If you have been contributing to a defined benefit – or so-called final salary - pension scheme, then the good news is that you may have more options than previously thought.
Transferring your pension out of a defined benefit scheme has previously been discouraged- and with good reason. This is a significant financial moment in your life In fact, the official regulations surrounding such transfers, include the proviso that financial advice from a qualified adviser must be sought before transferring any final salary scheme valued at more than £30,000.
Defined benefit pensions
Defined benefit (DB) schemes represent something of a gold standard – they offer guaranteed, inflation-proof incomes and frequently other benefits, such as the ability to make additional contributions when you choose and the continuation of benefits to your spouse, partner or dependents when you die.
You receive these pension benefits from the start date agreed with your employer (typically at retirement) but can receive guaranteed benefits for the rest of your life. The amount paid in benefits sometimes increases each year, generally in line with inflation.
The amount paid usually depends on the number of years for which you have contributed to the scheme and the value of your salary upon retirement – hence the name final salary pension.
If you weigh up the advantages of a defined benefit pension (ie final salary pension) and compare these to the alternative –defined contributions (DC) pension schemes, it may be easy to see why official sources, and many financial advisers caution against transferring from any defined benefits scheme.
But the key question is this. Do you know how much your current pension is worth?
Defined contribution pensions
A defined contribution (DC) pension scheme transfers the risk onto the individual from the company scheme.
Your pension is based on the contributions you have made to the scheme whilst you are a member (your pension “pot”), and the performance of the funds in which your pension is invested and the choices you make when you come to retire.
Those choices are greater because of the generally much more flexible nature of a defined contribution scheme. This takes the shape of much greater flexibility and choice in withdrawing cash from your pension pot – pension release – and the ability to take advantage of other, apparently more competitive pension schemes – pension transfer.
Security or risk
The gold-plated security of defined benefit pension schemesThe security enjoyed by members of gold-plated defined benefit pension schemes has come at a price – a price too high for many employers to bear and the result has been a reduction in DB schemes.
In the meantime, that has left existing members of defined benefits schemes in something of a quandary – Should I stay or should I transfer the current transfer value?
In practice, many have voted with their feet and insisted on transferring out of their safe and secure defined benefits arrangement into a more flexible defined contributions scheme.
Unsurprisingly, perhaps, independent financial advisers and retirement specialists have hitherto advised clients that it may not be in their best interests to make such a transfer.
However, you can make no decision at all unless you know the transfer value of your defined benefits scheme, and we urge you to find out today and then start to really analyse and drill down into the alternative benefits available.