Category : Defined Benefits Pension Transfer

Defined Benefit transfers increase because of pension drawdown

Posted By: Phil Handley DipPFS AwPETR On December 5, 2015 Category: Defined Benefits Pension Transfer

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.


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.