Defined benefit: who should transfer out?
Transferring out of a DB scheme is not for everyone – but could suit your individual circumstances.
31ST AUGUST 2016
A Number of FTSE 100 companies are making big offers to employees to cash in their defined benefit pensions. Scheme members are now being offered lump sums of more than 30 times their expected annual pension income to give up their defined benefit entitlements.
We usually recommend that members leave their pension benefits within the defined benefit scheme as they are usually more beneficial in the longer term.
They are guaranteed pensions which will increase in the future in line with inflation, transferring is a once only decision – once transferred to a personal pension the money cannot be transferred back to the defined benefit scheme.
It is therefore extremely important that the decision to transfer isn’t taken lightly.
Who should consider transferring
Those that are unlikely to live long into retirement should consider transferring their fund to a personal pension. This is because they could risk having their pension benefits die with them and might see only a small amount of death benefits paid out.
Those with no spouse or dependants
There is also a risk of the pension benefits dying with the member if they have no spouse or dependants. Most schemes offer only a survivor’s or dependant’s pension.
Parents who want to leave benefits to their children
Due to rule changes in 2015 that allow pension funds, held in drawdown, to pass to beneficiaries’ tax free if the policyholder dies before the age of 75. It can be more attractive to transfer to those who wish to pass their wealth down to their children. If the death occurs after the age of 75, the pension would be taxed at the beneficiaries’ marginal rate.
When their employer is in poor financial health
If an employer goes bust, scheme members risk losing a large percentage of their annual income if the scheme is taken over by the Pension Protection Fund. Under the PPF rules those who are yet to retire will get just 90% of what they were promised.
Those with large pensions
If a scheme is taken over by the PPF, those with a large pension may receive even less of their fund due to the annual cap of £37,420.42. Also someone with a Transfer Value of £1,000,000 may prefer to have this under their control in a pension fund they manage themselves and avoid the risk of their family not receiving any death benefits later down the line.
Those who wish to retire early
Most schemes and the PPF have a retirement age of 65. Requesting a transfer and switching it to a personal pension fund may allow someone to retire more flexibly from age 55 onwards.
Who should not consider transferring
Those in good health
A Defined Benefit pension is guaranteed until death, those who have a good health record and are from a family who traditionally live a long time, probably shouldn’t transfer their fund. The pension will increase in line with inflation and will provide an income for life. Basically, the longer they live, the wealthier they will ultimately become.
Those who are married
Members who are married and whose scheme provides a survivor’s pension, shouldn’t consider the value of the guaranteed spouses pension that would be paid out in the event of their death. A spouse’s pension can provide their spouse with an income (two-thirds of the income that the member would receive) for the rest of their life.
Those with other assets
Those that would like to leave their wealth to beneficiaries when they die and have other assets available. This is because the defined benefit scheme will be more beneficial to the scheme member during their retirement and they will still be able to leave assets behind for their beneficiaries when they die.
Those who are very cautious investors should not transfer, the defined benefit scheme is ideal for cautious people as it provides a guaranteed income for life. By transferring, the guarantee would be lost and their pension fund would thus be associated with a level of risk.
If you are still unsure whether you should transfer away from your defined benefit pension scheme, talk to us today.
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