You will undoubtedly be aware that choosing whether or not to transfer your final salary pension is a big decision. Weighing up the pros and cons of such a move is an important part in the process. You don’t need to do that in isolation. We’re here to help every step of the way, if you’d like us to. Equally, it helps to go into any situation fully armed with the facts. Here are what would typically be considered the most prominent plusses and minuses of a transfer.
Moving from a defined benefit (DB) pension scheme to a defined contribution (DC) pension scheme means that you will have a lot more flexibility, under the so-called ‘pension freedoms’ rules. Whilst DB pensions will pay a set amount based on a calculation at the end of your working life, it is up to you how much you withdraw and when from DC pensions (subject to considerations around taxation).
High transfer values
It is generally accepted that we are in a current period of high transfer values for DB pensions. This means that when you investigate executing a transfer, you are likely to get a higher offer than you may have done previously. Drivers for this include the long-term sustainability of many DB pension schemes and low gilt yields.
Capitalises your asset
Carrying out a DB pension transfer moves your retirement pot from being a theoretical amount paid every year to being a rounded figure, guaranteed for you or your family at the point of transfer. A DB pension of £20,000 per year, given a transfer value of 25 times that amount, instantly becomes a ‘pot’ of £500,000.
In a DC pension, with your increased flexibility, you could withdraw money from your pension fund to invest elsewhere. This could include any business opportunities that may arise during your retirement period or a more flexible definition of investment, such as: ‘in your grandchildren’s education’!
Retirement starts now!
With the extra flexibility of a DC pension, you could begin to start taking withdrawals from the age of 55. If you have already reached that age then your retirement could, in theory, start right now!
Loss of certainty
DB schemes have always been attractive because of the certainty that they provide depending on your time of service, retirement date, final salary and other factors. You can calculate exactly how much you will receive per year, have that confirmed and never need to worry about a fluctuation or whether your pension will last for your entire retirement.
Can be seen as increased risk
Because of the above, DB pensions are suitable for people who have very limited wish to expose themselves and their capital to more risk. Having said that, no investment is risk free and DB pension schemes can and will continue to get into trouble financially, which can place your pension income at risk.
The move to a flexible, more adaptable DC scheme brings with it a requirement to be more involved with your finances. Taking advantage of the flexibilities available means getting more comfortable with your assets and what you can do with them. Even if you work with an adviser such as ourselves, this overhead of increased involvement will still exist to a degree.
Whilst a DB pension offers certainty, transferring out of a DB scheme can create uncertainty. If you have a reasonable DB pension scheme there is no reason why your pension fund cannot last you for your entire lifetime, but there is always the risk that it will not, for whatever reason. With greater flexibility can come greater uncertainty.
The lack of a need to do so
Whilst not technically a ‘con’ of transferring, the simple fact is that you may not have any need or compelling reason to do so. Again, a transfer is a big decision and we would always recommend you seek formal advice. During the advice process your adviser can explore your life plans and financial situation in full, creating a proper picture of whether a transfer would be beneficial to your situation or not.
Individual risk notices and compliance
Beware of pension scams
Increased pensions flexibility has given rise to the number of pension scams operating in the UK and abroad. If you are seeking advice or talking to anyone who is providing advice, you should check their credentials on the FCA Register.
You can access this here – register.fca.org.uk. You should check that both the Company and individual are registered. In addition, under the Company registration, ‘permissions’ should be registered for ‘Advising on Pension Transfers and Pension Opt Outs’.
Always seek professional advice in relation to transferring a Defined Benefit Pension Scheme.