Transferring a Million+ Pension

You can transfer a defined benefit (DB) pension worth more than £1 million, but you must take regulated advice from an FCA-authorised adviser with the pension transfer permission first, and the FCA's starting assumption is still that a transfer is unlikely to be suitable. For very large pensions, the tax-free cash cap, the 2027 inheritance tax change and the way the Pension Protection Fund now works all mean the arguments look different from a few years ago. This illustrative example shows what a regulated adviser would weigh.

Illustrative Example: David's Situation

Quick summary

• Illustrative example: "David", 55
• DB transfer value (CETV): £1,400,000
• DB pension: around £55,000 a year promised from 65
• Family: not married, no partner, two adult children
• Other savings: £350,000 in cash deposits, no debts
• Spending: around £40,000 a year
• Work: plans to keep working until 65, earning £80,000 a year
• Likely outcome of regulated advice: not clear-cut. Under today's rules, two of David's main reasons for transferring carry much less weight, and keeping the DB pension may well be the conclusion.

Imagine David. He wants to understand the benefits and drawbacks of transferring his DB pension, and he has several concerns.

The health of his scheme. A few years ago, his scheme offered him a reduced transfer value because it was significantly underfunded and the employer wanted to reduce its liabilities. He turned it down because he didn't want to accept less. Now the scheme is offering a full transfer value, and he wonders whether he should take it.

The Pension Protection Fund. David knows the Pension Protection Fund (PPF) pays compensation if a scheme fails because the employer is insolvent. He has read that PPF compensation used to be capped, which would have meant a large cut to a pension the size of his.

What happens if he dies. David had a cancer scare a few years ago. He is not married and has no partner, so his scheme may pay little or nothing in death benefits if he dies before or soon after retiring. He wants anything left to go to his two adult children.

His financial security. He has substantial cash savings, no debts and a good salary, and expects his savings to keep growing until he retires at 65.

How the Picture Has Changed Since 2021

This example was first written in 2021. Several rules that mattered then have changed, and they change the analysis.

The PPF Compensation Cap

PPF compensation used to be subject to a cap for people below their scheme's normal pension age, which could significantly reduce very large pensions. Following a Court of Appeal ruling in 2021, the PPF no longer applies that cap. For someone below normal pension age, the PPF usually pays 90% of the pension, with more limited inflation increases than many schemes provide. That is still less than the full scheme pension, but the gap is far smaller than it was under the cap. You can read how compensation works on the PPF website.

The Lifetime Allowance and Tax-Free Cash

In 2021, the Lifetime Allowance was a major issue for a pension of this size. It was abolished on 6 April 2024 and replaced by:

• the Lump Sum Allowance (LSA) of £268,275, which caps the tax-free cash most people can take from all their pensions
• the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100, which caps tax-free lump sums in your lifetime and on death before 75

For a £1.4 million transfer value, 25% would be £350,000, but tax-free cash would be capped at £268,275 unless David held an old protection. Lump sums paid on death before 75 above his remaining LSDBA would be taxed as the beneficiary's income. Our article on pension tax allowances and DB transfers explains more.

Inheritance Tax From April 2027

In 2021, pension funds usually sat outside the estate for inheritance tax, which made a transferred fund an attractive way to pass money to children. From 6 April 2027, unused pension funds and most pension death benefits are due to come into the scope of inheritance tax. As David isn't married, there is no spouse exemption. A transferred fund left to his children could face inheritance tax, and if he died after 75 they would also pay income tax on what they took out. Our article on the 2027 pension IHT overhaul explains the change.

How Advice Is Charged

Since 1 October 2020, contingent charging for DB transfer advice has been banned in most cases. David would pay for advice whatever the recommendation.

What a Regulated Adviser Would Weigh

An adviser with the pension transfer permission would start from the FCA's assumption that a transfer is unlikely to be suitable, and would carry out an appropriate pension transfer analysis, including a transfer value comparator and cashflow modelling. In David's example, they would weigh points on both sides.

