Pension buy-in and buy-out: what it means for your DB pension

A pension buy-in is when your defined benefit scheme's trustees buy an insurance policy to cover some or all of the pensions they owe, while the scheme stays responsible for paying you. A buy-out goes further: an insurer takes over paying your pension directly, and the scheme can then be wound up. In both cases the aim is to make your promised pension more secure.

If you have had a letter from your scheme saying it is "insuring" members' benefits, "securing benefits with an insurer" or moving to a buy-out, this guide explains what that means in plain English, what changes for you and what stays the same.

Buy-in vs buy-out: the difference

Both are ways for a defined benefit (DB) scheme to pass the risk of paying pensions to an insurance company. The Pensions Regulator's guidance on new models and options for DB schemes describes the difference like this:

• A buy-in is a partial risk transfer. The trustees buy a bulk annuity policy from an insurer, and that policy becomes an asset of the scheme. The insurer pays the trustees, and the trustees still pay you. The trustees remain legally responsible for your pension.
• A buy-out is a complete risk transfer, subject to some residual risks. The insurer becomes directly responsible for paying members' pensions, usually through an individual policy in each member's name. The trustees can then wind up the scheme and end the link with the employer.

	Buy-in	Buy-out
Who pays your pension	The scheme's trustees (funded by the insurer)	The insurer, directly
Who you deal with	The scheme administrator	The insurer or its administrator
Does the scheme carry on?	Yes	No, it is usually wound up afterwards
Link with your employer	Continues	Ends once the scheme is wound up
Main safety net	The scheme, the employer and the Pension Protection Fund	The Financial Services Compensation Scheme

A buy-in is often a step towards a buy-out. Some schemes cover only their pensioners at first, then add deferred members later. Others hold a buy-in for many years without ever moving to a buy-out.

Why schemes do it

A DB scheme promises to pay a set income for life, so it carries risks: people living longer than expected, inflation, and investments falling short. Insuring those pensions removes the risks from the scheme and the employer. Buy-outs are usually the most expensive way to secure benefits, so a scheme normally needs to be well funded before it can afford one.

A buy-out can also happen after an employer has failed. If a scheme in a Pension Protection Fund (PPF) assessment has enough money to secure pensions above PPF compensation levels, the PPF explains that it will buy out benefits with an insurer rather than transfer into the PPF.

What changes for members

For most people, very little changes day to day. The point of a buy-in or buy-out is to secure the pension you have already built up, not to change it.

With a buy-in, you usually notice nothing at all. Your pension is still paid by the scheme, your statements still come from the scheme administrator, and the trustees still make decisions about your benefits.

With a buy-out, the main change is who pays you:

• You are issued with an individual policy from the insurer, setting out your benefits.
• Your pension is paid by the insurer, and your annual statements and correspondence come from the insurer or its administrator.
• Your scheme's trustees and employer no longer have any responsibility for your pension once the scheme is wound up.
• The insurer's policy should set out your benefits as they stood under the scheme rules, including yearly increases, the tax-free cash option and any spouse's or dependant's pension.

Before a buy-out, schemes often carry out a lot of tidying up. You may get letters asking you to check your personal details, your marital status or your service dates. Some schemes complete their GMP equalisation work at this stage too. It is worth replying promptly and keeping copies, because the insurer will pay your pension from the data the scheme gives it.

There is one area to look at carefully. Some schemes pay benefits that are discretionary rather than guaranteed in the rules, such as extra increases agreed by the trustees from time to time, or generous terms for retiring early. These may not carry over to the insurer. Options such as the rate at which pension is exchanged for tax-free cash, or the reduction for early retirement, may also be set by the insurer once it takes over. Your scheme's announcement should explain this, and you can ask the trustees if it doesn't.

FSCS vs PPF protection

The protection behind your pension changes when a scheme moves from a buy-in to a buy-out, and this is the part many people find confusing.

While your scheme is still running, including after a buy-in

Your pension is still a promise from a DB occupational pension scheme. If the employer becomes insolvent and the scheme can't afford to pay at least PPF levels of benefits, the PPF can step in. The Financial Services Compensation Scheme (FSCS) says it can't protect occupational pension schemes if they fail, and that these may be protected by the PPF instead.

A buy-in policy is an asset held by the trustees. It strengthens the scheme's finances, but you don't hold the policy yourself. Our guide to what happens to your DB pension if your employer goes bust explains how PPF compensation works, including the 100% and 90% levels.

After a buy-out and wind-up

Once the scheme has bought out and been wound up, there is no longer a DB scheme for the PPF to protect. Your pension is now an insurance policy with a UK insurer, so the safety net is the FSCS rather than the PPF.

