Richard Porter IFA St Albans –When to keep your defined benefit pension scheme

Friday 2 February, 2018

Richard Porter, independent financial adviser St Albans reviews why you should consult a financial adviser for pension advice if you want to transfer out of a defined benefit pension scheme (final salary pension scheme) to a defined contribution pension scheme (money purchase pension scheme)?

Last year The Pensions Regulator confirmed that 67,700 people transferred out of a defined benefit pension scheme between 1 April 2016 and 31 March 2017 to take advantage of relatively high transfer values.  

Although no information is available for the previous year the number of transfers has remained high since pension freedom was introduced in April 2015.  This allowed anyone over 55 to access their defined benefit pension scheme and transfer it into a defined contribution pension scheme to take advantage of the pension flexibilities.

Reasons why financial advisers may recommend you DO NOT transfer your defined benefit pension scheme to a defined contribution scheme

1. Remember that defined benefit pension schemes are payable for life.  So if you transfer it you are giving up a guaranteed pension income that is inflation proof.  It can also be paid to a spouse.  If you do not have other income or savings that you can use in your retirement this guaranteed income maybe necessary to maintain your lifestyle in retirement.

2. If you give up your defined benefit pension scheme you will give up a guaranteed spousal income, this guarantees pension income for your beneficiaries.  A money purchase pension scheme or defined contribution scheme cannot guarantee the income or a lump sum payment for your beneficiaries.

3. If you have limited other assets that can provide you with an adequate retirement income your capacity for loss if you transfer to a defined contribution pension scheme is much greater, so you could be at higher risk of not achieving your financial goals in retirement.

Richard Porter, independent financial adviser and member of the St Albans financial planning team said:

 ‘It is important that anyone who is considering transferring out of their defined benefit pension scheme into a money purchase  or defined contribution pension scheme consults an independent financial adviser as we can explain the advantages and disadvantages of each course of action. 

Indeed anyone who has a fund worth more than £30,000 must seek financial advice from a qualified financial adviser before they can transfer their pension scheme.  Your financial adviser will consider your personal financial circumstances and your financial goals and objectives in retirement before offering you financial advice and pension advice.  This is important as every person is different and has varying requirements so every financial planning solution we deal with will be tailored to the individual. 

Mark Bowen, independent financial adviser in St Albans recently wrote a case study – Reviewing your defined benefit pension scheme.  He had provided pension advice and recommended his client transfer from a defined benefit pension scheme and purchase a defined contribution pension scheme due to its flexibility and because the client was in ill health. 

However, we have many other client cases where after assessing a client’s financial situation we have recommended that they do not transfer out of their defined benefit pension scheme. Remember that if you decide to transfer to a defined contribution scheme the potential advantages could be outweighed by increased risks, costs and loss of benefits involved. We need to make sure that the client fully understands the consequences of making the switch before we recommend it.  If we feel it is in the client’s best interests to switch we will offer independent financial advice on the suitability of different investments into which to switch.'

Richard Porter, independent financial adviser St Albans continued: 

‘We would always recommend our clients read as much as possible so they understand their choices and we have free resources available on our website.  Pension legislation is complicated but our Financial Advisers have passed the Chartered Institute of Insurance (RO8) Pensions Update examination, in order to better qualify them to offer you up to date pension advice. If you would like to arrange a free initial pension consultation call us on 01727 845500.’

Review more information on retirement planning in our Retirement Guide.  To find out what you should be considering at certain life stages read Your Retirement Options – freedom and choice: before, at and in retirement.  

 For more information read: Simon Prestcote, independent financial adviser Barnet, North London – should you transfer your defined benefit pension scheme?  Should you cash in your final salary pension scheme. Mark Bowen – Reviewing your defined benefit scheme

 

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