Until recently a transfer out of a defined benefit pension was almost always a complete no-no.
But is now the time to consider and transfer and what are the reasons to look at the possibility?
Before we get into the possible reasons, it’s important to note that the vast majority of people should still RETAIN their Defined Benefit pensions, but there have been a few changes recently that may urge you to consider a transfer, when previously, you would not have done so.
The ‘new’ pension freedom introduced in April 2015, have encouraged an increasing number of people to think about how best to access their pensions and understandably many people wish to consider transferring out of their defined benefit pension scheme and into a personal arrangement which is known as a Defined Contribution scheme. In most cases this would be a Personal Pension Plan.
Transfer values from Defined Benefit pension schemes should be looked at following further reduction in gilt yields over much of this year and the increase in the Cash Equivalent Transfer Values.
Defined Benefit pension schemes have long been regarded as the “gold plated” pension which many people have historically benefited from in retirement and for most this is still very much the case. But more recently, some people are now beginning to think the previously unthinkable.
“Should I transfer out of my Defined Benefit pension to take advantage of the new pension freedoms?”
Increased Cash Equivalent Transfer Values offered for transferring out of a Defined Benefit pension schemes are now higher as gilt yields and UK interest rates are lower. Falling gilt yields have increased the cost for scheme to provide benefits, which in turn has prompted them to offer improved transfer values to leaving members.
Swapping a guaranteed pension income for life for an invested personal pension account will not be the right decision for most people. But for some it may make sense to transfer to a personal arrangement. If a transfer takes place, effectively the member will have far greater control of what is a significant asset. More often than not, it will still be right for the individual to remain in the scheme but there are compelling reasons to at least consider a transfer.
The NEW pension freedom rules, will give the pension holder and ultimately their beneficiaries more freedom to access their pension funds. For people who already have a good level of guaranteed income for life or substantial other assets, this may be a route they wish to look more seriously.
So when might it be appropriate to consider a transfer?
Six reasons to consider a transfer out of your Defined Benefit pension schemes are:
- If you have health concerns or issues. It could take more than 20 years to fully receive the transfer value in equivalent income.
- Death benefits. Transferred funds are likely to offer much better income to spouses as they will not see income automatically reduced. Additionally, Defined Benefit pension schemes usually leave no benefit to future generations.
- Full access is available to the fund at any time if transferred into a personal arrangement, giving the ability to choose when and how to take income. This could prove significant for tax planning.
- Inheritance tax planning. For the fund that remain untouched, in some cases can be passed to the next generation very efficiently.
- Tax-free cash. Tax-free cash amounts can in some circumstances be higher.
- Investment growth. Investment returns currently required to replace the guaranteed income foregone from a Defined Benefit pension schemes have in some cases fallen to acceptable levels as transfer values have increased.
These are just some of the issues to consider if you are considering transferring out of a Defined Benefit pension schemes. However, this area of financial planning is extremely complex and great care needs to be taken before proceeding with a transfer and despite the changes the vast majority of people with deferred benefits, should still remain within the scheme. Just because “pension freedoms” exist doesn’t mean it is appropriate to give up guaranteed benefits to access them.
To make sure you don’t make a mistake, it is advisable to take advice from a professional financial adviser.
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like to talk about money issues.
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The contents of this article should not be regarded as specific advice. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.
