Should you transfer out of your defined benefit scheme?
Pensions have become a focal point for many as the coronavirus pandemic has forced retirees to re-evaluate their pension options. Some with Defined Benefit pensions may be tempted to transfer them, but is this the right thing to do?
As well as Covid-19 forcing a re-think for some pension savers, more and more people have been considering transferring their defined benefit pension since the pension freedoms were introduced in 2015. In addition to that, many employers have been incentivising members to shift their defined benefit plans to defined contribution schemes as these schemes are very costly for them to fund.
Transferring your Defined Benefit (DB) Pension scheme has therefore looked an attractive proposition in many cases. Unfortunately, this opportunity has also inevitably attracted a whole host of pension scams from unscrupulous operators, as well as hard selling tactics from some advisers who ought to know better. This is why the industry regulator – the Financial Conduct Authority - stresses the importance of getting pension transfer advice only from fully qualified pension transfer specialists - such as Kellands Bristol.
What you need to know if you are considering transferring out of a (DB) pension scheme:
Well firstly, not every DB pension is transferrable. Private sector schemes, and some public sector ones, will be ‘funded’ (supported by a central fund) which is the only kind from which you can transfer. Other public-sector schemes such as the NHS scheme are ‘unfunded’, meaning they are supported directly by the taxpayer and therefore you cannot transfer out of this kind of pension.
There are also safeguards in place to ensure that the person and their pension benefits are protected. For example, a person must receive regulated advice from a financial adviser before any benefits are transferred. Financial advice is not required if the transfer value is lower than £30,000 but if it is needed, the advice will need to be paid for and fully documented.
The best option for you will depend on how you personally weigh up the advantages and disadvantages. It is worth remembering that everyone’s circumstances are different, so just because a pension transfer worked for your colleague, it does not necessarily follow that it will work as well for you.
One of the many advantages of transferring a final salary pension is the fact that you can access your pension from an earlier age. You also have more flexibility over your income and can vary it if you so wish, taking more income early, for example, whilst you are still more active. Also, any remaining monies in your pension pot can be inherited by your beneficiaries, free of inheritance tax. Further, if stock markets perform well, you may end up with a bigger pension pot, and your pension will not be at risk if your former employer becomes insolvent.
Of course, on the other hand, there are some possible disadvantages too. For example, you could be giving up a guaranteed income for a pension pot that may run out and may be vulnerable to stock market falls. You may also be giving up some other valuable benefits, such as death benefits. In addition, you will be responsible for managing your pension from now on, which you may see as either a negative or a positive.
In most cases, the decision on whether it makes sense to transfer is not clear-cut. You need to take a wider, holistic view of your future retirement plans and objectives, rather than just focus on the transfer itself, however attractive it may sound. There are a lot of issues to take into account, and the financial advice given may be that the best option is not to transfer.
The key however is to talk to pension transfer specialists to find out what is the best way forward for you. So, if you are thinking of transferring out of your defined benefit pension scheme, talk to one of our pension transfer specialists today.
This information does not constitute financial advice. Everybody’s circumstances differ and regulated professional advice is required before proceeding with a pension transfer.