Should UK Expats Transfer Their Defined Benefit Pension?

A DB pension is a retirement scheme that promises a guaranteed income for life. The amount you receive is typically calculated using your salary and length of service with your employer. 

The scheme is responsible for investing the funds and ensuring there is enough money to pay the promised benefits, not you. 

When it comes to deciding whether or not to transfer your DB pension, the biggest hurdle is knowing where to start.

Transferring or reviewing a DB pension is a complex process, and only advisers with specialist UK qualifications can provide guidance. 

Finding a firm that is both willing and authorised to advise clients outside the UK can be challenging – making the choice of adviser your first, and most important, step. 

Transferring out of a defined benefit pension can be highly risky, especially for expats. Scammers often target those overseas with unsuitable or fraudulent schemes, leading to the loss of valuable guaranteed income. 

Even in legitimate cases, there are dangers such as currency mismatch – where income is paid in GBP but expenses are in another currency – and unexpected tax liabilities due to differences between UK and local tax laws. 

Moving money out of a DB scheme is unlikely to be in the best interests of most people, as it means giving up a guaranteed, inflation-protected income for life. 

It is also important to remember that a DB pension transfer is irreversible – once you leave the scheme, you cannot go back. 

And if you transfer into a defined contribution pension, you take on investment risk. The value of your pension can go down as well as up, and your retirement income is not guaranteed. 

There are several reasons expats might consider reviewing their DB pension: 

Currency Risk 

If you’re living in the U.S., for example, and spending U.S. dollars but receiving income in sterling, your monthly income will fluctuate with exchange rates. While the income is guaranteed in pounds, the value in your local currency is not. 

Tax Efficiency 

If you receive income from other sources, such as a local state pension or social security, your DB pension could push you into a higher tax bracket, resulting in unnecessary tax payments. 

By transferring into an invested pension pot, you might have more control over when and how you draw income. 

Flexibility Versus Fixed Income 

A DB pension provides a guaranteed, often inflation-linked income for life – a benefit that would be expensive to replicate with an annuity. 

The Financial Conduct Authority’s position is that staying in the scheme is generally in the client’s best interest, and transfers should only be recommended in exceptional circumstances. 

That said, some individuals – especially those retiring abroad – prioritise flexibility, preferring to access funds as and when they wish. 

Irreversibility 

As previously discussed, once you transfer out of a DB pension, you cannot reverse the decision. This makes it critical to weigh the pros and cons carefully, with guidance from a qualified adviser. 

Investment Risk 

In a DB scheme, the pension provider bears the investment risk. Once transferred to a defined contribution scheme, that risk is yours. 

While many say they are comfortable with investment risk, not everyone has experienced significant market downturns. If your pension pot fell by 20%, would you remain calm or feel compelled to sell? 

Death Benefits 

Most DB schemes offer a spouse’s pension, typically 50% (sometimes two-thirds) of your entitlement, but rarely 100%. 

Children’s pensions usually stop at age 18 (or 21 if still in full-time education). If you have no dependants, your pension may end with you. 

Ill Health 

If you are terminally ill, your scheme may offer alternative options, but transferring in such circumstances can have inheritance tax consequences. 

Inheritance Tax Changes 

Historically, pensions have been exempt from inheritance tax. However, this is set to change in 2027. The Chancellor announced in her Autumn Budget last year (October 2024) that inheritance tax may have to be paid on your pension when you die, depending on how much is left in your pot. 

This could significantly affect planning strategies and, while details are not yet finalised, clients in certain jurisdictions – such as the UAE, with its double taxation agreements – may have opportunities to mitigate future liabilities.

For UK expats, transferring a DB pension can create valuable tax and financial planning opportunities, but to reiterate, the process is complex and irreversible – once you leave a DB scheme, you cannot go back. 

Our UK-qualified pension transfer specialists take the time to understand your personal circumstances, long-term goals and appetite for risk before providing a clear, tailored recommendation. 

Whether that means staying in your DB scheme or exploring alternative structures, our aim is to ensure you have a complete, balanced view before making an irreversible decision. 

If you’re an expat considering your DB pension options, the most important step is to start with the right advice. 

We will explore the importance of taking the right advice on transferring DB pensions in the next article in this series.