The Defined Benefit Pension Decision Guide for Expats

A practical guide to understanding what your final salary or defined benefit pension is really worth before deciding whether transferring it should even be considered.

A defined benefit pension is fundamentally different from an investment account.

The starting point is not the transfer value. It is the lifetime income promise, the guarantees attached to it and the role that income could play in your retirement.

• Understand the benefits your pension is promising to provide
• Compare guaranteed income with the flexibility of a transfer
• Review tax, inheritance, investment risk and your wider retirement plan before making a decision

Start with the income promise, not the transfer value

A defined benefit pension can look deceptively simple.

You receive a transfer value.

It may be several hundred thousand pounds.

The natural question becomes:

“What could I do with that money?”

But that is not the first question that matters.

The transfer value is being offered in exchange for something.

Usually that means giving up a future stream of pension income, potentially payable for the rest of your life, together with scheme-specific increases and benefits for a spouse or dependants.

Once transferred, the nature of the retirement asset changes.

Instead of the scheme carrying much of the investment and longevity risk, you become responsible for managing an invested pension pot and deciding how quickly or slowly to draw from it.

That can provide greater flexibility.

It can also create greater responsibility.

For some people, flexibility, control and estate-planning objectives may be important.

For others, a secure pension covering a large proportion of core retirement spending may be exceptionally valuable.

That is why the decision should begin with:

What income am I giving up?

How valuable are the guarantees?

What role would this pension play in my retirement?

Only then should the transfer value enter the comparison.

Who is this guide for?

This guide is designed for British expats and internationally mobile professionals who hold a UK defined benefit or final salary pension.

It may be particularly useful if you:

• have received a cash equivalent transfer value
• are considering transferring a final salary pension
• have been recommended a SIPP or another pension arrangement
• want greater flexibility over retirement withdrawals
• are concerned about what happens to the pension when you die
• already have substantial secure income from other sources
• are trying to compare guaranteed income with an investment portfolio
• live outside the UK and want to understand the cross-border implications
• are approaching retirement and need to decide how the pension fits into your income plan
• want a second opinion before giving up guaranteed benefits

The guide does not assume that transferring is right or wrong.

It is designed to make sure the decision starts with the benefits you already have.

Protect the promise before considering the transfer

A defined benefit pension decision can be broken into four stages.

1. PROMISE

What is the scheme promising to pay?

Review:

• expected pension income
• retirement age
• inflation-linked increases
• spouse or dependant benefits
• any other scheme-specific features

2. PURPOSE

What job could that guaranteed income perform?

Could it cover housing costs?

Core household spending?

Essential retirement expenditure?

The more valuable the income is to the wider retirement plan, the more important the guarantee may become.

3. TRADE-OFF

What would change after a transfer?

You may gain flexibility and control.

You may lose guaranteed lifetime income and transfer investment, withdrawal and longevity risk onto yourself.

4. PLAN

Would transferring genuinely improve the full retirement plan?

That means considering other pensions, investments, tax, spending, health, dependants, inheritance objectives and future residence together.

Review first. Protect the promise. Transfer only when the case is clear.

Frequently asked questions

What is a defined benefit pension?

A defined benefit pension promises a future level of pension income based on the scheme rules. The benefits are usually linked to factors such as salary and service rather than simply the value of an individual investment account.

What is a cash equivalent transfer value?

A cash equivalent transfer value is the amount a scheme may offer in exchange for giving up the future defined benefits and transferring the value to another pension arrangement. It should be considered alongside the benefits being surrendered rather than viewed in isolation.

Is a high transfer value a good reason to transfer?

Not by itself. A large transfer value may simply reflect the value of the benefits being exchanged. The key question is whether giving up the guaranteed income and other scheme features improves your overall retirement position.

What happens to my defined benefit pension if I live abroad?

Living overseas does not automatically mean the pension needs to be transferred. The scheme can potentially remain an important source of retirement income, although tax, payment arrangements and currency should be considered in the wider plan.

Is transferring better for inheritance?

A transferred defined contribution pension may provide different death-benefit options from a defined benefit scheme, but that does not automatically make it better. The value of spouse benefits, guaranteed income, tax and the needs of the surviving household should all be considered.

What is the biggest risk of transferring?

One of the biggest changes is that responsibility shifts. Investment performance, withdrawal rates and the risk of the money needing to last for a long retirement become much more directly your responsibility.

About Josh Clancey

Josh Clancey is a cross-border financial planner based in Dubai, working with British expats and internationally mobile professionals on pensions and retirement planning.

His approach to defined benefit pensions starts with the benefits already promised by the scheme rather than the transfer value.

The objective is to understand what the guaranteed income contributes to the wider retirement plan and only consider giving it up where the alternative presents a sufficiently strong case.