Three reasons why (and why not) to transfer your defined benefit pension
Answers to the question “what should I do with my pension” should always start with another question: “what do you want to do with it?”
How to go about reaching your goal – and how achievable it is – will depend entirely on your particular circumstances, but for those with a defined benefit pension there are particular elements to consider.
If you want access to all of your pension at once rather than receive it as income – possible since the pension freedoms rules were introduced in 2015 – first you’ll have to transfer it into a defined contribution pension. If it is worth more than £30,000 you’ll need to get regulated advice before you can transfer.
City watchdog the Financial Conduct Authority (FCA) is of the opinion that for most people, sticking with a defined benefit pension is the best course of action. But you may think differently.
Telegraph Money asked a national advice firm, Foster Denovo, for some rules of thumb people could use to gauge whether transferring might be a good idea for them, before starting any formal process to withdraw their cash.
Once taken, transfer decisions cannot be reversed so it’s important to make sure you make the right choice for you. Giving up the guarantee of an income for life is not a decision to be taken lightly.
Three reasons why transferring might not be right for you
Income for life – by law, defined benefit pensions must pay members a certain income until their death. If you decide to move to a defined contribution pension, you give up this guarantee.
Transferring investment risk – out of a defined benefit scheme the responsibility for investing the pension, and associated risks, rest with you, rather than any trustees.
Tax implications – the lifetime allowance (LTA) limits the amount of pension savings you can build up without being taxed. Due to how the LTA is calculated, when a pensioner transfers out of a defined benefit pension scheme it could push them above the limit and they may suffer a tax charge.
Three reasons why transferring might be right for you
Shorter life expectancy – if you don’t have a spouse or dependents, you may be able to get more value from your money by using the transfer value from your defined benefit pension to buy an impaired life annuity on the open market.
Flexibility – pensioners in defined benefit schemes have little flexibility around how and when they draw their money.
Death benefits and inheritance – if you transfer to a defined contribution scheme, your pension fund can be used to pay a lump sum, annuity or drawdown pension to any family member or other nominated person, in some instances tax free.
Jamie Smith, Partner at Foster Denovo, said: “Because the income from a DB pension scheme is guaranteed for life, you need to be certain that transferring your benefits is the right thing for you. If you have any doubts, it’s probably best not to transfer.
Giving advice on DB transfers is extremely complicated. It takes many hours, and sometimes days of work, to analyse and make a qualified recommendation. The high level of complexity around transfers will likely be reflected in the price you pay for the advice and so you also want to make sure that you’re comfortable you’re receiving the best value for money.”
Read the full article on Telegraph Money here.