The FSCS explains that annuities are a common example of a "contract of long-term insurance" and that, where it can pay, it covers these at 100% with no upper cap. It also says it can't confirm whether a particular plan counts as a contract of long-term insurance, so it's sensible to ask the trustees or the insurer to confirm how your policy is protected.

Insurers selling annuities are authorised by the Prudential Regulation Authority and regulated by the FCA and the PRA. You can check any firm on the FCA Register.

Can you still transfer, and do transfer values change?

This depends on where your scheme is in the process, and whether your pension has already started.

If your pension is already in payment, you usually can't transfer it, buy-out or not.

If you are a deferred member and the scheme is still running, including after a buy-in, the usual rules on asking your scheme for a cash equivalent transfer value (CETV) carry on. Trustees set the basis for working out transfer values with advice from the scheme actuary and review it from time to time, so values can go up or down for many reasons. Our guide to what the transfer value of a pension is explains how CETVs work.

After a buy-out, your options are set by the insurer's policy, not the scheme rules. Whether you can transfer before your pension starts, and how any transfer value is worked out, depend on the policy terms. A transfer value from the insurer may be higher or lower than one the scheme would have offered, so if a transfer is something you want to understand, ask about it before the buy-out completes.

Some schemes offer members options before a buy-out, such as an enhanced transfer value. An offer like this doesn't change what you would be giving up. The FCA's starting assumption is that a transfer is unlikely to be suitable for most people, and a buy-out generally makes a DB pension more secure, not less.

If the value of your safeguarded benefits is more than £30,000, the law requires you to take regulated advice from an FCA-authorised firm with the pension transfer permission before you can transfer. The Pensions Regulator's guidance on DB to DC transfers explains that trustees must check this advice has been taken. Our guide to defined benefit pensions covers the advice process in more detail.

A buy-out letter can be followed by unexpected calls or messages about your pension. Be wary of anyone who contacts you out of the blue, and check the FCA ScamSmart site before dealing with any firm.

Questions to ask the trustees

Your scheme should write to explain what is happening, and the trustees or administrator should be able to answer questions. You might find these useful:

1. Is this a buy-in or a buy-out, and which members does it cover?
2. If it's a buy-out, when will the insurer take over paying my pension, and when will the scheme be wound up?
3. Which insurer has been chosen, and how will my policy be protected by the FSCS?
4. Will all my benefits be secured exactly as they are now, including yearly increases and any spouse's or dependant's pension?
5. Are any discretionary benefits or practices, such as extra increases or early retirement terms, likely to change or stop?
6. How will tax-free cash and early retirement be worked out once the insurer takes over?
7. Can I still ask for a transfer value, both now and after the buy-out, and how will it be calculated?
8. Will I be offered any options before the buy-out, and is independent help available if I am?
9. Who should I contact with questions after the buy-out?

Getting help

For free, impartial guidance on your pension, contact MoneyHelper. If you are 50 or over, you can book a free Pension Wise appointment about your options for defined contribution pensions.

Frequently asked questions

What is a pension buy-out?

A pension buy-out is when a DB scheme's trustees pass the responsibility for paying members' pensions to an insurance company. Each member usually gets an individual policy with the insurer, and the insurer pays the pension directly. The scheme can then be wound up and the link with the employer ends.

What is a pension buy-in?

A pension buy-in is an insurance policy that the trustees buy and hold as an asset of the scheme. The insurer pays the trustees, who carry on paying members as before. The scheme continues and the trustees remain responsible for your pension.

Will my pension go down after a buy-out?

A buy-out is meant to secure the benefits you are entitled to under the scheme rules, not reduce them. Discretionary benefits, which the scheme was never obliged to pay, may not carry over, and some options may be worked out on the insurer's terms. Ask the trustees to confirm what applies to you.

Is my pension still protected by the PPF after a buy-out?

Not once the scheme has bought out and been wound up, because there is no DB scheme left for the PPF to protect. Your pension is then an insurance policy, and the FSCS says it covers annuities and other contracts of long-term insurance at 100% with no upper cap where it can pay.

Can I transfer my pension after a buy-out?

It depends on the insurer's policy terms and on whether your pension has started. Pensions already in payment usually can't be transferred. If you are interested in your transfer options, ask the trustees before the buy-out completes. Regulated advice is required by law if your safeguarded benefits are worth more than £30,000.

If your DB pension is worth £50,000 or more and you would like to understand how transfers and the advice process work, you can book a free, no-advice chat. It is general information, not advice. If your pension is worth less than £50,000, MoneyHelper is a good place to start.