Got a final salary pension? Act now!

May 15, 2014

You may have heard mention of something called ‘DB to DC transfer’. You may well have tuned straight out of that conversation because, let’s face it, it doesn’t sound particularly interesting. However, if you have a final salary pension, it’s really important that you understand what this is all about because it affects you.

Firstly, some definitions to help things along:

DB pension (Defined Benefit): this is a final salary pension plan, where your retirement income is based on your final salary rather than the value of your pension pot. This is the type of pension you’d receive if you work in public services. They were also commonly available in the private sector until they started phasing them out about 15 years ago because they’re expensive. Lots of people still have one sitting around.

DC pension (Defined Contributions): this is your bog standard pension where retirement income is based on the value of your pension pot and the annuity rates available when you retire.

When the Budget in March announced changes to pensions which will allow people to withdraw their whole pensions from April 2015, they were referring to DC pensions. This has led to speculation that people with DB schemes will transfer to DC schemes so they can access the whole fund.

So why is this news?

Transfers out of public sector schemes are soon to be blocked, partially because final salary schemes are perceived to be high quality, and partially because some public sector schemes are unfunded and are just backed by the government so there is no transfer value to pay. There is pressure to extend the ban to the private sector too. However, we believe this is a mistake. For some people, a transfer is the right thing to do.

Why consider a DB to DC transfer?

The problem with DB schemes is that they define how you take your benefits, i.e. they must increase with inflation, have a 50% spouse death benefit…

For some people, this isn’t a problem. However, if you’re not married, for example, or if you have medical conditions which would qualify you for an enhanced annuity rate under a DC scheme due to your reduced life expectancy, the best options might not be available to you. You may get a higher, more suitable income from purchasing an annuity. In addition, if you have other retirement provision i.e. you own a business, withdrawing your whole pension fund under the new rules may suit.  If a complete transfer ban is implemented, some savers could stand to receive poor value for their savings and disappointing retirement outcomes.

With the threat of a government ban on DB to DC transfers, if you have a final salary pension, now is the time to act. For many people with a DB pension, the best option might well be to stick with it – the new DC flexibility may not outweigh the value and certainty of your DB income promise. However, in some cases, a transfer may mean that you can improve your situation by taking advantage of the new-found freedom of the DC world. A DB transfer can take up to six months to process. Failure to take action now could see the best-laid retirement plans go to waste. Get in touch to discuss your options now or face disappointment.


This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.