Is your defined benefit pension scheme still worth having?
A defined benefit pension scheme (also known as a final salary scheme) is designed to offer a secure income for your retirement which increases each year. It will normally also pay a reduced pension to your spouse, civil partner or dependents when you die.
The success of a scheme depends on continued funding from the employer who set it up. Pensions industry data for May 2017, shows there are 5,794 defined benefit schemes in the UK. Of these, 74% are in deficit, which means they lack the funds to cover their commitments to members in full. The scheme will have a plan in place to make-up the deficit, but if the employer fails, your pension scheme could enter the Pension Protection Fund and your pension income may be reduced. This fund is not, contrary to popular belief, guaranteed by the government.
Concerns over underfunded defined benefit schemes have lead many scheme members to think about transferring their pension pots to alternative structures. Others consider transfers because their needs have changed and they are looking to use their pension funds more flexibly.
A scheme transfer could be worthwhile if you are thinking of retiring early, a phased retirement or passing wealth to children or grandchildren free of inheritance tax. It could also be useful if you are looking for flexible income in retirement or suffering from ill-health. Your marital status is another very important factor in the decision.
There are, of course, risks to moving your pension fund and it’s not right for everyone, but it could be worthwhile understanding whether your defined benefit pension fund could be working harder for you than it is.
The first step is to find out the cash-equivalent transfer value (CETV) of your fund. Under the rules of your scheme, you will be entitled to one free CETV per year. It will show you the current value of your fund and projected income levels at retirement, so you can compare other options against it.
Secondly, be clear about the benefits that you want from your pension that your current scheme cannot offer. There is a cost to transferring a pension and you want to be sure that any new scheme matches your needs and will meet your future objectives.
If you are a conservative and cautious investor who wants a secure guaranteed escalating income, retaining your existing defined benefit pension scheme may be the best option.
Before taking any action, you should seek professional advice from a qualified Independent Financial Adviser who specialises in this complicated area of pension planning. They will advise you of the risks and the possible benefits of a transfer, in the light of your needs and objectives. You may also benefit from tax advice, especially if you are looking to save inheritance tax.
For further information on the merits of considering a transfer away from your defined benefit pension scheme, please contact Paula Jeffs.