Case Study: DB Pension with a Protected Pension Age: When Pre-2006 Rules Change Everything

A protected pension age lets some members of older pension schemes take their benefits before the normal minimum pension age, which is 55 now and rises to 57 on 6 April 2028. That protection is usually lost if you transfer to a new pension on your own. In this illustrative example, losing it is one of several reasons a regulated adviser would most likely conclude that the DB pension should be kept.

At a glance

• Illustrative example: "David", aged 53
• Situation: deferred DB pension from a scheme whose rules before 6 April 2006 gave him a protected pension age of 50
• CETV: £345,000
• Other pension: DC pot of £38,000 with his current employer
• Goal: some income in his mid-fifties; wondering whether a transfer would give more flexibility
• Likely outcome of regulated advice: keep the DB pension; the protected pension age and the guaranteed income are too valuable to give up

When people think about pension transfers, they tend to focus on the headline number: the Cash Equivalent Transfer Value (CETV). Sometimes, though, the most important factor has nothing to do with money. This hypothetical example looks at how a single detail, a protected pension age (PPA), can change the whole picture.

Background: who is David?

Imagine David, who is 53 and works as a senior manager for a logistics company in the East Midlands. He has two pensions:

• A deferred defined benefit (DB) pension from a manufacturing firm he joined in 1995 and left in 2007. The scheme's normal retirement age is 60, but before 6 April 2006 its rules gave members an unqualified right to take their pension from 50. David meets the conditions to keep that right as a protected pension age of 50.
• A defined contribution (DC) pension with his current employer, worth about £38,000.

David has read about the pension freedoms and assumed he could not touch any pension until his mid-fifties at the earliest. He was surprised to learn he could take his DB pension now, although at a reduced rate. He has also been wondering whether transferring to a SIPP would give him "more flexibility".

Key point: what is a protected pension age?

Before 6 April 2006 (known as "A-Day"), many occupational schemes let members take their pension from 50, or even earlier in some jobs. When the tax rules changed in 2006, the minimum pension age became 50, then rose to 55 in 2010. People who already had an unqualified right under their scheme's rules to take benefits earlier could keep that earlier age as a protected pension age, if they met certain conditions. The protection belongs to that scheme membership. It is usually lost on an individual transfer, although it can sometimes be kept on a "block transfer", where two or more members move together to the same new scheme.

The CETV: a generous-looking offer

David's former employer's scheme has quoted a CETV of £345,000. If he stays, the scheme will pay:

• £14,200 a year from age 60, increasing with CPI, capped at 2.5% a year
• A separate tax-free lump sum of about £42,600 at 60
• A spouse's pension of £7,100 a year if he dies first

The CETV is around 24 times the annual pension at 60. That multiple can look generous, but transfer values move with gilt yields and other factors, and a large number on its own says little about whether a transfer would be suitable. My guide to what is the transfer value of a pension explains how CETVs are worked out.

David has done some reading and likes the idea of a SIPP: flexible drawdown, his own investment choices and the pension freedoms. He would like some income from about 55. His question is simple: should he transfer?

Step one: understanding the protected pension age

Before any financial modelling, a regulated adviser would need to establish exactly what David would be keeping or giving up on each path.

David's scheme was set up long before A-Day, and its rules at the time gave members an unqualified right to take benefits from age 50. He was a member on the relevant dates, so under the transitional rules in the Finance Act 2004 he keeps a protected pension age of 50 as a deferred member.

That means David could take this DB pension now, at 53. He has chosen not to so far, because taking it early means a reduction. In this example the scheme reduces the pension by about 4% for each year before 60.

Important: what a transfer would mean for David's access age

If David transferred his CETV to a new SIPP on his own, his protected pension age would almost certainly be lost. The SIPP would follow the normal minimum pension age: 55 until 5 April 2028, then 57. David turns 55 after 6 April 2028, so he would most likely have to wait until 57 to take any money from the SIPP. A separate protected age of 55 exists for some members under the transition rules for the 2028 change, but a new SIPP opened now would not normally give him that. Once lost, a protected pension age cannot be restored.

The modelling: three scenarios

A regulated adviser would typically compare a few scenarios. The figures below are illustrative.

Scenario A: keep the DB pension and take it at 60 (the scheme's normal retirement age)

• Pension from 60: £14,200 a year, increasing with CPI up to 2.5%
• Tax-free lump sum at 60: £42,600
• Spouse's pension: £7,100 a year
• On a simple basis, ignoring increases and investment growth, the income paid would exceed the CETV somewhere between his early and mid-eighties, well within typical life expectancy

Scenario B: keep the DB pension and take it at 55

Taking the pension five years early, at roughly 4% a year, would reduce it by about 20%, to around £11,360 a year. The lump sum and spouse's pension would be reduced in proportion. The income would still be guaranteed for life, still increase with inflation up to the cap, and still include a pension for his wife. Because of his protected pension age, David could start it at any point from now, if he needed to.

Scenario C: transfer to a SIPP and take money from 57

• CETV of £345,000 invested in a SIPP
• Assumed growth of 4.5% a year after charges for four years (from 53 to 57): pot of about £411,000
• 25% tax-free cash: about £103,000
• Remaining pot: about £308,000 for drawdown
• Income at a 3.5% withdrawal rate: about £10,800 a year
• No guaranteed income, no built-in spouse's pension, all the investment risk on David
• No protection against living longer than expected
• No access at all before 57, unless he could rely on a protected age in the new scheme, which is unlikely

Key finding: The SIPP route would give David a larger tax-free lump sum, which some people value. But even at a cautious 3.5% withdrawal rate, the income of about £10,800 a year would be lower than the DB pension at 57 (about £12,500 a year after a 12% reduction) or at 60 (£14,200), and that is before taking account of inflation increases, the spouse's pension and the risk of the pot running out. He would also lose the ability to take income before 57.

