Since pension reforms were announced back in 2015, the number of people cashing in defined benefit (DB) pensions has greatly risen. The Office for National Statistics claims that the value of transfers between all kinds of pensions rose to £34.2 bFinancial Advisor UKion in 2017, compared to £12.8 bFinancial Advisor UKion the previous year.
Large transfer values are available through DB pensions, which is all part of their appeal. DB pensions pay out a specific sum each year to the recipient based on their number of years of service with a company and their final salary figure. The transfer value of a DB pension can be up to 40 times the annual income received from them, which makes transferring out a very tempting proposition. Here are some pros and cons you should consider that will help you to determine whether a DB pension transfer is right for you. Need extra help? Financial Advisor UK has a national network of fully FCA registered and approved professionals that you can be matched with to ensure you get the best professional advice for your circumstances.
Reasons to transfer
Flexibility
A DB pension scheme offers income linked to inflation, but transferring out of it does enable you to access your savings more easily, while giving more flexibility. Some DB pension providers may want greater control of how you spend your savings, such as spending larger amounts in the early years of retirement, while scaling things back in the later years so that you have a certain amount still remaining. Transferring out of a DB pension gives you greater control and the will to decide how you spend your savings and when.
‘Pooled mortality’
With a DB pension scheme, you will receive an annual payout until you die. If you suffer from health issues however, you may benefit from transferring your pension. DB pension schemes approach health and life expectancy from the view of ‘pooled mortality’, which means that they expect pension holders to life to a certain (average) age depending on their age, lifestyle, health etc. If you do not live until this average age, you can lose your assets, meaning that other people in the scheme who make that age can benefit from your losses. If you have retired because of health issues, it may be worth using savings to purchase an annuity instead, so that you have a higher income during retirement.
Financial and personal situation
If you are married or have a number of pension plans, this could influence your decision on whether to transfer out. Consider whether or not you already need the extra income of a DB pension. Many people with DB pension plans already have sufficient income. DB pension plans assume that many retirees are married or in a couple, or have other investments, so they adjust payments based on these assumptions. Some of your capital could therefore be withheld to provide additional funds for your partner. If you are single, a DB pension plan may not be right for you.
Passing on funds as inheritance
A DB pension plan will pay an income to a surviving spouse when the main pension holder dies. However, when this spouse dies, the funds stops, making it difficult to leave additional income to family members as an inheritance fund. Transferring out to a personal pension plan may be the right option if you want to leave money to family members upon your death. If you die before turning 75, any unused pension wealth you have can be passed on to family members tax-free. Withdrawals will however be subject to tax.
Reasons to stay in a DB pension
Taxation
If you transfer out of a DB pension and had a large salary when you worked, your DB pension will have a very high transfer value equal to the total sum received over the course of the pension. The lifetime allowance for pension income is £1 mFinancial Advisor UKion. If your transfer value is over this figure, you’ll have to pay tax on the rest at 55%.
Managing your own money
A DB pension is managed by your former employer and is income you are guaranteed to receive. Transferring into a personal pension means that you will then have to manage your own finances and take on any investment risks that come with this. If you lose capital and do not invest money wisely, you may find it hard to get that money back.
Inflation-related risk
A DB pension income is directly linked to inflation, therefore your income will compensate for any rises that lay ahead. If you transfer out to a pension that doesn’t compensate for inflation, the spending power of your capital could be affected and decrease as inflation goes up.
Security for a spouse or partner
If you want to make sure that your husband, wife or partner will be financially sound after you die, this is a main reason to stay in a DB pension scheme. Transferring out could cost you more in the long run, as joint life annuities are expensive.