Should I quit my de­fined ben­e­fit pen­sion scheme?

We run through the es­sen­tial points to con­sider

Shares - - CONTENTS - Tom Selby, Se­nior An­a­lyst, AJ Bell

Tens of thou­sands of savers have ditched the se­cu­rity of a de­fined ben­e­fit (DB) pen­sion since the launch of pen­sion free­doms in April 2015. This type of pen­sion usu­ally pays out a guar­an­teed, in­fla­tion-linked sum in re­tire­ment.

In­di­vid­u­als have switched in favour of man­ag­ing their own re­tire­ment pot through a de­fined con­tri­bu­tion (DC) scheme such as a self-in­vested per­sonal pen­sion (SIPP).

With a re­port by in­flu­en­tial trade body the Pen­sions and Life­time Sav­ings As­so­ci­a­tion (PLSA) sug­gest­ing 3m mem­bers in the weak­est DB schemes have only a 50/50 chance of get­ting their full pen­sion; this de­mand is un­likely to ease any time soon.

Fur­ther­more, many savers are at­tracted to the ex­tra flex­i­bil­ity cre­ated for DC savers by the pen­sion free­doms and the abil­ity to pass on funds tax-ef­fi­ciently after death.

But the process of trans­fer­ring is not straight­for­ward and comes with real risks.

SEEK­ING FI­NAN­CIAL AD­VICE

If you want to trans­fer your DB pen­sion and it’s val­ued at £30,000 or more, Gov­ern­ment rules re­quire that you speak to a reg­u­lated fi­nan­cial ad­viser first. You can search for an ad­viser near you on www.un­bi­ased.co.uk.

Fi­nan­cial ad­vice is ex­tremely valu­able – par­tic­u­larly in re­la­tion to com­plex ar­eas such as pen­sion trans­fers – so it’s worth lis­ten­ing care­fully to what they tell you.

Ad­vice doesn’t come cheap. Ac­cord­ing to ad­viser search provider Un­bi­ased, spe­cial­ist de­fined ben­e­fit trans­fer ad­vice costs around £1,500.

Even if you’re will­ing to pay that, many ad­vis­ers sim­ply aren’t tak­ing on pen­sion trans­fer busi­ness ei­ther be­cause they don’t have the qual­i­fi­ca­tions or they fear be­ing sued fur­ther down the line.

TRANS­FER VAL­UES

An ad­viser will talk you through a whole se­ries of is­sues that fac­tor into whether or not a trans­fer is right for you.

One of these is the trans­fer value – this is the cash amount your DB scheme is of­fer­ing you to give up your guar­an­teed pen­sion.

The size of the of­fer will de­pend on a num­ber of fac­tors in­clud­ing your age, whether your pen­sion is in­fla­tion-proofed and the yield (that is in­vest­ment re­turn) on Gov­ern­ment gilts (if the yield is low, the trans­fer value will be high). Your trans­fer value will be ex­pressed as a ra­tio.

For ex­am­ple, if you have a DB pen­sion worth £10,000 a year and you’re of­fered a trans­fer value of 20:1 you’ll get £200,000 in ex­change for giv­ing up your guar­an­teed pen­sion.

Clearly such cash of­fers are ex­tremely tempt­ing but re­mem­ber you’ll be giv­ing some­thing up that’s in­cred­i­bly

valu­able. DB pen­sions usu­ally come with in­fla­tion pro­tec­tion – mean­ing the real value of your in­come will be main­tained – and also of­ten guar­an­tee to pay your spouse an in­come after you die.

IS THE SCHEME SPON­SOR SAFE?

In light of the PLSA re­port you might be con­cerned the com­pany that’s sup­posed to pay your DB pen­sion won’t sur­vive as long as you do. This is per­fectly log­i­cal but it’s worth not­ing that even if the scheme spon­sor hits the wall you won’t be left empty handed.

The Pen­sion Pro­tec­tion Fund (PPF) pro­vides a valu­able safety net for DB mem­bers in the event their em­ployer (or ex-em­ployer) fails.

If you have al­ready re­tired and were re­ceiv­ing a pen­sion from your scheme be­fore it went bust, the PPF will pay you 100% com­pen­sa­tion. You’ll get the same level of re­tire­ment in­come as when the scheme you’re a mem­ber of failed.

Pay­ments re­lat­ing to pen­sion rights built up from 5 April 1997 will rise in line with in­fla­tion, sub­ject to a cap of 2.5%. Pay­ments re­lat­ing to ser­vice be­fore then will not in­crease.

If you re­tired early and had not reached your scheme’s ‘nor­mal pen­sion age’, or had yet to re­tire, when your em­ployer went bust, you’ll gen­er­ally re­ceive 90% of the in­come you would have re­ceived.

How­ever, this is also sub­ject to an an­nual cap on com­pen­sa­tion de­pend­ing on how old you were when you re­tired. The PPF main­tains a list of cap lev­els for each age. The ear­lier you re­tired, the lower the an­nual cap set to com­pen­sate for the longer time you will be re­ceiv­ing pay­ments.

For ex­am­ple, the cap at age 65 is just short of £35,000 a year (when the 90% com­pen­sa­tion level is ap­plied).

Pay­ments will in­crease with in­fla­tion in the same way as some­one who has al­ready re­tired.

So in short, while the fail­ure of the com­pany that is sup­posed to pay your pen­sion will re­duce your re­tire­ment in­come, you should still get most of it.

WHAT DO YOU WANT FROM YOUR PEN­SION?

Whether or not to trans­fer will de­pend on your own per­sonal cir­cum­stances and goals. Some peo­ple will al­ready feel they have enough se­cure in­come to fund their day-to-day spend­ing and are there­fore able to cash-in the rest (al­though re­mem­ber this will be taxed in the same way as in­come).

Oth­ers will be at­tracted to the tax treat­ment of DC pen­sions which al­lows you to pass on your en­tire fund tax-free if you die be­fore age 75 or at your re­cip­i­ent’s mar­ginal rate if you die after this age. Fur­ther­more, you can now pass it on to any­one – it doesn’t need to be a spouse or de­pen­dant.

What­ever you de­cide, re­mem­ber that your pen­sion first and fore­most needs to pro­vide an in­come that lasts through­out your re­tire­ment – a pe­riod that could last 30 years or more. In most cases, keep­ing your DB pen­sion will re­main the best way to do this.

WHETHER OR NOT TO TRANS­FER WILL DE­PEND ON YOUR OWN PER­SONAL CIR­CUM­STANCES AND GOALS.

WHAT­EVER YOU DE­CIDE, RE­MEM­BER THAT YOUR PEN­SION FIRST AND FORE­MOST NEEDS TO PRO­VIDE AN IN­COME THAT LASTS THROUGH­OUT YOUR RE­TIRE­MENT – A PE­RIOD THAT COULD LAST 30 YEARS OR MORE

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