Defined Benefit Pension Options
If you have a Defined Benefit Pension - often called a Final Salary Pension, you may be offered the option to transfer it into a Defined Contribution Pension.
In 2015, the pension legislation changed which offered much more flexibility with how pensions could be taken.
A Defined Benefit (DB) pension is a particular type of workplace pension where it provides you with a guaranteed annual income for life, based on your final or average salary.
A Defined Contrbribution (DC) pension is different in that it builds up a pension pot over time. You and/or your employer will pay into this type of pension. The pension you receive when you retire depends on how much you and your employer pay in, the growth of the pot, how long you save and how you decide to take the income (which often depends on interest rates at the time).
A DB pension offers a guaranteed retirement income for the rest of your life but it is not as flexible as a DC pension. You cannot vary the income you take from it, nor draw out larger lump sums (apart from the tax-free lump sum offered by some final salary schemes). Also, this kind of pension cannot be inherited by your beneficiaries.
What is a Transfer Value - This is the size of the pension pot you would receive in exchange for giving up your DB pension. Some providers will offer generous transfer values and, on face value, this can look very attractive. The choice you face is essentially this: having more money available to spend when you want to, versus having a guaranteed income for the rest of your life. We don't usually know how long we are going to live so you could face running out of money if you give up your DB pension.
It is very important that you understand that once you transfer your pension, you will not be able to transfer back. All the risks will be explained to you and you must take your time to do your sums and to assess your options. Remember, an experienced pension transfer specialist will be able to offer valuable advice.
It isn't an easy decision. If you transfer your DB pension there is a risk that your pension will one day run out, or you will not achieve as high an income as you would have received from the original scheme. If you don't transfer it, you will not be able to take advantage of flexibility of income and the ability to leave the capital value remaining at your death to your beneficiaries.
Having money to spend now may be very appealing, especially if there is a pressing demand for it. If your pension’s transfer value is over £30,000, however, the law requires you to seek financial advice from a pension transfer specialist before the transfer can be made. Some providers even insist that you get advice on smaller transfer values. This is to protect themselves if you later feel that you have made the wrong decision.
Taking advice from a pension transfer specialist helps you to weigh up your long-term needs against your short-term plans. Which may reveal benefits of your pension that you haven’t considered.
What happens next - If you have a Defined Benefit Pension and you are wondering whether it would be sensible to transfer it, then please contact us to arrange an appointment. At that meeting, our pension specialist will carry out a factfind to find out more about you, your family, your attitude to risk and your aspirations for your family. We will obtain an up to date transfer value and compile a report to discuss with you along with a recommendation. The costs of this work will be discussed with you at the preliminary meeting.