Defined Benefit schemes pledge to pay employees a fixed pension per year based on various factors such as salary and years of service. Paid in to by both employers and employees, the schemes are run by the employer.

Like many Financial Planners we have seen a steady rise of people obtaining Cash Equivalent Transfer Values – CETV (the figure your DB pension is worth if you decide to cash it in) from their pension schemes and then contacting us for advice.

Our advice is not always, in fact is rarely, cut your losses and run. For one, there are definite benefits to having a guaranteed fixed income. But one size does not fit all, so what are the pros and cons of cashing in or keeping a Defined Benefit Pension?

Defined Benefit Pension Schemes (DB) – The Pros and Cons

Advantages:

• Provide a guaranteed, index linked income for life.
• There is no investment risk on the individual. Once you’ve started drawing your pension, assuming you are past the scheme’s Normal Retirement Date (NRD), even if the scheme goes bust the Pension Protection Fund will pay 90% of your pension, if you have not already retired.
• If you are looking for a guaranteed index linked pension your DB Pension typically offers better income levels than comparative annuities in the open market. However, it would be advisable to seeking financial advice from your IFA.
• Your If you have the misfortune to die early then the scheme will continue to guarantee a 50% spouse’s pension, which will likely mean you do not lose out in monetary terms over both of your lifetimes.

Disadvantages:

• If you want the tax-free cash from your DB scheme, then you have to take your income. In contrast transferring to a personal pension and going into drawdown enables you the flexibility of taking your tax-free cash in as many payments as you wish and leave the rest of the pension invested (albeit at your own investment risk). This can be advantageous to clients where income levels can be varied to suit their income requirements and tax liabilities.
• DB schemes are not very good at providing lump sums of cash in the event of a members’ death. Typically they provide a return of the members’ contributions as a lump sum before retirement, but often no lump sum is paid to the beneficiaries once the member has started taking their pension. Whereas if your money is in a personal pension, then on your death your spouse/beneficiary receives up to 100% of the fund value. When potentially the family need it the most.
• The majority of DB scheme rules pre-date pension flexibility rules of 2015 which therefore will mean tax free cash amounts are lower than 25%, under the new rules.
• There are reports that many large DB pension schemes are worryingly short of cash so employees are less likely to receive their promised pension in full. The Pension Protection Fund reported in March 2020 that of the 5,422 Defined Benefit Schemes in their index, 3.606 schemes were in deficit. The BHS story is a recent, horrific example. Against this backdrop you might think that cashing in and extracting your cash from your DB Pension would be the best route.

Please Note: If you are single/divorced, so you do not need to provide for a spouse on death, transferring the scheme to a personal pension might be more appealing. Another reason why some people transfer is if you have serious Financial Advisor UK health problems or if you are in serious financial difficulties.

How to transfer

Get a CETV

Approach your DB scheme provider and request a CETV. The first one will be provided free of charge. The scheme will provide a free one every 12 months but will usually charge approximately £250+vat for another within 12 months.

Visit an IFA

Find a local IFA who specialises and are experienced in Final Salary Pension transfers. This is not only good practice, it is a legal requirement if your DB pension is over £30,000. Look for an adviser who specialises in pensions. The adviser will discuss your options and objectives and talk specifically about future income needs and cashflow (so work out a budget for when you retire).

Make your choice

The IFA will prepare a Transfer Value Assessment Report (TVAS) which analyses all the benefits of your DB scheme and compares them against the benefits of a Personal Pension/Drawdown Pension, including looking at the projected income, death benefits, spouses benefits, the inflation linking and the funding position of your current scheme. It’s all very well having an excellent DB pension but will the company still be there to pay it?

How long does it all take?

From start to finish, at least three months, possibly longer depending on how quickly the pension scheme responds to queries.

How much does it cost?

Typically the IFA will charge an engagement fee to prepare the TVAS report and recommendations. Do not be put off by upfront fees from £1,000-£10,000, dependent on the complexity for preparing such a detailed impartial analysis and be wary if the IFA will do it for free.

What will I get if I transfer?

Once the funds are transferred into your Personal Pension, you can access your Tax Free Lump Sum (up to 25% of your entire pension) and withdraw a taxable income or leave it all invested. The choices are endless! Beware, some providers do not offer all the bells and whistles, so speak to your IFA about what you are planning on doing and they will recommend the most appropriate pension provider.

Get leading Final Salary Pension advice from Seymour Financial

Seymour Financial is an independent wealth advisory firm who focus on the areas of retirement planning and final salary pensions to provide clients with a clear guide as to what they should be considering. This is a specialised area of advice for clients for which we have adopted the PFS Pension Transfer Gold Standard which promotes ethical behaviour, the highest professionalism for technical knowledge and client servicing.

For clients 55 years or older who are considering the options of consolidating their pensions or transferring their final salary pension, now is a good time to look at this. As we live through the biggest change of our lives as a result of Covid 19, stock markets have collapsed; some companies are fighting for survival, with pension assets having dramatically dropped in value with over half of UK companies now having company pension schemes in deficit.

If you wish to explore all your options and you are 55 years or older with pension(s) totalling more than £300,000 in value then please get in touch with us for a professional review of your pension options.