UK Defined Benefit Pensions in Australia: Transfer or Keep the Guaranteed Income?

For Australians who have previously worked in the UK, a Defined Benefit pension can represent a significant part of their retirement savings.

When a UK pension scheme provides a substantial transfer value, it can understandably attract attention.

£500,000 today, or an inflation-linked pension for life?

At first glance, the transfer value provides an easy number to focus on. But it doesn’t necessarily tell you whether transferring your UK pension to Australia would improve your retirement position.

The real comparison is between the capital being offered and the benefits you would surrender to receive it.

1. What is a UK Defined Benefit pension?

A Defined Benefit pension, sometimes referred to as a final salary or salary-related pension, is fundamentally different from a Defined Contribution pension.

With a Defined Contribution pension, you generally have an identifiable investment fund.

A Defined Benefit pension instead promises benefits calculated under the rules of the pension scheme. These will typically include a retirement income payable for life.

Depending on the scheme, the pension may also provide increases to income in retirement and benefits for a spouse or dependant following the member’s death.

This distinction is important because transferring a Defined Benefit pension generally means giving up those promised benefits in exchange for a capital transfer value.

2. What does the transfer value actually represent?

A Cash Equivalent Transfer Value (CETV) is the amount a UK Defined Benefit pension scheme is prepared to transfer in exchange for the member surrendering their benefits under the scheme.

A CETV of £300,000, £500,000 or even more can look compelling.

But the transfer value shouldn’t be considered in isolation.

The important question is:

What benefits are you being asked to surrender in exchange for that amount?

That requires considerably more analysis than simply comparing the transfer value with the current annual pension.

3. What guaranteed benefits could you be giving up?

The precise benefits depend upon the individual scheme, but a UK Defined Benefit pension may include valuable features such as:

• A guaranteed retirement income for life.
• Increases to pension income.
• Spouse or dependant benefits.
• Scheme-specific guarantees or protections.

These benefits can be difficult to replicate once surrendered.

For example, somebody who transfers their Defined Benefit pension and subsequently invests the proceeds assumes responsibility for producing their own retirement income from that capital.

Under the original scheme, responsibility for providing the promised pension generally remains with the pension scheme.

That difference is fundamental to the transfer decision.

4. What risks change after a transfer?

A pension transfer doesn’t simply change where the money is held.

It can also change who carries the risk.

With a Defined Benefit pension, the scheme is responsible for providing the benefits promised under its rules.

Following a transfer, the member may assume greater responsibility for risks including:

• Investment risk; investment returns may be higher or lower than expected.
• Sequencing risk; poor investment returns around retirement can have a disproportionate effect when withdrawals are being made.
• Longevity risk; the transferred capital may need to support retirement expenditure for an unknown period.
• Inflation risk; retirement income needs to maintain purchasing power over potentially several decades.

Those risks don’t automatically mean retaining the Defined Benefit pension is preferable.

But they do need to be considered when comparing the alternatives.

5. Does living in Australia change the decision?

Living permanently in Australia can naturally lead to the question:

Why leave my pension in the UK when the rest of my retirement assets are in Australia?

There can be practical reasons for wanting retirement assets in one country.

However, geography alone shouldn’t determine whether a pension is transferred.

For an Australian resident, the analysis may also need to consider:

• Australian superannuation.
• UK and Australian taxation.
• Currency exposure.
• Contribution and transfer rules.
• Retirement income requirements.
• Other investments and assets.
• Estate-planning objectives.

The UK pension therefore needs to be considered as part of the individual’s overall Australian retirement strategy, rather than as an isolated overseas asset.

6. Why can’t the transfer value answer the question?

Consider two people who are each offered a £500,000 transfer value.

The headline number is identical.

But one may have substantial Australian superannuation, other guaranteed retirement income and a high capacity for investment risk.

The other may depend heavily upon their UK pension to provide secure retirement income.

Their pension values may be identical.

Their appropriate retirement strategies may be completely different.

Age, health, dependants, other assets, income requirements, attitude to investment risk and retirement objectives can all influence the analysis.

That’s why the transfer value alone can’t determine whether somebody should transfer.

7. Transfer or retain, how should the decision be made?

The starting point shouldn’t be:

“How do I transfer my UK pension to Australia?”

A better starting point is:

“What outcome am I trying to achieve?”

That requires understanding the existing pension, the benefits being surrendered, the risks being assumed and how each alternative fits into the individual’s wider financial position.

Sometimes the analysis may support transferring.

Sometimes retaining the guaranteed UK pension benefits may be appropriate.

And sometimes another strategy may be considered.

The purpose of specialist pension transfer advice isn’t simply to facilitate a transfer.

It’s to determine which strategy is appropriate for the individual.

The bottom line

A large UK Defined Benefit pension transfer value can understandably attract attention.

But transfer value and pension value aren’t necessarily the same thing.

The transfer value tells you what capital may be available if you surrender the existing pension benefits.

It doesn’t, by itself, tell you whether doing so would improve your retirement position.

For somebody living in Australia, the decision should consider both sides of the equation:

What would you receive?

and

What would you give up?

Only then can the UK pension be properly considered alongside Australian superannuation and the rest of the individual’s retirement strategy.

The question isn’t simply “How much can I transfer?”

It’s “Would exchanging these benefits for the transfer value improve my retirement position?”

This information is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining professional advice appropriate to your circumstances before making financial decisions.