Over recent months, we have seen increased coverage in the press, as well as many enquiries from new potential clients, around the feasibility of transferring pension benefits from final salary (Defined Benefit ‘DB’) schemes into personal pension (Defined Contribution ‘DC’) arrangements.
Our default position has always been that, for many people, it is likely not to be the best option to affect a transfer out of a DB scheme, as this passes the risk of providing retirement benefits onto the end member who is then reliant on future investment returns (which are not guaranteed).
Whilst the peace of mind offered by a DB pension is very valuable, the introduction in2015 of new ‘Pensions Freedom’ legislation certainly provides more flexibility for those who have funds in a DC arrangement. This is true both for those looking to use their funds to provide more flexible benefits in retirement, as well as those who look at their pensions as a vehicle to provide a future legacy for their family. This flexibility can make the transfer from DB to DC look more attractive than in the past.
Furthermore, many of the transfer values being offered from DB schemes are now higher than they have been historically, and therefore worthy of analysis and consideration in some circumstances. Transfer values are being inflated due to the way that these are calculated by scheme actuaries, to reflect the higher cost of securing a guaranteed income in the current low-interest rate and low yield environment.
Having a broad understanding of a client’s current and future financial position, their likely needs in retirement, and the strategy for meeting their needs (for example, when and how is income going to be provided) is crucial to feed into any transfer assessment.
A retirement strategy has many moving but interlinked parts.
It is sensible for many to consider building a retirement strategy out of a mix of guaranteed and more flexible pension arrangements, typically with at least their basic living costs met by secured income (for example, State Pension, DB pensions, annuities, etc.). Thereafter, more ‘luxury’ expenditure and ‘legacy’ planning is able to be met by more flexible unsecured arrangements (for example, pension drawdown) – if this element underperforms, it will not be too detrimental to a person’s core needs.
However, with current high transfer amounts, we understand there are those where the traditional secure pension route needs to be compared to the alternatives.