Defined Benefit Pensions
Do you have a Final Salary Pension?
People employed or previously employed by large national firms may have enrolled into the firm’s Defined Benefit pension scheme. Defined Benefit pensions (DB), sometimes called Final Salary or Gold-Plated pensions offer the employee a secure income for life and usually increase year on year up to and throughout retirement.
At Pension Works, we hold the necessary qualifications to advise on Defined Benefit pensions.
Considerations for a Defined Benefit transfer:
Why transferring might
be right for you
High transfer values – many companies are offering generous Cash Equivalent Transfer Values (CETV) to employees to move their DB pension away into DC schemes.
Flexibility – a Defined Benefit scheme has a set retirement age and pays a fixed income that cannot be changed. A Defined Contribution pension allows you to control how much income you withdraw and at what time, and lets you alter this as your needs change over time.
Tax-free cash – Defined Benefit schemes work out the amount of tax-free cash you can take in a different way to a Defined Contribution pension. You could get more tax-free cash with a defined contribution pension.
Control Tax on Withdrawals – Moving your Defined Benefit pension to a personal pension could help with better tax planning. The guaranteed regular income from a DB pension will be taxed regardless of whether you need the income or not. With a DC pension and income drawdown, you can flexibly take funds, which could potentially help you to take advantage of your tax allowances.
Death benefits & health – unfortunately not everyone enjoys the same level of health, and if you pass away, a Defined Benefit scheme normally only offers a spouse’s or dependants benefit in the form of a lifetime income. A Defined Contribution pension lets you pass on any unused funds to your loved ones, either as an income or a lump sum.
Scheme solvency – in the current economic climate, some businesses with Defined Benefit schemes have been unable to meet their pension liabilities. Where a business becomes insolvent, the pension scheme could be automatically transferred into the Pension Protection Fund (PPF), which may provide less generous benefits.
Why transferring may
not be right for you
Investment risk – a Defined Contribution pension is always riskier than a defined benefit as the value of the pension could go down as well as up depending on the success of your investments.
Income for life – Defined Benefit pensions will give a secure income for life, regardless of how long your retirement lasts. A Defined Contribution pension has a fund value that you’ve built up, and once that fund has run out, you will receive no more income.
Guaranteed income for dependants – based on the scheme rules, your Defined Benefit pension could offer income for your dependants when you die for the rest of their lives too. You would lose these guarantees moving to a DC scheme.
Concern about overspending – Keeping a close eye on your income and spending is important if you transfer your final salary pension to a private pension as you no longer have the fixed guaranteed income. There is more of a risk that you could run out of funds before you die unless you have other pension pots available.