Defined benefit/final salary pension schemes were largely left unchanged by the raft of pension rule changes earlier in the year. As those with defined contribution schemes were allow full access to their funds, defined benefit scheme members were still required to take an income according to scheme rules.
This has caused a notable increase in people wishing to transfer away from the guaranteed, inflation proofed income offered by these schemes in favor of the more flexible arrangements offered through income drawdown.
The latest research from Xafinity shows almost double the people accepting transfer payments verses those who did in January 2015 (before the rules changed).
Defined benefit scheme member don’t have a ‘fund’ size they can monitor throughout their working lives as it’s simply an amount of money required to buy the benefits they are promised at retirement.
A guaranteed lifetime, inflation proofed income, with spousal benefits can be quite expensive to purchase given increasing longevity, and therefore the reflected transfer values can be appealing to some member.
A Cash Equivalent Transfer Value (CETV) can be acquired on request by the member (or their financial adviser) through the scheme administrators.
The attraction for some members to come out of these guarantee schemes is to have more control and access to the funds.
If someone with no partner took benefits from a scheme and died a year later, there’s generally no mechanism to pay any remaining funds onto their estate. The scheme would simply ‘win’ from extra funding.
If benefits were transferred and the member subsequently took income drawdown, these funds could either be enjoyed by them or their estate. Drawdown allow assets to be passed onto partners, children or anyone names on the ‘nomination of beneficiaries’ form.
A decision to move away from these type of scheme pensions shouldn’t be made lightly. Drawdown doesn’t offer any lifetime guarantee of income and has investment risk.
The regulator recognised that more people may want to transfer away from these types of schemes with guaranteed benefits and put certain procedures in place.
Any scheme with a transfer value of £30,000 or more needs to be moved only with the use of a qualified professional. A standard financial adviser isn’t enough, the regulator has stipulated that the adviser must have a specialised pension transfer qualification such as AF3, G60 or AwPETR.
Here at compare drawdown, we have also noticed an increase in enquires from people looking to preserve the funds they have built up under defined benefit/final salary schemes. We fully asses the adequacy of such a request before recommending a transfer. If you wish to know more about your options we can help.