Looking ahead: why flexibility of access matters

The rise in the normal minimum pension age to 57 on 6 April 2028 makes David's protected pension age more valuable, not less.

David has no plans to take his DB pension right now. But his PPA gives him real options. If his circumstances changed, for example through ill health, redundancy or caring for a relative, he could start an income straight away rather than wait until 57. That option is hard to put a figure on, but it is real.

Likely outcome of regulated advice

After a full advice process, including an appropriate pension transfer analysis, a transfer value comparator, and an assessment of David's attitude to risk, capacity for loss and wider finances, a regulated adviser would most likely conclude: keep the DB pension.

The main reasons a regulated adviser would typically weigh in a case like this:

1. Loss of the protected pension age: a transfer would almost certainly remove it permanently, and with it David's ability to take income before 57.
2. Guaranteed income: even after early retirement reductions, the DB income compares well with what a SIPP could sustainably provide from the same money.
3. Longevity protection: the DB pension pays for life, however long David lives and whatever markets do. A SIPP can run out.
4. Spouse's pension: David is married. The built-in spouse's pension would be expensive to replicate.
5. Inflation protection: CPI-linked increases (up to 2.5%) help protect the pension's buying power. A drawdown pot needs active management to do the same.

This is consistent with the FCA's starting assumption that a transfer is unlikely to be suitable for most people.

What about the DC pot?

David's £38,000 DC pension is a different matter. It already sits within the pension freedoms and gives him flexible access from the normal minimum pension age. An adviser might typically suggest using the DC pot for flexibility, alongside the DB pension taken at or near 60, or earlier if needed. DB for the secure base, DC for flexibility.

What David might do next

In an example like this, David might decide to keep his DB pension and review the investment choices in his DC pension in light of his plans.

His plan might look like this:

• From the mid-fifties, if needed: take flexible income from the DC pot (subject to the minimum pension age for that pension), or start the reduced DB pension early using his protected pension age
• Age 60: take the DB pension in full (£14,200 a year plus the £42,600 lump sum) if he has not started it earlier
• State Pension: from 67, adding another layer of guaranteed income

Key lessons from this example

1. The CETV is only part of the story

A CETV of £345,000 sounds like a lot of money. But without understanding what you would give up, including guaranteed income, a spouse's pension, inflation increases and, in David's case, a protected pension age, the number alone tells you very little.

2. A protected pension age is valuable and easy to overlook

Protected pension ages are relatively uncommon. They apply to members of schemes whose rules gave an unqualified right to early retirement before A-Day, and to some members under the separate rules for the 2028 change. If you think you might have one, check with your scheme before making any transfer decision.

3. Flexibility has a cost

The pension freedoms and the flexibility of a SIPP are valuable. But they come with investment risk, sequencing risk and the risk of living longer than your money lasts. For many people with meaningful DB pensions, the certainty of a guaranteed income outweighs the flexibility.

4. Using DB and DC pensions together often works well

Where someone has both DB and DC pensions, using each for a different purpose and at a different time can work better than turning everything into one pot.

Frequently asked questions

Q: Can I transfer a DB pension with a protected pension age to a SIPP?

A: Yes, but on an individual transfer you will usually lose the protected pension age. The SIPP will follow the normal minimum pension age: 55 now, rising to 57 on 6 April 2028. It can sometimes be kept on a block transfer. Regulated advice is legally required before transferring safeguarded benefits worth over £30,000.

Q: How do I find out if I have a protected pension age?

A: Ask the scheme administrator or trustees whether a protected pension age applies to your benefits, and on what conditions. For pensions built up before 6 April 2006, the original scheme rules matter. For the separate protection linked to the 2028 change, what matters is whether your scheme's rules gave you an unqualified right to take benefits before 57 on the relevant date.

Q: What are early retirement reductions on a DB pension?

A: They vary by scheme. Many reduce the pension by a few per cent for each year before the normal retirement age. Some schemes are more generous, particularly for long-serving members. Your scheme booklet or administrator can tell you.

Q: Is a DB pension always worth keeping?

A: Not always. There are circumstances where a transfer may be suitable, for example for some people in serious ill health. But the FCA's starting assumption is that a transfer is unlikely to be suitable for most people, and the adviser must show clearly why a transfer would be suitable for you.

Getting help

This hypothetical example shows how complex pension transfer decisions can be, and why regulated advice matters. Many people do not know they have a protected pension age, and losing it through a transfer cannot be undone.

If you have a deferred DB pension, particularly from an employer you joined before 2006, it is worth asking the scheme whether a protected pension age applies. For free, impartial guidance, try MoneyHelper or, if you are 50 or over, Pension Wise. Be wary of anyone who contacts you out of the blue offering early access to your pension, and check the FCA ScamSmart site before acting.

If you would like a free chat about how DB transfers and the advice process work, you can get in touch. The chat gives general information, not advice. If you then want regulated advice on a transfer value of £50,000 or more, I can introduce you to an FCA-authorised firm that holds the pension transfer permission. Arthur Browns may receive a fee from the firm we introduce you to if you become their client.

This is a hypothetical example. David is not a real person and the figures are examples only. It is not advice and should not be relied on as a basis for any decision.