Defined Benefit pensions, or Final Salary schemes as they were traditionally known, are a hot topic in financial advice. For years, DB pensions have been the 'gold standard' of pension provisions, in which the company you worked for during most of your life looked after you throughout your retirement.
Reasons why Defined Benefit pensions are still an exceptional way of generating an income in retirement:
- A Defined Benefit pension will provide a known and guaranteed pension income, payable for the rest of your life, with little or no investment risk attached
- The income once set up for payment, will likely increase year on year in line with a measure of inflation
- You can access an element of your pension as a Pension Commencement Lump Sum (Tax-Free Cash)
- In the event of death, there will likely be a guaranteed Spouse's pension which will become payable to your spouse at the date of death and will be payable to them for the rest of their life. Potentially there may also be children's pensions, which will pay out to your children until they reach 21 years of age, or even until they have left higher education in some circumstances
- Should the sponsoring company ever go into liquidation or be declared insolvent and unable to pay your pension; protection is provided through the Pension Protection Fund, which guarantees 100% of the income for those people whose pensions are already in payment and 90% for those yet to access their benefits.
Defined Benefit pensions, therefore, provide an element of certainty to your retirement planning. You know that once you have accessed the benefits from your Defined Benefit pension, you are going to receive an inflation-proofed income that will be payable for the rest of your life and that of your spouse. Defined benefit pensions, therefore, offer a significant level of financial certainty when you are no longer working or earning full time.
It is often suggested that the best way of planning your retirement finances is to ensure that you have enough guaranteed income to cover your expenditure requirements. This means knowing that for the rest of your life you can cover your bills, put food on the table, and afford to do the things you want year on year throughout your retirement.
But, what if you already have enough guaranteed income from other sources outside of a Defined Benefit pension? These may include your state pension, other defined benefit schemes, other pensions already set up for payment, rental income or savings that you are happy to draw on throughout your retirement.
Furthermore, should you be single and have no requirement for spouse's or children's benefits; that money from your pension might be allocated to benefits you don't require. Equally, for those with shortened life expectancy, it could be more appropriate to access your money sooner rather than over the long-term.
If you want to secure a certain level of income to cover expenditure requirements, but don't want or need all the income offered through a Defined Benefit scheme, no such flexibility exists. Potentially, you could be paying tax unnecessarily or could even be pushed into paying a higher rate of tax on income you don't need.
If any of the above points are relevant to you, then you may wish to conduct a review of your Defined Benefit pension, as well as your wider pension and retirement situation, to investigate the option of transferring your Defined Benefit pension into a Defined Contribution environment.
When George Osborne introduced the pensions freedom legislation in 2015, it changed the face of retirement planning. Through a Defined Contribution pension, and using Flexi-Access Drawdown to access your pension, you now can:
- Be fully flexible around what you take out of your pension and when. If you want to receive a higher level of income from your pension in the early years (when you are still young and able to enjoy your retirement), or if you don't want to take an income from your pension at all, it is entirely up to you when and how you access your pension
- Leave money invested in your pension to continue to benefit from investment growth, thereby maximising your pension provisions for when you need to draw on them
- Phase the withdrawal of the Pension Commencement Lump Sum, so that you can take tax efficient lump sums out of your pension as and when you choose
- Pass the entire value of your pension onto who you want in the event of your death in a tax efficient manner. They then also have the ability to pass the pension on in the event of their death, too. This could refer to your wife and, ultimately, your children. Importantly, pension benefits are also deemed to be outside of your estate for inheritance tax purposes
- Retain the ability to secure a guaranteed income from all or part of your pension at any point in time, should you need it
In the above scenarios, transferring a defined benefit scheme to a defined contribution scheme could be a suitable option. It is an important decision, however, and strong consideration needs to be given to your personal and financial situation, your aims and objectives and what you want to achieve moving forwards, and whether these objectives could be met by retaining benefits within your Defined Benefit pension.
Most importantly, before making any decision like this, you need to seek financial advice. It is a regulatory requirement that advice is sought for a transfer of this nature when the transfer value from your pension is more than £30,000. By seeking financial advice, you can rest assured that you will be supported in identifying the most suitable course of action for your retirement plans.
For more information on Defined Benefit Pensions, or if you would like to speak to an adviser about planning for your retirement, please call Flying Colours on 0333 241 9900 or request a call back here.