the scheme having such benefits as they will require you to obatain FCA Regulated advice from a Pension Transfer Specialist if the value of those guarantees is over £30,000. If the scheme does not stipulate any financial advice being required, then it is likely that you do not require the advice from a Pension Transfer Specialist.
When were your DC Pensions previously updated?
Markets change and portfolios need to be aligned
The final value of your pension benefits in retirement is important to you. You cannot control what the markets do. There will be recessions like the 2008 Financial Crisis and there will be bull markets like the past decade. What you can control though is ensuring you have a suitable portfolio with a risk/volatility profile that suits your risk profile.
How much will a DC pension transfer cost?
There will be a set-up fee of between 1-3%
DC pension transfers do not require additional FCA sign-off which keeps the costs lower than those for our Defined Benefot clients. Our advice/implementation fees up to £250k is 3%. For portfolios between £250k and £1m this reduces to 2% and for portfolios over £1m it reduces further to 1%. We work on a transparent model of advice for all pension transfes and do not receive any form of commission. So you will know exactly how much your advice is going to cost before you make any decisions or commitments. To learn more about what is included in our service click Our Costs Page.
What happens to my DC pension if I die?
Your beneficiaries receive your pension in full.
Nominating your own beneficiaries is a task we complete with all clients before your pension is even transferred. It is a simple form which takes less than 30-seconds to complete. You are also free to decide on the percentages. For example, spouse 100% or son 50% and daughter 50%, you are free to complete this as you wish. You can then rest assured that in a worst-case scenario your financial affairs are as simple as possible for your family.
Would a DC pension transfer be the right advice for me?
There is no one size fits all answer.
Any pension transfer decision should be considered carefully. For many clients, whether based in the UK or anywhere in the world, the advantages of a DC transfer outweigh the costs of completing a transfer. This is always best discussed with your regulated Financial Adviser. The team at Cameron James hope you have found this article useful. You can share the article with any expat colleagues or friends through the social buttons below. Click the link below to talk to an Experienced Financial Adviser in confidence about your DC pension requirements.