How can you be sure you’re getting the right advice on your defined benefit pension
We discuss the key areas for consideration
From opportunistic scammers to unreliable transfer advice, when it comes to defined benefit (DB) pension plans, the media stories are rarely positive. Being a member of a DB pension scheme brings with it a number of benefits, as well as some possible risks.
In this blog post, we will highlight the benefits, options and risk associated with this type of pension. We will discuss when a transfer might be appropriate and share guidance to help you find a reputable pension transfer specialist.
What is a defined benefit pension?
A DB pension is also known as a final salary or career average pension. It provides you with a guaranteed lifetime income after you retire.
The amount of money available to you from your pension will depend on a number of factors. These include everything from the rules of your scheme to how long you have worked for your employer and the salary that you earned while working
It is your employer’s responsibility to ensure that there is enough money to pay for your pension income, but often you can make contributions to your pension too.
You will find a current estimate of the amount available to you (at normal retirement age) on your pension statement. It is likely that some or possibly all of your pension will increase each year to protect you from inflation.
How should you take your DB pension: lump sum or income?
While many people find it reassuring to have a guaranteed lifetime income after retiring, others may prefer to exercise greater control over their money. The rules of your scheme will outline how and when you can access your DB pension.
When it comes to deciding whether to take your DB pension as a lump sum or as income – or as a combination of the two – there is no ‘one size fits all’ answer. Opting for a lump sum over income, however, may increase your risk of running out of money in retirement.
Regardless of which option you prefer, it is always wise to seek professional pension planning advice. When you speak with a financial adviser about your retirement plans, he or she will take time to understand your current situation, the rules associated with your pension scheme and your financial goals. They will use tools like cash flow forecasting to pinpoint any potential shortfalls and review interlinked areas of your finances. This helps to protect your overall financial position by highlighting any unnecessary risk – or loss – which may arise due to the pension planning decisions made.
What happens if your employer cannot afford to pay your pension?
Being the holder of a DB pension can be highly beneficial, but it does not come without risk. If the sponsoring becomes insolvent, for example, and they have not made adequate provison, you might not receive the amount that you had initially expected.
The Pension Protection Fund (PPF) has been set up to protect defined benefit scheme members from such an event. Unfortunately, the amount of compensation that you are paid, should you need the PPF’s support, may fall short of the amount that you are entitled to.
While this risk does not necessarily mean that you should consider a pension transfer, it does highlight the importance of planning for your retirement ahead of time. Doing so allows you to better understand your financial situation and plan for all contingencies.
Should you transfer your pension?
In an article about DB pension transfers for International Adviser, our Senior Client Director, Nicholas Toubkin stated: “I am firmly of the opinion that the vast majority of people in a DB pension scheme should retain this valuable benefit.”
His opinion echoes that of our team members, as well as of industry regulatory bodies such as the Financial Conduct Authority (FCA). The FCA’s stark warning – “if you transfer out of a DB pension, you cannot reverse it” – serves to remind us all that, if you willingly give up your guaranteed lifetime income, there is no turning back.
That said, there are a number of individuals who might benefit from transferring their DB pension. Typically, these individuals have no need of the lifetime income that this type of pension can guarantee. Below, we have shared two scenarios where a transfer might be advantageous.
Scenario #1: Internationally mobile individuals
A pension transfer might be a viable option if you do not need to rely on the lifetime income that a DB pension can provide and you have returned or relocated to another country – a country where payment of your pension in GBP might be disadvantageous. Of course, this would not be the only reason for transfer and client circumstances would be assessed on an individual basis.
Nicholas highlights the fact that, for such individuals, it is possible to transfer a DB scheme to a recognised overseas pension scheme (ROPS). For internationally mobile individuals, this.may be a more beneficial option than retaining their DB Scheme.
If this option seems relevant to you, it is a good idea to contact a financial adviser as soon as possible. There is indecision about the scope to transfer to a ROPS post-Brexit; taking action before the end of the year, therefore, is strongly recommended.
Scenario #2: Individuals limited by defined benefit succession planning options
As a member of a DB pension scheme, a portion of your pension income may continue to be made to your spouse, civil partner or dependents if you pass away before they do.
If this is of little benefit to you and you are not reliant on the guaranteed income provided by this type of pension, a transfer may be warranted. This is particularly the case if you wish to pass on your pension fund/s to an intended beneficiary or charity, while also making use of available inheritance tax (IHT) exemptions.
Defined benefit pension transfer advice
If you believe that a pension transfer might be the right option for you, it is required for you to receive financial advice, even if your pension savings are below the £30,000 threshold. If you do not have an adviser, it is crucial that you find the right financial adviser for you, someone with the credentials and experience that you need.
Within our team of experienced financial advisers, we have a number of defined benefit transfer specialists. Having achieved – and successfully maintained – Corporate Chartered status, we pride ourselves on our continued dedication to best practice. We voluntarily adhere to the Personal Finance Society’s (PFS) ‘Pension Transfer Standard’. This is the gold standard for firms providing pension transfer advice. It ensures that we follow 9 core principles, from “helping clients understand when advice is appropriate” to providing “transparency in advice processes and outcomes.”
In line with these principles, we urge you to read the PFS’ ‘Consumer Guide to the Pension Transfer Gold Standard.’ If you have already received advice, but feel that it might not have been in line with best practice guidance, we recommend reviewing the FCA’s ‘Advice Checker’ notes and comments. Here, the regulator outlines exactly what you can expect – as a minimum – from a defined benefit transfer specialist.
Ready to discuss your pension plan?
Strabens Hall provides you with independent advice that is fully tailored to you, your current situation and your financial goals.
To discuss your pension plan and any questions that you may have about transfers, contact our London or Nice office and book an appointment with one of our advisers.
Find out more about our pensions expertise here.