So, what’s it all about?
First, it’s worth reminding ourselves what the two main types of pension are:
- With Defined Benefit (DB) pensions, an employer promises to pay you a regular, predictable income during your retirement. This is usually related to your salary while you work for that employer. It’s the benefit that is defined. You’ll get what was promised, when it’s due.
- Defined Contribution (DC) pensions don’t promise any particular level of income. It’s the contributions paid in that are defined. What you get back depends on how much is paid in, how your investments perform and how much tax you pay when you take your money out. You normally have some control over how much income you take and when you take it.
Most private-sector DB schemes are closed to new employees and some are no longer linked to salary, but there are many people who have already built-up an amount of promised income from their time in such a scheme over the years. And most public sector employees are still building-up their DB pensions.
Income from a defined benefit pension can give you peace of mind that the bills will be paid in your later years.
Recent press coverage has centred on the number of people transferring from their DB pension to a DC one. Some 80,000 people have done so over the last year, marking a significant increase from previous years. But this is still a very small proportion of the number of people who have DB pensions. There are around 11 million people with private-sector DB pensions who haven’t transferred out and millions more in the public sector.
What you need to think about
On the face of it, it may seem an odd decision to give up a regular, predictable DB income in favour of relying on investments to meet your retirement needs.
Income from a defined benefit pension can give you peace of mind that the bills will be paid in your later years; with a DC pension, in the worst case scenario, you could run out of money. This is why regulatory body the Financial Conduct Authority starts from the position that income guarantees are valuable and shouldn’t be given up lightly.
However, the introduction of greater flexibility for DC pensions, and the fact that recent economic conditions have meant that many transfer values being offered are higher than normal, has convinced some people that this is a more suitable way of providing them with a retirement income.
And, of course, some of the recent, high-profile DB scheme failures have left some people with uncertainty that their promised income would be delivered in full. We should keep this in perspective. These failures are rare and there’s a pension protection scheme that will usually pay out most of the promised pension should anything happen.
What will meet your needs?
As such, it’s not a good idea to base any decision on what others are doing, or the idea that your employer might not be able to pay benefits when they’re required to. It’s about doing what is most likely to meet your needs when you retire.
Usually, the reasons for transferring – or not – come down to the difference between the two types of pension. DB pensions offer relative certainty, whereas DC pensions provide flexibility.
Thinking about transferring your pension?
Here’s what you need to consider.
You will probably need to take advice. If you are considering transferring your DB pension, legally you need to take advice from a suitably-regulated adviser if the value of your transfer is above £30,000
Ahead of that, you may want to consider some of the main points any adviser is likely to explore with you. Here are a few reasons why you may want to stick with your DB pension:
- You value the reassurance of a regular, predictable, growing income for life that helps ensure the bills can be paid whatever happens – or your immediate dependents would.
- The risks of investing your pension pot are not something you are comfortable with.
- You don’t have many other assets to fall back on in your later years if you transfer and things go wrong.
Some of the reasons you may want to consider transferring your money to a DC pension include:
- Your DB pension is much higher than the retirement income you need. You’d rather have more choice over how much income you take and when you take it.
- You have a lot of other assets to fall back on if things go wrong and can use other sources of regular income which give you more options around how you take your pension more tax-efficiently or create a legacy for your loved ones.
- Health issues mean your income needs are short term, and access to your money now is more important to you than long-term income certainty.
What is the answer?
None of these would give you a definitive answer and an adviser will run through a detailed process to help you understand whether a transfer could be the right decision for you, or not.
Asking yourself the questions above in advance may help you decide whether you want to consider it in the first place. Advice won’t be cheap but it can give you invaluable reassurance before you make what could be one of the biggest decisions of your life.
We know there’s a lot to think about. Giving up what a defined benefit pension promises is a big decision and it’s usually irreversible. It’s not one that should be taken lightly.