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Understanding Your Defined Benefit Pension

People employed or previously employed by large national firms may have enrolled into the firms Defined Benefit pension scheme. Defined Benefit pensions (DB) or 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 in retirement.
Since the introduction of Pension Freedoms in 2015, people are now considering transferring their Defined Benefit pension into a Defined Contribution policy that will allow them to take advantage of the increased flexibility pension freedoms now give.

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What Should You Consider When Thinking About Transferring

There are many benefits of a Defined Benefit pension that will need careful consideration before thinking about a transfer to a Defined Contribution pension. We’ve highlighted a couple of key points below, but it is always important to speak to a financial adviser about your DB scheme.

  • What age do you wish to retire and is this in line with your DB Scheme?
  • Why do you think giving up the guaranteed income is right for you?
  • Will any dependants rely on your pension should you no longer be here?
  • How important is the Defined Benefit guaranteed income to your retirement plans?

Why transferring might be right for you

Your financial adviser can offer expert advice on the benefits and negatives transferring the DB scheme will mean for you

  1. High transfer values – Many companies are offering generous Cash Equivalent Transfer Values (CETV) to employees to move their DB pension away into DC schemes.
  2. Flexibility – A defined benefit scheme is generally less flexible than a defined contribution pension. A DB scheme usually has a set retirement age and delivers a fixed amount of income each year.
  3. Tax-free cash – Defined Benefit schemes work out the amount of tax-free cash you can take very differently to a Defined Contribution pension. You could get more tax-free cash with a defined contribution pension.
  4. Death benefits & health – Unfortunately not everyone enjoys the same level of health, and if you pass away, a defined benefit scheme may not offer the opportunity for your spouse or dependants to take the funds, or only a limited payout.
  5. Scheme solvency – In the current economic climate, some businesses with defined benefit schemes may not have enough funds to support the employees with a generous final-salary pension. Some large national firms have gone out of existence with the employee’s pension being moved into the restrictive and less valuable Pension Protection Fund.

Why transferring may not be right for you

  1. 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.
  2. 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.
  3. Guaranteed income for dependants – Based on the scheme rules, your defined benefit pension could offer income for your dependants when you pass for the rest of their lives too. You may lose these guarantees moving to a DC scheme, or the value of the pension pot doesn’t last.

Why do I need financial advice with a Defined Benefit Pension?

It’s a legal requirement to seek expert advice from a fully qualified DB specialist for any Defined Benefit Pension valued over £30,000 or more and you are considering a transfer. At Pension Works, we hold the necessary qualifications to advise on Defined Benefit pensions.

At Pension Works, our Independent Financial Advisers will assess your Defined Benefit pension alongside the Cash Equivalent Transfer Value (CETV) you’ve received to understand if transferring the pension to a Defined Contribution policy is in the best financial interests for you.

The Financial Conduct Authority’s stance on Defined Benefit schemes is that a transfer is unlikely to be in the best interests of most people. The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

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