Defined Benefit Pension Calculator For Non-Residents
A Defined Benefit Pension (DB Pension) is a type of retirement plan that guarantees a specific and predetermined income to an employee upon retirement. Unlike defined contribution plans (e.g, 401k or personal pension plans), where the retirement benefit depends on investment performance, the benefits in a DB pension are calculated based on a formula tied to factors like salary, years of service, and a fixed accrual rate.
Defined Benefit Pension Transfer
A Defined Benefit Pension Plan Transfer refers to the process of moving the value of a defined benefit (DB) pension scheme into another pension arrangement, such as a defined contribution (DC) plan / a self-invested personal pension (SIPP). While transferring a DB pension can offer certain advantages, it’s a complex decision with significant financial implications.
If the value of your defined benefit plan is over £30,000, you will need to take advice from an FCA-authorised pension transfer specialist.
Defined Benefit Pension Calculator
A Defined Benefit Pension Calculator is the tool used to estimate the retirement benefits you will receive from your defined benefit pension plan.
Key Features of a Defined Benefit Pension Calculator:
The calculator requires the user to input details such as:
Annual Salary: Current or final salary, depending on the plan.
Years of Service: The total number of years worked for the employer offering the pension.
Accrual Rate: The percentage of the salary earned as a pension benefit for each year of service.
Retirement Age: The age at which the pension benefits will commence.
It’s important to note that while these calculators provide useful estimates, the actual pension benefits may vary due to plan rules, changes in legislation, or other factors. Always consult with the plan provider for precise details.
Cash Equivalent Transfer Value CETV
The Cash Equivalent Transfer Value (CETV) refers to the amount of money you could receive if you transfer the value of your pension benefits from your DB scheme to a personal pension.
A CETV calculation takes into account factors such as:
The pension entitlement: How much you will receive when you retire, based on the scheme's rules.
Life expectancy: How long the person you’re expected to live, affects the value of future pension payments.
Assumed investment returns: Based on the current economic environment and the expected performance of investments.
Discount rates: Used to calculate the present value of future payments.
In short, the CETV is used to determine how much your pension scheme will pay out if you were to transfer your pension pot to another pension scheme provider.
Reasons To Consider A Transfer
Whilst transferring your pension plan out of your DB scheme comes with many risks, there are some key reasons to consider a transfer.
Flexibility:
A transfer allows greater control over how and when you can access pension funds, such as taking lump sums, managing withdrawals, or tailoring investments to personal needs.
Inheritance Options:
Unlike DB pensions, which often have limited or no death benefits beyond a spouse’s pension, transferred funds can be left to your beneficiaries.
Potential for Higher Returns:
By transferring to a DC plan, you may benefit from investment growth, especially if the transfer value is significant and well-invested.
Change in Personal Circumstances:
If you have health concerns or don’t expect to live long, transferring may allow you to access more of your pension benefits upfront.
Risks of Transferring a DB Pension
Loss of Guaranteed Income:
The biggest risk is giving up the guaranteed income in retirement that a DB scheme provides. Once you transfer, your retirement income becomes dependent on how well your investments perform.
A Lower Total Pension Value:
If the transfer value isn’t large enough to generate an equivalent income through investments, your retirement income could be lower than if you had stayed in the DB scheme.
No Inflation Protection:
Many DB schemes provide inflation protection, meaning your pension increases with inflation. DC schemes typically don’t offer this, so your income could be eroded by inflation over time.
Regulatory Considerations
As mentioned, due to the complexity and risks involved, financial advice is required for anyone considering transferring out of a DB pension if the transfer value exceeds £30,000.
A regulated financial adviser will help assess whether the transfer is in your best interests.
Defined Benefit Transfer Process
Requesting a Transfer Value: You’ll need to contact your pension provider to get an up-to-date CETV.
Financial Advice: If necessary, seek advice from a regulated financial adviser to help you understand the pros and cons of the transfer.
Transfer Decision: After considering the advice and weighing the risks, you can decide whether to proceed with the transfer.
How Much Does A Defined Benefit Pension Transfer Cost?
The cost of a Defined Benefit (DB) Pension Transfer can vary depending on several factors, but there are a few key elements involved in determining the overall cost:
Cash Equivalent Transfer Value CETV:
If you have already received a CETV in the last year and require a new one to be calculated, your trustee can charge up to £400. You will however receive one free valuation per year.
Financial Advice Fees:
Subject to the value being greater than £30,000, you will require the advice of an FCA authorised pension transfer specialist. These fees can vary from £1500-£3000 with additional costs for extra schemes.
As a non-UK resident, there will also be your locally regulated adviser fees. These are usually charged as a percentage ranging from 1-3% of the CETV.
There are also ongoing costs to be aware of, usually 1% per annum.
Product Costs:
Depending on the pension scheme you are transferring to, there may be setup costs as well as ongoing costs. These can range from zero setup and £240 per annum.
In summary, a DB pension transfer can be appealing in some situations, especially if you want more flexibility or the potential to leave an inheritance.
However, it carries risks, and it’s essential to carefully consider your retirement goals and seek advice before proceeding.
Independent Expat Financial Adviser
The Wealth Genesis offers expert financial planning and wealth management services to UK expats globally. Rather than relying on generic, one-size-fits-all investment models, we provide personalised solutions tailored to your unique needs. Our team works with a select group of UK FCA-authorised pension specialists who are equipped to serve expats in any location.
With our one-time fee of £3,000 and an ongoing charge of 0.85%, we eliminate conflicts of interest and ensure that performance isn’t hindered by excessive fees.
Contact us today using the diary below to discuss your defined benefit plan either in isolation or consolidating with other private pension schemes.
