DB transfers – three things to think about

Advisers are receiving an increasing number of requests from clients looking to transfer their pension from defined benefit schemes to personal pensions.
Three things to think about

Defined benefit transfers are a complicated area of advice.

There are three themes in the queries we receive on the subject:

  • lifetime allowance and protection
  • equalisation
  • Guaranteed Minimum Pension (GMP)

This is a complicated area of advice and the queries we’re receiving fall under three themes: 

  • lifetime allowance and protection
  • equalisation
  • Guaranteed Minimum Pension (GMP)

We look at each of them in turn.

Lifetime allowance

The way in which benefits are tested against the lifetime allowance is different for defined benefit and defined contribution arrangements.

For a defined benefit arrangement it is the value of the annual pension multiplied by 20. If some of the pension is commuted for a lump sum, it is the pension after commutation that is multiplied by 20.  The value of the lump sum is added to this value.

Under a defined contribution arrangement it is the total market value of the funds/assets held.

This can result in a large difference between the value under a defined benefit arrangement and the value under a defined contribution arrangement when tested against the lifetime allowance. Normally with the defined benefit arrangement having a lower value than the defined contribution. 

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 defined benefit scheme.

The problem isn’t helped by the fact that if the client tries to use individual protection to mitigate the situation, it will be based on a lower value (defined benefit). This is because the value for individual protection 2016 is the value of the pension as at 5 April 2016, when they are still in the defined benefit arrangement. Read about individual protection in more detail.

This is best shown with an example.

Take the case of Max.  He’s aged 59 and has an accrued pension in his defined benefit scheme of £43,000.  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 £1.2 million.  

If Max goes ahead with the transfer, the immediate value of his transferred pension will be £126,900 over the current lifetime allowance of £1,073,100.

However, assuming the accrued value of his pension at 5 April 2016 was £40,000 (he has no other pension benefits), so the valuation for individual protection 2016 is only £800,000. This means that individual protection is not available nor was fixed protection as he has accrued benefits since April 2016.

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

Equalisation of pensions

Prior to the Barber case in 1990, defined benefit pension schemes typically provided pensions at age 60 for women and age 65 for men.  After Barber, schemes had to change their rules so benefits were paid at the same age for men and women. They could be equalised at the higher age or any age between the two ages but until a pension scheme got round to changing their rules, they were deemed to be equalised at the lower age. 

The scheme rules will state the legal process by which the rules can be changed. So if the proper process isn’t followed, it could be that the scheme thinks it’s equalised at say age 65 when in fact it could be that the lower age applies. 

Most providers need confirmation that benefits in the scheme have been equalised before the transfer can go ahead, otherwise the transfer value may not reflect the correct value of the benefits.
Usually it’s a formality but sometimes the ceding scheme isn’t able to provide the necessary confirmation and the transfer can’t go ahead.

Guaranteed Minimum Pension (GMP)

Defined benefit schemes which were contracted-out before 1997 have to provide a GMP roughly equivalent to the earnings-related State pension the member would have received if they’d stayed in the State scheme.

This runs alongside the scheme pension and at age 60 for women or 65 for men, the higher of the two pensions has to be paid.

In a transfer, the cost of the GMP at the relevant age has to be covered by that part of the transfer value monies that can be used for this purpose. Often it’s not, because the cost doesn’t actually have to be met until age 60/65.

Post-1997 funds (when GMP stopped accruing) and additional voluntary contributions can’t be used to cover the GMP cost. So just because the total transfer value is higher than the GMP cost at age 60/65 doesn’t necessarily mean that the part of the transfer value that can be used to cover it (sometimes known as the reserved amount) is high enough.

If the GMP cost isn’t covered, the transfer can’t happen. The receiving scheme needs confirmation that the GMP cost at 60/65 is covered by the reserved amount.

If the cost isn’t covered the transfer can’t go ahead unless the ceding scheme is willing to increase the transfer value to the point that it is covered.

The Lloyds Banking case 

Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc and others

As you will be aware the above case was looked at by the High Court, the initial decision on 26 October 2018, confirmed that GMPs do have to be equalised and a decision for the Lloyds Banking Group Pension has been given.  A further decision was made on 20 November 2020 on previous transfer payments. 

These articles by Sackers & Partners LLP gives some background to the case.

The Pensions Administration Standards Association’s GMP equalisation working group have produced the following document


The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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