DB transfers – one more factor to consider

Jim Grant – Senior Product Insight & Technical Support Analyst

We look at how higher DB transfer values could cause a lifetime allowance issue and how that affects the advice process.

Advisers are receiving an increasing number of requests from clients looking to transfer their pension from final salary schemes to personal pensions.

This is a complicated area of advice and new rules which add additional factors to the equation do not help. One such factor is the lifetime allowance (LTA).

Why are transfer values so high

Gilt yields and annuity rates have been falling over the past few years and this trend has accelerated over the past year as a result of economic pressures and the Brexit vote.

So because you now need more money to buy a particular level of guaranteed pension, transfer values have been rising by around 12%, according to some reports.1

Added to the attractions of pension freedom under defined contribution (DC) arrangements, it is not surprising that transfer requests have increased.

What’s the problem?

The way in which benefits are tested against the lifetime allowance is different for defined benefit (DB) and DC arrangements. The same factors that have led to increased transfer values also mean that the DB test (20 times the accrued pension at the relevant date) currently produces lower Lifetime Allowance valuation figures than the DC test (the value of the fund).

This means that if a transfer goes ahead, some clients could end up with a lifetime allowance issue that they wouldn’t have had if they’d remained in their DB scheme.

The problem isn’t helped by the fact that if the client tries to use individual protection (IP) to mitigate the situation, it will be based on a lower value. This is because the value for IP 2016 for defined benefit pensions is the value of the pension as at 5 April 2016 and for IP 14 is the value as at 5 April 2014.

Read about individual protection in more detail.


Take the case of Max. He’s aged 59 and has an accrued pension in his defined benefit scheme of £40,000. He’s thinking of transferring to a personal pension to take advantage of the new pension freedoms and has been quoted a transfer value of £1.2m. A few months ago, he’d been quoted a value of £1m.

If Max goes ahead with the transfer, the immediate value of his transferred pension will be £200,000 over the current lifetime allowance of £1m.

However, assuming the accrued value of his pension at 5 April 2016 was also £40,000, this would mean the valuation for IP 16 is only £800,000. This means that IP16 is not available.

So as well as the usual merits or otherwise of transferring from a DB environment, an adviser needs to take into account the impact the transfer will have on the client’s lifetime allowance situation.  The transfer may still be in the client’s best interests of course but it’s one more issue that the advice needs to take into account.


  1. Defined benefit pension transfer values 'shooting up', BBC, 10 December 2016


Pensions-savings-retirement-piggy bank

Mothers missing out on millions

New HMRC figures show number of ‘mothers missing out on millions’ in pension rights has doubled in two years – Steve Webb Figures published on 24th March by HM Revenue & Customs show a doubling in the number of mothers missing out unnecessarily on vital pension rights because of a change in the rules on Child […]

Pensions Dashboards around the World

Steve Webb’s latest policy paper British savers risk being left in the ‘slow lane’ unless the UK Government takes a more active role in ensuring the successful delivery of a Pensions Dashboard. The report, ‘Pensions Dashboards around the World’, coincided with a major conference that was held on Monday 16 May and brought together experts […]

FAMR – a familiar response

Pension specialist Fiona Tait takes a look at the Financial Advice Market Review and assesses the three areas where it suggests improvements can be made With significant budget changes ruled out (for a while anyway), the pension community briefly turned its attention to the FCA’s final report on its Financial Advice Market Review (FAMR), hoping […]

Unfinished business?

Pension specialist Fiona Tait gives an update on three big announcements from the 2016 Budget – Pensions Advice Allowance (PAA), the Lifetime ISA (LISA) and the pension dashboard. £500 Pensions Advice Allowance What’s new Under current rules it is possible to deduct an adviser charge from a defined contribution pension fund to pay for financial […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com