Final Salary/Defined Benefit Pension into Income Drawdown

Posted By: Phil Handley DipPFS AwPETR On August 8, 2015 Category: Defined Benefits Pension Transfer Final Salary Pension

Since the new pension reforms came into effect in April 2015 those in Defined Benefit pension scheme (often called final salary) have looked more seriously at transferring their benefits out. Defined Benefit schemes have often been referred to as gold plated schemes for the excellent benefits they offer. These often include an inflation proofed, lifetime income with built in spouses benefits.

Defined benefit schemes were largely overlooked in the reforms with no real announcements which effected the way they could be taken. In fact those in unfunded public sector schemes were banned from transferring their benefits away from April 2015.

In the first instance, transferring away from a defined benefit scheme should be viewed as not a beneficial exercise. This is because it is near impossible to replicate the benefits by taking the transfer value and trying to purchase similar benefits on the open market.

Anyone who wants to find out how much their benefits are worth should ask for a cash equivalent transfer value (CETV) from their scheme administrators. This provides a cash value to the benefits being provided.

The transfer value is guaranteed for 3 months by law and there is often a charge should a 2nd transfer value be required within any 12 month period.

From my experience, people are often surprised at the transfer value being offered and with the changes brought about by pension freedoms, are more protective of preserving this for their estate.

One of the drawbacks of defined benefit scheme are the lack of death benefits in terms of the funds being passed onto an estate. Outside of the spouses benefits the value of the pension fund is passed back to the scheme. It is therefore becoming more common for those in final salary scheme, who wish to preserve assets to move into income drawdown if this is a high priority.

Unused assets within income drawdown can be passed onto spouses or beneficiaries and not lost, providing security of the full pension fund. Often people who are unmarried and therefore have no use for a spouses benefit, may want to move into drawdown and have more flexibility to with how and when they access their pension fund.

If a single person dies shortly after commencing their defined benefit scheme, there can be a huge amount of benefits lost back to the scheme. Transferring into income drawdown can prevent this happening.

For people with large transfer value of £200,000 plus, the possibility of losing this value rather than being able to pass it onto their estate can be more difficult.

To be clear, transferring out of a defined benefit scheme, for the most part, isn’t a good idea. They provide excellent guaranteed lifetime benefits. If however more flexibility of your funds or preservation of assets is a higher priority, income drawdown might be an alternative.

As the decision to move away from final salary schemes involves complex analysis, to understand the benefit being lost verses the benefits potentially gained, the regulator will only allow this through the use of a suitably qualified financial adviser with pension transfer qualifications. The only exception is if the transfer value is less than £30,000.

Need advice on your final salary pension?

If you are considering moving away from a final salary or defined benefit scheme, we have the required qualifications and experience to assist. If you want to talk to us about your situation, please don’t hesitate to call us for a no obligation chat.