Updated: August 21, 2019

Pension Risk Transfer

Has your defined benefit pension been transferred to another provider? Find out what to do next by reading this article

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: August 21, 2019

With accounts of pension schemes offering members literally thousands of pounds to leave, ‘pension risk transfers’ have made quite a stir over the last few years.

In this piece you’ll find out what’s happening with pension risk transfers in 2019, and how you may be affected if your defined benefit pension does get transferred to another provider.

If you’re concerned, or would like some help, get in touch. The experts we work with can help to explain your options and advise you on what to do if your scheme initiates a risk transfer.

What is ‘pension risk transfer’ and how does it affect me?

A good definition of pension risk transfer is a scenario in which a defined benefit pension scheme no longer wants to keep paying out a guaranteed income to its members.

This can be for various reasons, for example: people living longer, more people joining the scheme than predicted, or less income coming into the scheme in the first place.

As such, the scheme will try to dispose of (or ‘transfer’) the ‘risk’ of these payments in a number of different ways. It may decide to try and end the scheme wholesale, or to only take the more expensive members off its books.

In some instances of risk transfer, you have a say, though in others you don’t. We’ve outlined the most common kinds of pension risk transfer below.

Incentivised transfer
’Section 32’, or ‘Buyout’

This is the most usual scenario, and one you may have heard of. In this scenario, your provider tries to entice you to leave the scheme by offering incentives, such as a large lump-sum (on top of the money you’d get for transferring out anyway).

This may be offered to some or all of the people in the pension scheme, depending on how much risk the scheme wants to offload.

In a Buyout (which is legally referred to as a Section 32), another company (often an insurance firm) takes over the administration of your pension.

In the process, your benefits are ‘cloned’ which means that, for all intents and purposes, the amount of money you’re paid will remain the same. The offer won’t necessarily be made to everyone in the scheme, and not everyone who gets an offer will receive the same terms.

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What are my options in a pension risk transfer?

Your options will depend on how the scheme decides to go about the transfer.

If your pension provider offers you an ‘incentivised transfer’

You can either choose to take the scheme’s offer (and the various incentives) or not. If you decline the offer, you’ll remain in the scheme. The scheme may choose to make you a different offer in future. Again, you can choose to decline.

If your pension provider initiates a ‘buyout’

In this scenario, you don’t really have any options. However, the law will protect your pension and you will, for all intents and purposes, retain the same benefits as you had before the buyout – you’ll just end up with someone else administering your pension scheme.

What are the pension transfer risks for moving out of my defined benefit pension?

Put another way – what are the risks to you, for transferring out of your workplace pension into another kind of scheme?

The risks of transferring to an annuity

Annuity transfers come with potential drawbacks that you should be aware of, including…

Possibility of lower returns

It’s less likely to find an annuity that will pay out at a rate comparable to your workplace pension

The risks of transferring to a defined contribution pension

Defined contribution transfers also have possible pitfalls…

Loss of guaranteed income

Whereas a final salary scheme promises to pay out a set amount of income until you die, the fate of a defined contribution based pension is directly tied to the performance of your investments.

Possible loss of benefits

Many defined benefit pensions provide a certain amount of protection against inflation, and additional benefits that can be paid to a spouse, if you pass away before them. This is not as common with drawdown-based pensions.

Of course, there can be pros to transferring out as well. As the name would suggest, a flexi-drawdown based pension provides increased options, and is ideal for the kind of person who wants more control with regards to their retirement savings.

So, should I opt to leave?

Without knowing your personal circumstances, it’s impossible to say.

In many instances, transferring out of a defined benefit scheme is unlikely to be in your best interest, according to most experts. As many savers have found, it can be extremely hard to find a better deal elsewhere. Want to know for sure? Speak to one of the professional advisors we work with. You can arrange a free, no obligation chat, and they should be able to offer you the right advice for your circumstances.

Talk to a pension risk transfer expert today

If you have questions about UK pension risk transfer and want to speak to an expert for the right advice, call Online Money Advisor today on 0808 189 0463 or make an enquiry.

Then sit back and let us do all the hard work in finding the risk transfer expert with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation.

Ask a quick question

We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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