The reasons David gives for wanting to transfer:

• He has no spouse or partner, so the scheme's survivor benefits may be of little use to him
• He wants to leave money to his children, which a DB pension may not allow
• He has substantial other savings and a good income, so he could absorb some investment losses
• His health history may shorten the time the pension is paid

The points an adviser would weigh against those reasons:

• £55,000 a year, guaranteed and increasing for life, would be very expensive to buy elsewhere, and a transferred fund would need to match it through investment growth
• With the PPF cap no longer applied, scheme failure would cost him much less than he feared
• From April 2027, a transferred fund left to his children is expected to face inheritance tax, and possibly income tax too
• Tax-free cash from a transferred fund would be capped at £268,275
• His spending of £40,000 a year is well covered by the DB pension, so he doesn't need the flexibility of drawdown to meet his needs
• A transferred fund of this size would need careful, ongoing investment management and would carry investment and longevity risk

Other ways to meet his aims without a transfer:

• Life insurance written in trust for his children, which could provide a lump sum on death outside his estate
• Using his DB income during retirement to make regular gifts to his children, which can be exempt from inheritance tax if they come from surplus income
• Reviewing what death benefits the scheme does offer, such as any lump sum or guarantee period, and naming his children where the scheme allows

Likely Outcome of Regulated Advice

In 2021, an example like David's was one of the less common situations where an adviser might have concluded a transfer could be suitable. Under today's rules, the conclusion is less clear-cut. Two of his main reasons, the PPF cap and the inheritance tax advantage of a pension, carry much less weight than they did. A regulated adviser would need clear evidence that a transfer was in his best interests, and keeping the DB pension, with life insurance and gifting to help his children, may well be the likely outcome.

The decision would depend on a full, personal analysis. No two cases are the same, and this example doesn't mean a transfer is right or wrong for anyone else.

Getting Regulated Advice and Help

Free, impartial guidance is available from MoneyHelper, and if you're 50 or over you can book a Pension Wise appointment about your DC pensions. Be wary of anyone who contacts you out of the blue about your pension, and check the FCA's ScamSmart pages first.

I don't give pension transfer advice. If it would help, you can book a free, no-obligation chat about how DB transfers and the advice process work. It's general information, not advice. If you then want regulated advice, 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. Introductions are for UK residents with a transfer value of £50,000 or more.

Frequently asked questions

Can I transfer a defined benefit pension worth over £1 million?

Yes, it is possible, but if your safeguarded benefits are worth more than £30,000 you must take advice from an FCA-authorised adviser with the pension transfer permission first. The FCA's starting assumption is that a transfer is unlikely to be suitable for most people. A large transfer involves a detailed analysis of the transfer value, the scheme's funding, your circumstances and the tax position, including the Lump Sum Allowance of £268,275 and the Lump Sum and Death Benefit Allowance of £1,073,100.

What is the Pension Protection Fund and what are its limits?

The Pension Protection Fund (PPF) pays compensation if your DB scheme can't pay your pension because your employer is insolvent. If you are below your scheme's normal pension age when the employer fails, it usually pays 90% of your pension. If you are already over that age, it usually pays 100%. Increases are often lower than the scheme would have paid. The PPF stopped applying its compensation cap following a court ruling in 2021. See the PPF website for details.

What happens to a large pension when you die?

In a DB scheme, death benefits usually go to a spouse, civil partner or dependants, and payments to adult children may be limited or not available. A DC pension, such as a SIPP, can usually pass to anyone you nominate. But from 6 April 2027, unused pension funds and most pension death benefits are due to come into the scope of inheritance tax, so passing on a DC fund is likely to be less tax-efficient than it was.

Do I need financial advice to transfer a large defined benefit pension?

Yes. By law, if your safeguarded benefits are worth more than £30,000, you must take advice from an FCA-authorised adviser with the pension transfer permission before transferring. For large transfers, the advice includes an appropriate pension transfer analysis with a transfer value comparator, cashflow modelling and a written suitability report.

What are the risks of transferring a large defined benefit pension?

You would give up a guaranteed income for life, inflation protection and any survivor's pension. Responsibility for investing the money and making it last passes to you. Investment returns aren't guaranteed, and poor returns or high withdrawals could reduce your income. The 2027 inheritance tax change and the cap on tax-free cash also affect the comparison. Any decision should follow regulated advice.

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This is an illustrative example. David is hypothetical, and all figures are examples only, based on assumptions that may not apply to you. Nothing in this article is advice or a recommendation to transfer or keep any pension. Please read our important information.