Defined Benefit “Final Salary” & Safeguarded Pension Schemes
We have qualified Pension Transfer Specialists (PTS) that can deal with this area of financial planning. FCA rules require that only a PTS can give advice for transferring these pensions.
Here, we can provide only general information and our intention is only to help you consider if you may benefit from seeking regulated advice in relation to your personal situation.
Remember: a defined benefit, or final salary pension scheme usually provides you with valuable guarantees.
It is usually considered unsuitable to transfer out of this type of scheme.
It is for this is the reason that the Financial Conduct Authority (FCA) say that advisers must start from the viewpoint that “it is unlikely to be suitable to transfer safeguarded benefits offered through an occupation pension scheme in favour of flexible benefits”.
The FCA has produced a short video explaining what they and you should expect from any adviser you ask to advise you. The link is below. You will need to confirm to us that you have watched this before we will start our advice process.
We have produced a general comparison of some of the possible key advantages and disadvantages of defined benefits schemes and personal pension plans. This may help you decide which factors are important to you.
This is not intended to be and should not be treated as advice or a recommendation to take a particular course of action.
Potential advantages of defined benefit schemes
- You will receive a secured income for your lifetime (subject to income tax), which is likely to rise each year in line with inflation, and you can elect for your spouse/partner to receive an income for their lifetime (subject to income tax) upon your death.
- There is minimal paperwork needed to start the payment of benefits and no ongoing monitoring of the scheme is required once the first payment has been made.
- Defined benefit schemes will place no personal investment risk on you.
- Defined benefit schemes have a legal duty to provide a pension for a surviving widow/widower or dependent in the event of your death.
Potential disadvantages of defined benefit schemes
- A defined benefit scheme is rigid in its structure, you will get a set amount of money each month until you die therefore it cannot adapt if your financial needs change during retirement.
- The payments of your scheme pension must be selected before taking any benefits and cannot be changed at a later date.
- Many defined benefit schemes have a pre-selected retirement age and taking benefits early can result in penalties.
- Only your spouse/partner and children under the age of 23 (unless legally defined as a dependent if older) will usually be entitled to a reduced pension on your death. This will mean you will not be able to leave your pension benefits to anyone else on your death.
- Any options to provide benefits on death (if offered by your scheme) must be selected at outset and will result in a lower initial pension payment.
Potential advantages - individual pension or drawdown plan
- The tax-free cash of an individual pension or drawdown plan may be greater than from a defined benefit scheme.
- You can choose how and when your benefits are taken. This offers more flexibility and choice (which you may or may not want/need).
- When taking benefits there are no restrictions on the amount of money you can withdraw at any one time.
- On your death your nominated beneficiaries will receive the remainder of your pension fund. There is no restriction on who you choose to receive these benefits.
Potential disadvantages - individual pension or drawdown plan
- The benefits taken from a drawdown plan will need to be carefully managed to ensure the fund does not run out.
- IF YOU NEED REGULAR INCOME THERE IS THE POSSIBILITY THE INVESTMENT FUND MAY NOT BE SUSTAINABLE THROUGHOUT YOUR LIFETIME. THIS COULD POTENTIALLY MEAN YOU ARE NOT ABLE TO MEET CORE INCOME REQUIREMENTS IN LATER LIFE.
- The value of the funds you invest in will be subject to fluctuation and this can result in the value of the fund reducing even when income is not being taken. Where income is being taken this will reduce the fund value to a greater extent.
- The only way to secure an income through an individual pension is with the purchase of an annuity. It is unlikely this would be able to replicate the same level of income payments paid by the defined benefits pension scheme.
- Should you be interested in transferring your defined benefit pension scheme, and the transfer value is £30,000 or more, it is a legal requirement that you obtain formal financial advice.
- There will be ongoing advice, plan and fund charges to pay. You will also need to monitor where the fund is invested to ensure it meets your attitude to risk and investment objectives.
Examples of where a transfer may be beneficial or harmful
A transfer may be harmful - if you will need to rely on the pension income to meet your key/core income requirements throughout retirement.
A transfer may be beneficial - if you will not need to rely on the pension income throughout retirement and would like others to benefit from the plan on your death.
Please read all of the following:
If you are unsure of the most suitable route for your individual circumstances, you should seek independent financial advice from a firm that is appropriately qualified (PTS)
If the value of your pension fund is higher than £30,000 your scheme is required to check that you have had advice before they will allow a transfer
The Financial Conduct Authority (FCA) has said that we cannot discuss your personal circumstances and requirements unless we treat you as client - you will be asked to sign our engagement letter
This is a complex and high risk area of financial planning and this is reflected in the costs to provide it
All advice will be given by formal letter/report (this is also a requirement of the FCA)
If asked to advise you, we cannot guarantee to deliver our advice before the expiry date of any guarantee period given for your scheme transfer value (usually a maximum of 3 months)
Future transfer values quoted by your current pension scheme may be higher or lower than quoted now.
Please note that our advice may be that you do not transfer your pension
We will not process any transfer request if our advice is that you should not transfer
You will still be charged whether or not we advise you to transfer your pension