What is a defined benefit pension transfer?
A defined benefit pension is the same as a final salary or career average (CARE) scheme.
Defined benefit pensions get their name because it is the benefit/pension itself calculated or defined. See below.
How it works
If you work or worked for a company who has a defined benefit pension workplace pension. Also known as a final salary or career average (CARE) scheme.
If you are / were in the scheme you have a defined benefit pension / final salary pension. A defined benefit or DB pension.
Often referred to as gold plated pensions. While you are an ‘active member’ of the scheme you are getting amazing benefits.
As an active member this is how it works:
If you are earning £40,000 and the scheme is a 60ths scheme you will earn 1/60th of your final salary for every year. If you are good at fractions then 30 years in the scheme will give you 30 60ths (30/60) which is the same as a half. so, if your final salary is £40,000 then your final salary pension will be half of £40,000. Being £20,000 p.a. pension.
This is a defined benefit pension of £20,000 p.a.
Once you have left the scheme as an ‘active member’ you then become a deferred member. And, as a deferred member of your a defined benefit pension scheme you can transfer out your defined benefit pension.
By doing this you give up your guaranteed pension in exchange for a cash amount. This cash amount is then paid into a personal pension. The amount offered by the scheme depends on many factors which is a different blog. This cash amount is referred to as a Cash Equivalent Transfer Value (CETV).
Is a defined benefit pension transfer right for you?
Again, this is a different and difficult subject. For more information see our Simple guide to transferring final salary pensions.
You may also find out article Who is suitable to do a final salary pension transfer and how does it work? helpful?