Should I Stay or Should I Go?

Some Defined Benefit Pension Policyholders are being offered large sums to transfer out of the scheme. But with such a big carrot being dangled, what’s the catch?

pension transfer out value carrot being dangled

Even if you haven’t paid into the scheme for years it is likely that you are still entitled to the benefits, known as “deferred benefits”. Have you got one from a previous job? Many people we see have a DB pension from earlier in their career that they have forgotten about. They are often surprised by how much is being offered them to transfer out of the scheme. Take a look and let us know.

Transfer values: Too good to be true?

Increased life expectancies and decreasing gilt values have meant that many institutions are now offering DB pension holders generous sums to transfer out. I have heard of Cash Equivalent Transfer Value (CETV) offers of 30 or 40 times the pension value (although the average is around 22 times), a figure which is bound to have some initial appeal.

But given the DB scheme’s solid reputation, should you really wave goodbye to all that security and jump into an investment-led retirement plan?  A typical alternative to a DB scheme is a defined contribution (DC) scheme. Its value at retirement will be determined by the performance of its investments over time, unlike your DB scheme which has a guaranteed income.

So, should you accept the CETV offer or not? Although you could have the access your benefits you will be subject to the levels of risk that come with investments.

Here are some of the key points to consider. It all boils down to your own personal circumstances and your priorities. You should take independent financial advice to help you reach your decision.

Considering Staying? Factors to consider (and take advice on).

  • If the scheme is in deficit there is a risk that it may be taken over by the Pension Protection Fund. If that happens your benefits may be reduced.
  • Check whether your beneficiaries or dependents would be compensated in the event of your death.
  • The new pension freedoms give a lot of options and flexibility for retirement planning. You could miss out on these by sticking with your DB pension.
  • Today’s exceptionally high pension transfer values may never be matched again, so you may regret not accepting the offer to transfer out for the DB scheme.
  • If you’re in poor health and or you are a smoker, you may have a lower life expectancy. DB schemes don’t usually adjust for this. You could possibly benefit from an enhanced annuity to boost your retirement earnings, if you transferred out of the DB scheme.

Considering Going? Factors to consider (and take advice on).

  • You are giving up a secure income for life. The decision is permanent – you can’t transfer back in.
  • You’ll have to take on the investment risk that comes with DC schemes and other investment. But a large number of people do this successfully, especially with the help of a good Financial Advisor.
  • If your investments don’t perform as well as you had hoped, you may have to compromise your lifestyle in retirement, in order to make your money last as long as it needs to.
  • A common way of converting a DC scheme into an income for retirement is by purchasing an annuity. Annuity rates are low at the moment. However, there are other options, like income drawdown, which could allow you a far more flexible approach. You should discuss your options with your financial advisor and evaluate what is best for you.
  • Asses what other assets you have that provide you with a guaranteed income for life, so that you can have a balanced retirement plan.

If you are planning your retirement effectively, the minimum you should be aware of at present is the likely income that you are estimated to receive in retirement. Contacting the administrator of your former company scheme would be my advice in the first instance.

If you’re unsure about this, please contact me and I’ll be happy to discuss your options with you.  Yours, John.

*Sources: Sep 28th, 2017