There has been so much talk recently around whether you should transfer your defined benefit pension. So much so it has even hit mainstream media at times, particularly with stories around the British Steel Pension Scheme.
Not sure on what a defined benefit (DB) pension is? Well this type of pension is also known as a final salary pension.
Basically with this type of pension your employer, be that current or former, has made a promise to pay you a level of pension income from an agreed retirement date for the rest of your life.
The amount will be based on how long you worked for the company and what your salary was.
This is a different type of pension to today’s more common defined contribution (DC) pensions whereby we all have a pot of pension savings and the amount we can withdraw at retirement will depend on what we put in and how our investment choices have performed.
Years ago it was unheard of to request a monetary value of your DB pension and then transfer that value to a private DC pension.
Why would you? You were giving up all the guarantees and taking on all the risk.
But now lives are changing. We are living longer and want more flexibility in our retirement. We don’t want a fixed or increasing level of income in retirement. We want the ability to choose how much and when we spend our pension.
There’s also the risk that the company promising to pay your pension is no longer as secure as it once was. Please see my article What happens to my Final Salary pension if the company goes bust for more information on this.
So DB to DC transfers are becoming more common but this doesn’t mean it’s right.
Deciding on whether to transfer a DB pension will be one of the most important decisions you’ll ever make in your life. It’s a bit like gambling on your home.
Please note you can only transfer a DB pension that is deferred, as in you are not currently receiving payment from.
To help you make a decision on whether you should explore a review of your deferred DB pension using a specialist Financial Adviser I would like to pull out some information from a recent guide published by Aegon.
Factors that make it less likely to consider transferring your defined benefit pension
#1 – You don’t have a regular guaranteed income (like another DB pension, pension annuity or a State Pension) that will cover all your regular outgoings in retirement.
#2 – You are not comfortable investing in the stock market and have a low attitude to investment risk.
#3 – You are likely to want your pension income regular and guaranteed. You like the idea of a pension annuity that pays you an income until you die regardless of what happens in the stock market.
Factors that make it more likely to consider transferring your defined benefit pension
#1 – You don’t have a partner who is eligible for your DB pension should you die.
#2 – You have a medical condition that reduces your life expectancy significantly.
#3 – You have enough guaranteed secure income (from other DB pensions, pension annuity or a State Pension) that will cover all your basic needs.
#4 – You are comfortable investing in the stock market and understand the risks involved.
#5 – You want different levels of pension income at different stages of your retirement.
#6 – You are keen to leave a significant sum to your family on death rather than use it yourself.
Answering yes or no in just one of the above categories does not automatically mean you should or shouldn’t take pension transfer advice. It’s more a combination of the above that could steer you to exploring the possibilities.
If you, a friend or colleague you know would find a one page checklist of these questions useful then please email me at carl@rtsfinancialplanning.co.uk and I would be happy to send it to you.
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.
