On the face of it, transferring a defined benefit pension for an annuity would seem like a bad idea.

After all, a defined benefit pension is one that will pay you a secure income for life, the same as an annuity and are generally more generous.

It usually takes a much larger defined contribution pension to buy an annuity at the same level of income as a defined benefit pension.

However, defined benefit pensions are not designed to be personal to you. They are usually a scheme designed with the initial employer to cover the entire workforce.

An annuity can be tailored to your specific needs and with interest rates currently rising it might be time to take another look.


5 benefits of changing a defined benefit pension for an annuity


An annuity is a secure pension income that you arrange through an annuity provider using a defined contribution pension.

You can decide what type of annuity and how much of your pension you would like to use.

A defined benefit pension (also known as a final salary pension) secures your income through the scheme itself.

The only thing you can usually change about a defined benefit pension is whether you take a high tax free lump sum or more income.

In order to switch a defined benefit pension for an annuity you would first need to transfer your defined benefit pension to a defined contribution pension. This is normally only possible with deferred private sector defined benefit pensions and depending on the value of the benefits, you would likely need to seek financial advice.

As interest rates rise this tends to increase the income offered through annuities. However rising interest rates also reduce the transfer value offered from defined benefit pension schemes.

So rising interest rates alone a not a good reason to transfer a defined benefit pension for an annuity however there are other reasons why it could make sense.


#1 – You’re single

Defined benefit pensions typically provide a dependants pension on your death and this is therefore built in to the level of income they offer.

With annuities you can choose a single life option meaning if you have no partner or other dependants the pension income will die with you.

The benefit of this if your single is that the income you receive could be higher as the annuity doesn’t have to pay out for as long.


#2 – You want your partner to receive more income on death

If you do have a partner then a defined benefit pension usually only pays out one half of your income on your death for the rest of your partner’s life.

You may wish to secure a higher income on your death for your partner through an annuity.


#3 – You want more income now

Defined benefit pensions typically offer some form of inflation protection on the income they pay out.

This means the initial income you receive will partly keep up with the rising cost of living over time.

However, with an annuity you can select a ‘level’ option. This means your income will not increase and will remain the same for the rest of your life.

It may sound silly to not go for the inflation protection however if you did go for the level annuity you may find your starting income is higher as the annuity provider doesn’t have to budget for future increases.

A higher income initially could suit you if you plan to spend more whilst you are younger and less in the later years of your retirement.


#4 – A shortened life expectancy

Following on from the above point, you may also want a higher income now if your life expectancy is short.

Annuity providers often offer even higher income rates for those in poor health.


#5 – The defined benefit pension provides too much income

It may be the case that your defined benefit pension income is far more than you need to cover all your core spending.

Another option could be to transfer to a defined contribution pension and then only use some of the new pension to purchase an annuity that provides the level of income you need.

You can then use the remaining defined contribution pension to make flexible one-off withdrawals as and when you need them.

You could even leave it untouched and use it as an Inheritance Tax planning tool.


Financial advice is definitely recommended


Deciding which pension is best to have is never clear cut and will depend on your own circumstances.

It definitely makes sense to explore all of your options rather than just sticking with the first option provided to you.

Financial advice is definitely recommended.

If you would like to organise your pensions and get the right investment strategy that will deliver your retirement then please get in touch for a free no obligation 15-minute call. We have carried out hundreds of pension reviews for our clients and have created many happy retirements. This could be you too!

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.