Defined Benefit or Defined Contribution
What is a Defined Benefit pension?
These schemes, usually known as DB schemes or Final Salary Pension Schemes, are set up by your employer, to provide a pension for you for life when you reach retirement age.
They are usually based on your salary and how long you have been a member of the scheme (usually years of service).
They can provide a guaranteed income for life, or a tax free cash sum and a smaller income.
The income is normally index linked up to certain levels and as long as inflation stays within these levels, your pension will always keep up with inflation.
There are no investment risks and no monthly charges other than your contributions into the scheme, where applicable.
A DB scheme can provide a reduced pension for your spouse or civil partner when you die for the rest of their life.
The pension will not end in your lifetime and will never run out of money. The payments will only stop when your spouse or civil partner dies.
Most schemes provide for an early retirement if you want to stop working before the normal retirement age, however this will usually reduce the pension you receive.
Most schemes provide for a Tax Free Cash sum at retirement, although this will mean a reduced guaranteed income for life.
Once you take the Tax Free Cash, the pension, guaranteed for life, will start and will be taxable as it is treated as earned income.
Think about why you might want to transfer your pension. What will your defined benefit (Final Salary) pension do for YOU that a Personal Pension will not, and which are important to YOU.
What is a Defined Contribution Pension?
These schemes, known as DC schemes, are personal pensions, sometimes set up by employers as Group Personal Pensions, but are usually taken out by you with an insurance company or investment house.
The Benefits at retirement depend on how much you have paid in and how well your investment has grown. This type of pension will always have a tangible value on any given day.
The benefits are not defined. Newer DC Schemes are designed to be flexible to allow YOU to dictate how to take the benefits and when (subject to minimum ages), deciding how much you want at any given point in your retirement (the “Shape” of the income).
These plans involve investing in the markets at a risk level appropriate for you. This gives the potential for gains AND losses at any time.
The full value of the DC can be passed to your nominated beneficiary when you die. This can be a spouse, civil partner, long term cohabitee family member or any other appropriate beneficiary. Depending on your age at the point of death, this will affect the tax treatment for the beneficiary.
There are no guarantees with DC schemes. The pension could run out before you die. However, with advice and proper management this risk can be reduced.
Phased retirement is possible. This could allow you, for example, to reduce your working hours to ease into retirement and taking a portion of your pension for a specific need.
Tax Free Cash of up 25% of your fund is available at any time over the age of 55 (57 from 2028) This will leave a smaller amount to provide your pension at retirement. This can be taken in one lump sum or as a withdrawal each month to provide tax efficient income. With this type of scheme, there is still the option of converting to a guaranteed income for life later on through an annuity. You should note though this is not guaranteed to provide the income that you might get from your occuptional scheme.
Consider what a transfer can do for your pension and your retirement. What features of either a DB or DC scheme are important to you.
Our aim with this document is to help you decide whether you want to proceed to the Advice Stage of the process of considering a transfer from a DB pension into a DC plan.
The first point is to assess your feelings toward risk and reward and how a loss in the value of the pension fund would affect you in retirement.
Risk and reward is the term used when describing the effect of risk on an investment, usually a higher risk will bring higher rewards but with the increased chance that there will be a loss in value at some point during the term of the investment. However, holding the investment for a medium to long period, should yield a positive return overall.
Lower risk will therefore typically yield lower rewards, but will limit losses within your investment.
We use a risk scale of 1-10, 1 being the lowest risk and 10 being the highest. Normally a risk score of 3 or less would mean that we would be unlikely to feel comfortable recommending a transfer unless there were any unusual circumstances. If you feel that you are someone that would fall into this category, we think that you would probably be better off leaving your pension within the guaranteed environment unless there were circumstances that dictated our advice or for example, limited life expectancy.
Secondly, you should consider how a loss in value of the pension fund would affect your standard of living in retirement. Do you have the ability to reduce your income to allow the pension value to potentially recover? Are there any other assets that could be used for income should this happen? What would a loss in the value mean to you?
If the questions below and the answers to them make you feel uncomfortable, then perhaps a transfer is not right for you.
When you have considered the above basic information and how it affects you and your plans for the future, you can decide whether you wish to ask us to provide an analysis of your scheme and how it will compare when transferred to a personal arrangement.
We would then carry out an analysis of the scheme to produce an Appropriate Pension Transfer Analysis report. This provides an estimate of how much pension the transfer value might provide in the future given information provided by the scheme. We then compare this to how a personal pension might have to perform to match the benefits in the scheme.
Finally, after finding out about how you want your pension to look, how much Tax Free Cash you might need and what income you would need in retirement, we would carry out a Cash Flow Analysis which will give us an idea of how the pension would last if you were to transfer the scheme benefits to a personal pension.
This will usually involve a Fee for our work, whether or not you decide to go ahead with any recommendation to transfer.
Please complete the questionnaire below and also indicate below whether you feel that you would like to proceed with the advice process.
Please enter any comments or questions you may feel are important to you in the Message area below.