Defined Benefit Pension Transfers: Think Carefully
A defined benefit (DB) pension promises a guaranteed income for life, linked to your salary and years of service. Transferring it to a defined contribution scheme exchanges that certainty for a cash lump sum and investment freedom. The FCA considers this advice so consequential that it requires regulated advice for transfers above £30,000. Here is what you need to understand.
What Is a CETV?
The Cash Equivalent Transfer Value (CETV) is the lump sum your DB scheme offers if you wish to transfer out. It represents the scheme actuary's calculation of how much money would be needed today, invested prudently, to replicate the promised pension income over your expected lifetime.
CETVs are expressed as a multiple of the annual pension promised. A "transfer value multiple" of 20 means the CETV is 20 times your annual DB pension. So if your scheme promises £15,000 per year and your CETV is £300,000, the multiple is 20.
Historically, CETVs were very generous, often exceeding 30 times the annual pension. In 2022-2024, rising interest rates caused CETVs to fall sharply, as the discount rate used in the calculation increased. A pension that might have attracted a £500,000 CETV in 2021 could now offer only £300,000. This fall reflects the mathematical reality that higher interest rates mean less capital is needed to fund the same future income.
Your CETV is time-limited. Schemes guarantee a CETV for a limited period (typically three months). After that, it is recalculated and may be higher or lower. If you are considering a transfer, request your CETV early to give yourself time to take advice and make a decision before it expires.
What You Give Up in a Transfer
Transferring out of a DB pension means permanently surrendering several highly valuable features. It is essential to understand exactly what you are losing before making this irreversible decision.
Guaranteed income for life
A DB pension pays you a defined amount every month, regardless of investment markets, interest rates, or how long you live. This is the closest thing to a risk-free retirement income that exists. In a defined contribution scheme, you bear all the investment risk and longevity risk yourself. If markets crash or you live longer than expected, your money can run out.
Inflation protection
Most DB pensions increase in payment, either in line with CPI/RPI (up to a cap, typically 2.5% or 5%) or by a fixed annual percentage. This protects your purchasing power over a retirement that could last 30 years or more. Replicating this in a DC scheme requires either buying an inflation-linked annuity (which provides much lower initial income) or accepting that your withdrawals may not keep pace with prices.
Spouse and dependant benefits
Most DB schemes pay a survivor's pension to your spouse or civil partner after your death, typically 50% of your pension. This continues for their lifetime. In a DC scheme, any remaining pot passes to beneficiaries, but there is no guarantee it will last for their lifetime, and the amount depends entirely on what is left when you die.
The Pension Protection Fund (PPF) safety net
If your employer goes bust and the DB scheme cannot meet its obligations, the PPF steps in. Members below the scheme's normal pension age receive 90% of their promised pension (capped at approximately £41,500 per year at age 65 for 2024-25). Members already receiving their pension receive 100%. This safety net does not exist for DC pensions — once transferred, your money is entirely your own responsibility.
When a Transfer Might Make Sense
The FCA's starting position is that retaining a DB pension is in the member's best interest. However, there are specific, limited circumstances where a transfer may be appropriate:
Serious ill health
If you have been diagnosed with a condition that significantly reduces your life expectancy, the guaranteed-for-life feature of a DB pension becomes less valuable. A CETV gives you access to a larger lump sum that you can use during your remaining years and pass to your family. Some schemes offer enhanced CETVs or ill-health early retirement benefits that should be explored first.
Very high CETV multiple
When transfer value multiples are exceptionally high (historically above 25-30 times the annual pension), the lump sum may be large enough to replicate the DB income and still have capital remaining. In the current interest rate environment, such generous offers are rare, but they do still occur in well-funded schemes.
No dependants and a desire for flexibility
If you have no spouse, partner, or dependants who would benefit from the survivor's pension, a significant part of the DB scheme's value is wasted on you. A transfer gives you a pot you can spend as you wish, leave to whomever you choose, or use for purposes a DB pension cannot serve (such as paying off a mortgage or funding a business).
Scheme insolvency concerns
If your former employer is in financial difficulty and the scheme is significantly underfunded, there is a risk (albeit one mitigated by the PPF) that benefits could be reduced. For very high earners whose pensions exceed the PPF cap, a transfer removes this risk entirely. For most members, the PPF protection is sufficient.
Example: Assessing a transfer offer
Graham, 58, is offered a CETV of £420,000 for a DB pension of £18,000 per year starting at 65, increasing by CPI (capped at 2.5%), with a 50% spouse's pension.
Transfer value multiple: £420,000 ÷ £18,000 = 23.3
To replicate the DB income in drawdown: Assuming a 3.5% sustainable withdrawal rate, £420,000 would provide approximately £14,700 per year — significantly less than the £18,000 guaranteed DB income, without inflation protection or a spouse's pension.
To replicate via annuity: A level annuity at 65 with a 50% spouse's pension might cost around £300,000-£350,000, but it would not include inflation linking.
In Graham's case, retaining the DB pension is almost certainly the better option.
The British Steel Pension Scheme Lessons
The British Steel Pension Scheme (BSPS) case is the most prominent example of mass DB pension transfers gone wrong. When Tata Steel restructured in 2017, approximately 8,000 members were advised to transfer out of the scheme, often into unsuitable high-fee DC arrangements. Many received poor advice, and the FCA subsequently launched a redress scheme for those who were mis-advised.
Key lessons from the BSPS scandal include:
- Beware of unsolicited contact: Legitimate advisers do not cold-call you about pension transfers. If someone contacts you out of the blue, it is almost certainly a scam or at best an inappropriate sales approach
- Understand the adviser's incentives: Transfer advice was historically lucrative for advisers, creating a potential conflict of interest. Check that your adviser is FCA-authorised and has professional indemnity insurance specifically covering DB transfer advice
- Take your time: There is rarely any urgency. Schemes are required to provide CETVs, and you have the right to take advice at your own pace. Anyone pressuring you to act quickly should be treated with extreme suspicion
- Get a second opinion if in doubt: The FCA encourages members to seek a second opinion, particularly if the first adviser recommends a transfer. Some organisations offer free guidance (not advice) on pension decisions, including MoneyHelper (the government-backed service)
FCA requirement: For DB pensions with a CETV above £30,000, you must receive a personal recommendation from an FCA-authorised adviser with the specific DB transfer advice permission before the scheme can process the transfer. This advice typically costs £3,000-£5,000, reflecting the complexity and the adviser's liability. The cost is justified by the magnitude of the decision.
Scam Warning Signs
Pension scams remain a serious threat, and DB transfer victims have lost life-changing sums. The Pensions Regulator and FCA jointly warn against the following red flags:
- Promises of high or guaranteed returns from pension investments
- Unsolicited phone calls, texts, or emails about your pension
- Pressure to act quickly or claims of a "limited time offer"
- Offers of a free pension review from companies you have not heard of
- Suggestions to move money overseas or into unusual investments (property abroad, forestry, storage pods, etc.)
- Requests to transfer to an unregulated scheme or a Self-Invested Personal Pension (SIPP) with exotic investments
If in any doubt, check the FCA Register to verify that the adviser and firm are authorised to give DB pension transfer advice. You can also call the FCA consumer helpline on 0800 111 6768 or visit the ScamSmart website.
Understand the Full Picture Before You Decide
Model what your DB pension is truly worth and how it compares to a transfer.
Join the Waitlist