If you have a Defined Benefit Pension, then you are almost certainly aware that the pension flexibilities introduced in 2015 and, in some cases, enhanced transfer values have made the option of transferring out of your Defined Benefit scheme very attractive – and there are plenty of companies making noise about the benefits or drawbacks of doing so.
At Rawlinsons PIP, we like to make sure our clients understand the options available to them before any decisions are taken.
What you need to know about Defined Benefit Transfers
The most important thing you need to know about Defined Benefit Transfers is that it is a legal requirement to take advice from a suitably qualified pension transfer specialist on transfer options before any transfer can proceed where the value of the transfer exceeds £30k.
And, in general, whilst transferring Defined Benefit Pensions might be suitable for some people, most of the time the best advice is to keep it where it is.
However, there are cases where it may be an appropriate option for people, and before you do consider any transfer you might find it helpful to read more about Defined Benefit Pensions and the pros and cons of switching:
How do Defined Benefit Schemes and Defined Contribution Schemes differ?
- Defined Benefit Pension schemes, (also known as Final Salary Schemes) are traditionally seen as the ‘gold standard’ when it comes to retirement saving
- Under this kind of scheme, your pension amount is determined by your years of service and either your final salary or your career average with the firm
- However, these are incredibly expensive pensions to maintain for employers, which is why very few still offer them
- Instead, many employers have moved to Defined Contribution pension schemes, where you, the employer and the Government all contribute a set amount
- This money is then invested and can eventually be used to buy an annuity or kept invested and accessed via Flexi-Access drawdown
- The accepted thinking for a long time has been that it’s a bad move to switch from a Defined Benefit Scheme to a Defined Contribution Scheme – you’re giving up guaranteed benefits to do so, and taking on investment risks
Impact of Pensions Freedoms
- There has been a sharp rise in Defined Benefit Transfers (to Personal Pension Policies) since pension freedoms of 2015 which enabled people to access their pension ‘flexibly’ and to suit their needs
- There have been some headline stories around mis-selling scandals perhaps most notably affecting members of the British Steel Pension Scheme (BSPS)
- Enhanced Transfer Values have been on offer, some 30-40 times the value of the starting annual pension amount as businesses are concerned about the sustainability of the Defined Benefit Schemes into the future
- The combination of higher transfer values and more flexible access to pension benefits has led many people to consider the transfer option
- The pension owner must legally seek advice if the transfer is over £30,000
- Must use a pension transfer specialist which we have 3 of at Rawlinsons PIP
- The default position is to ‘keep it where it is’; however, that might not always be suitable for all people and ‘keeping it where it is’ might actually be the wrong advice especially if the individual has high levels of wealth elsewhere and / or highly values the ability to pass wealth down through the generations
- New FCA regulation coming into force through 2018 to ensure that the process of Defined Benefit Transfers is more robust throughout the industry and attempt to stop the scandals – though of course, at Rawlinsons PIP, we already have these in place
Positives of staying with Defined Benefit Pensions
- You are guaranteed income for life (and that of spouses), usually increasing in line with inflation
- There is no exposure to investment risks
- You are reliant on your pension income to cover your main income needs in retirement and so cannot afford for your income to reduce or be suspended for a period of time in poor investment conditions
- You do not wish to be involved in making investment decisions or managing pension assets
- Avoiding a potential tax bill if transfer value is calculated to be over £1,030,000 – the current lifetime allowance
Reasons to consider switching
- Freedom over the accessibility of pension
- Control over pension payments
- Access to potentially higher tax-free cash at 55
- High transfer values at present
- Income can be adjusted to meet needs or personal tax planning agenda
- You have other sources of income so are not entirely dependent upon this pension
- You wish to have control over your pension fund and its investments
- Ability to take tax free cash in stages
- Access to tax free cash sum whilst deferring pension withdrawals to a later date
- Flexible death benefits, particularly when you do not have a qualifying spouse or dependent
- The ability to maintain some or all of your pension fund in a format that allows you to pass it on to future generations
Rawlinsons PIP Defined Benefit Transfer Specialists
At Rawlinsons PIP, we have three pension transfer specialists in-house and so are well placed to provide you with this advice, and we’d be delighted to help you understand your options. Just call us on 01733 568321 to arrange an initial consultation.