It was recently reported in the Guardian that the coronavirus lockdown has added £10 billion to the UK’s Final Salary scheme deficit. The following week, Money Marketing confirmed that hundreds of schemes are likely to put-off tackling the issue until after the current crisis.
If you were planning to transfer out of your Defined Benefit (DB) scheme, you’ll be aware that in March, the Pensions Regulator introduced emergency measures allowing trustees to freeze DB transfers for up to three months.
It won’t always be in your best interests to transfer out of a DB scheme but if you were considering it before the current freeze, what are the pros and cons, and is it right for you?
Why you might consider a DB transfer
- Pension Freedoms
One of the main reasons people consider transferring out of a DB scheme is to access their pension via one of the Pension Freedom options introduced in 2015.
Pension Freedoms give Defined Contribution (DC) scheme holders greater flexibility in how they access their pension funds.
As well as the traditional annuity (a regular income paid for life) Uncrystallised Fund Pension Lump Sums (UFPLS) and drawdown became an option.
An UFPLS allows those at retirement age to access their whole pension fund in one go as a lump sum, whilst drawdown allows for income to be taken – or ‘drawn down’ – as and when it is needed, whilst leaving the uncrystallised portion of the fund invested.
- To release money because of ill health or for inheritance purposes
If you are in ill health you may want to release capital to pay for treatment, or for Inheritance Tax (IHT) purposes.
Transferring your DB pension to a DC scheme would allow you to pass the unused pot on to a beneficiary of your choosing tax-free if you were under age 75 at the time of death.
Benefits can still be passed on to a beneficiary if death occurs after the age of 75 but they will be taxed at their marginal rate.
Note that the transferred amount could still become liable for IHT if death occurs within two years of the transfer date, under the so-called ‘two-year rule’.
Why you might opt not to complete a DB transfer
- You might be giving up valuable benefits
A Final Salary (or DB scheme) provides a defined and regular amount of pension income, that is likely to be highly competitive when compared to a DC alternative.
On top of that, your DB plan might have valuable additional benefits that only apply if you remain a member of the scheme, or take your retirement benefits in a certain way.
This might be a death benefit – a spouse or civil partner’s pension, or a pension paid to a child (normally where they are under age 18, or under 23 and in full-time education) – or a full pension if you retire early through ill health.
Giving up these benefits to access your pension flexibly means giving up a guaranteed, regular income for life.
- DB schemes are a target for scammers
The Pensions Regulator (TPR) recently decided to halt DB transfers after weeks of market volatility caused by the global coronavirus pandemic.
Market turbulence, coupled with the reduction in the Bank of England interest rate, was expected to lead to increased interest in DB transfers which would, in turn, make investors easier prey for scammers.
The FTAdviser stated that there were 105 reports of fraud relating to Covid-19 in the period from February 1st to the middle of March, with total losses reaching £970,000. The red flags of pension scams remain the same – unsolicited approaches such as cold calls, time-limited offers, and ‘guarantees’ that appear too good to be true.
Is a DB transfer right for you?
DB pensions are based on the number of years you’ve been with the scheme as well as your final, or average, salary.
This means that unlike DC schemes – where you pay contributions to build a pension pot that is invested and used to fund your retirement – DB pensions will likely not be affected by market performance.
Although pension transfers are frozen, for now, there’s no reason to panic. Be wary of potential scams and remember that whether a DB transfer is right for you will depend on your personal circumstances. We can help you decide on the best option for you.
Also, remember that if your plan has a value of over £30,000 you are required to seek advice before transferring out of a DB scheme so if you think you would like to do this speak to us.
If you’d like to discuss any element of your Final Salary pension, do get in touch.