Pension Transfers – Defined Benefit Pension or Defined Contribution Pension? When should you transfer?

The pension freedoms introduced by the UK government two years ago changed the pension landscape permanently. Whilst the new rules are now well and truly bedded in, the decision on whether or not to undertake a pension transfer is still heavily discussed by clients and advisors alike.

Opinion is often divided on whether to stay with a defined benefit (DB) pension scheme or move to a more flexible defined contribution (DC) pension. Weighing up the benefits and issues that might arise from a pension transfer means looking at what the real situation is for the people who are right in the middle of it – the pension holders themselves

Surge in demand for Pension Transfer Advice

The pension freedom legislation in 2015 heralded a phenomenal surge in demand for advice on transferring a pension out of a final salary scheme. If current stats are to be believed, there is no sign of this demand abating in the near future. More and more defined benefit pension members are looking to explore their options and take advantage of the same freedoms that are being offered to their defined contribution pension peers.

The flexibility offered by a defined contribution pension is highly appealing. With the ability to switch income on or off, increase or decrease it as personal circumstances dictate, combined with enhanced death benefits, tax efficiency and greater control, it’s ever-likely that defined benefit pension members are looking into their options.

When you add the enormously elevated transfer values that are currently being offered to final salary pension holder, then it seems that everyone’s Christmas has come at once!

Why are Transfer Values so high?

Three simple reasons:

1. We are all living longer

The longer we live, the more pension money will need to be paid out in our retirement. Pension providers are realising this and offering a high value transfer to remove the long term risk from their books.

2. Equities changing to Government Bonds

Another aspect of DB pension schemes de-risking has been a move from a greater allocation to equities in favour of government bonds. This has resulted in lower returns on pension scheme assets.

3. Lower Gilt Yields

The move to increased allocation to government bonds has coincided with historically low gilt yields meaning that DB pensions now cost much more to provide.  

These three factors have combined to deliver transfer values that are typically 30–40 times the projected annual income of the DB scheme. For some, this is a tempting offer that’s too good to miss.

To Transfer or Not To Transfer?

What’s the right choice for you? From day one of the pension freedom reforms, the Financial Conduct Authority’s view on pension transfers has remained very much on the side of not transferring and remaining with their “gold-plated”defined benefit pensions with the guaranteed income and inflation protection that they provide.

For many people, this is may well be the best course of action, but not for everyone. Clients who are of higher net worth, and who may have other sources of income at their disposal  can afford to be more risk tolerant in their pension planning. For them, transferring out of a defined benefit pension to a defined contribution pension, could well be the right decision. The flexibility of a defined contribution pension would allow them to manage their tax affairs more efficiently and also to leave a considerable financial legacy to cascade down the generations.

Stuck in the middle

But there are also plenty of people who sit somewhere in the middle. They have defined benefit pensions that give the comfort of a guaranteed income, but they could perhaps benefit from investing a proportion of their accrued DB pension into a DC scheme.

In this situation, a partial transfer could be a satisfactory compromise. Not all DB schemes offer this option, but if it is in the best interest of the client, it is a question worth asking. And if a partial transfer is not an option, the question needs to be asked – why not?

Best of both worlds – Partial Pension Transfers

This area of pension transfer advice has moved on significantly in the last two years. Partial pension transfers could represent a ‘best of both worlds’ option for clients and means that the “transfer or not transfer” question becomes somewhat less binary, helping clients achieve their desired financial outcomes, while also helping pension trustees and employers manage their liabilities. It seems to potentially be a win-win situation!

Retirement needs have not changed

The pensions landscape has changed a lot since 2015. But whilst it is more challenging to navigate, with social trends, industry developments, legislative reform and a changing financial market, clients’ retirement needs have remained the same.

People want the same things they have always wanted in their retirement.

  • Sustainable income
  • Access to rainy-day money
  • The ability to leave a legacy
  • Flexibility and control over their retirement savings.

The trend in pension transfers will continue, but the most important aspect of it, is that with new pension freedoms, clients’ retirement planning is very much in their own hands.

Pension members face difficult long-term choices, which require more robust and rigorous advice than ever before, and high-quality investment solutions to match.

At Haven, we keep the clients’ interests front and centre of mind, and by applying efficient processes around pension transfers,it means that pension transfers don’t have to be a minefield for you.

We understand the benefits of both defined benefit and defined contribution schemes, and we are cognisant of the long-term implications of transferring, – please contact us and we will help you to plough the field and ensure that your future is fertile.