A defined benefit pension, also known as a final salary pension, has often been described as a gold plated pension.
A pension income for the rest of your life that doesn’t usually cost you a huge amount in personal contributions to the scheme.
In recent years however, there has been a large increase in people transferring their defined benefit pension to a defined contribution pension, known as a personal pension, to take advantage of new pension freedoms.
Some large transfer values were on offer during the times interest rates were low but now interest rates are significantly higher, is it still a good time to transfer this so-called gold plated pension?
Let’s examine.
What’s happened with the gold plated pension transfer values
As a reminder a defined benefit pension is a promise by the pension scheme to pay you a set level of pension income from a set retirement age for the rest of your life.
You do not have your own pension pot or value behind it, you can only make projections on what your pension income will be at different retirement ages.
These pensions have been considered a gold plated pension because of the supposedly guaranteed nature of them.
You don’t need to worry about the stock market or investing your pension as this is dealt with by the scheme as a whole.
Compared to today’s workplace pensions the benefit is generally much higher for the level of contributions made.
Since pension freedoms were introduced in 2015 there has been a large increase in people requesting a cash equivalent transfer value for their defined benefit pension and then transferring the benefits to a personal pension.
This results in you having full control of a pension pot which then needs to be invested by you and managed to ensure you don’t run out of money before you run out of life.
Cash equivalent transfer values are partly worked out using interest rates at the time of the request. If interest rates are low, then transfer values should be higher. If interest rates are higher then transfer values will be lower.
So since interest rates started to rise at the back end of 2021 there has been a sharp fall in the defined benefit transfer values being offered.
According to the XPS Transfer Value Index, average transfer values peaked at £270,840 on the 7th December 2021. By the end of June 2023 the figure was £162,024.
So from a pure transfer value point of view, it’s not a great time to transfer if you are comparing the value now to the likely value from a year or so ago.
The transfer value from a gold plated pension isn’t everything though, there is much more to think about if you are considering a transfer.
Why you still might want to transfer your gold plated pension
Here are four reasons you might still consider transferring a gold plated pension.
#1 – Pension flexibility
The main reason you would even be considering a transfer in the first place is because the defined benefit doesn’t deliver the outcomes you want.
A defined benefit pension is a set and forget pension. Once you have taken the pension then income will not change for the rest of your life apart from some form of inflation increase each year.
Your lifestyle in retirement will likely change quite a bit over the next 20, 30 or even 40 years.
You might want to spend more now while you are fit and healthier and less in your later years. You might want to give funds away to the kids or grandchildren. You might want to retire earlier or go part time and subsidise your income with a small amount of pension income before taking more pension income at a later date when fully retired.
All of this flexibility is still possible with a personal pension in drawdown. It just might mean your starting pot is now lower.
#2 – Consider annuities
While defined benefit pension transfer values have gone down, annuity rates have been increasing.
This means you could transfer your defined benefit pension to a personal pension and then secure an annuity with it.
An annuity will give you a guaranteed element and you could leave some of the pension left over to be more flexible, perhaps topping up your income at different stages of your life.
I don’t believe many defined benefit pension schemes allow a partial transfer so by doing a full transfer and then purchasing an annuity with some of the funds, this is a way around it.
If you had tried to do this a few years ago you may have found transfer values were higher but the annuity rates would have been a lot lower.
#3 – Defined benefit pensions may not be as secure as you think
A defined benefit pension income is only guaranteed as long as the scheme or employer behind the scheme is able to fund it.
It is still the case that many defined benefit schemes are underfunded meaning their liabilities are more than their assets.
If your defined benefit pension scheme fails, you might find you have a much lower pension income than expected.
At least by transferring to a personal pension you control the pot and are in charge of your own destiny.
#4 – Interest rates could go higher
Yes, interest rates are much higher than compared to the last few years but you could say they have normalised to the longer term average. Perhaps this level of interest rate is here to stay.
Or interest rates could go even higher meaning transfer values could go lower still.
If you are considering transferring your defined benefit pension there is much to think about and the decision should not be taken lightly. If the guaranteed benefits are worth more than £30,000 you legally have to seek advice from a Financial Adviser.
The pool of Advisers working in this area is shrinking due to the complexity of this type of advice and the compliance risks involved.
We work with a specialist team who are experts in this field.
If you are not sure what to do with your personal and workplace pensions at retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
