by Don Wernham
Just recently there has been a real surge of interest from people wanting to look at transferring their Defined Benefit (DB) Pension Scheme into a personal arrangement.
The main reason for this is the new pension freedoms rules that were brought into effect in April 2015. These rules allow a member to draw down whatever they wish from a pension (subject to tax). But, if you hold DB benefits you cannot do this. The scheme decides when, and how the member draws benefits.
In addition, the death benefits in a DB scheme can sometimes be small, and even worse nothing at all. A DB scheme will usually pay a spouse’s pension, typically around 50% of the member’s pension. It may also pay benefits for dependent children (up to the age of 18, or 23 if in further education).
However, if there are no dependent children then this benefit will cease. This is a major concern for many people. For example, if a scheme was offering a member a pension of £20,000pa and they died, then the spouse may get £10,000pa pension. However, if the same scheme were offering a transfer value of £600,000 as an alternative, and then the member died, the death benefits are completely different. In this case the spouse would be able to access the whole of the £600,000 pension fund.
The pension freedoms rule changes were all about giving people choice. Ever since pensions were first set up in the last century, they were designed to provide an income that would never run out during retirement. By this I mean that the fund will provide the same value at death as when you start drawing the benefits. Of course, if you want this type of pension, then you can still have it, by having a DB scheme or purchasing an annuity. But the old style of pension is inflexible. Many people who I talk to want to enjoy what I call the early part of their retirement.
This is usually 60 to 75 when they can travel the world, do what they have always wanted to do. After this age, they possibly want to slow down a little and spend time closer to home. Therefore, what is the point of having a pension that is getting bigger as you get older? Imagine getting into your 80’s, you probably will be spending less by then anyway. So, having a pension plan that you can control is very important.
Do you need to do anything if you are a member of a DB scheme? It depends on whether you are a deferred member or an active member. If you are the latter, then almost certainly you should have a look at the potential benefits and options available. If you are an active member of a DB scheme there is probably more risk in coming out of a scheme like this and giving up the benefits of your employer’s contributions to consider. And in addition, there are often the valuable benefits of life insurance provided by the scheme, also referred to as death in service benefits.
The decision to consider transferring away from a DB scheme is a big one. There are likely to be investment risks to consider if you do want to move your fund to a personal arrangement. Because of this, and if your fund is above £30,000 it is necessary to take professional financial advice.
*Please note views are my own and do not constitute advice
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