Most workers who participate in defined benefit schemes have the option of swapping theirentitlements for money. And given the way in which the transfer values of defined benefit pension have been shooting up rapidly over the past twelve months, it’s becoming a more attractive prospect than ever before. According to one major insurer, the transfer values of the defined benefit of around six million people have skyrocketed over the past year.
Royal London reported that an extensive contingency of such pension holders are being offered ‘eye-watering’ sums of cash, in many instance tens of thousands of pounds more than they were offered a year ago. They wrote that when a person has a pension income to the value of £20,000, it is becoming routine for them to be offered a whopping 30 times its value – in this instance, cash to the tune of £600,000.
But despite the fact that the benefits of selling the rights to these kinds of pensions seems relatively obvious, experts working with Royal London are warning that there can also be risks and downsides to doing so. Just as with all pensions and savings options, it is something that is suitable for some, not for all.
Depending on personal circumstances, accepting an elevated offer for a defined benefit pension can relieve financial pressure and make it easier to get by. In addition, there’s also the option of reinvesting the cash elsewhere, in order to further grow the total pot or use it to fund a drawdown. With a defined benefit pension, workers know exactly what they will receive during theiryears and so can weigh this up against the cash offer presented to them.
According to Royal London, transfer values attached to defined benefit pensions are increasing due to the continuation of low interest rates. This in turn makes these kinds of pensions more valuable. As far as the insurer is concerned, the primary benefits of agreeing to the sale of a defined benefit pension are those of more flexibility when it comes to retirement income, simpler inheritance transference and the possibility of more tax-free cash.
On the downside, they also warn of potential risks and consequences associated with transfers, advising many to stay with their defined benefit pensions into retirement. For example, defined benefit pensions offer inflation protection, the certainty of knowing exactly what you will receive for life and the peace of mind that comes with knowing stock market movements will not affect the income you receive.
The problem being that in accordance with current rules on DB pension, selling them means you have to sell either all of them or none at all. There’s currently no allowance for selling part of a DB pension and holding onto the rest.
“You either take the whole lot out or leave it where it is,” Steve Webb, former pensions minister who is now director of policy at Royal London, told the BBC.
“What I’m saying is there should be a middle ground where you can go on having some of your salary-related pension, so you have got this guaranteed income, but then you have got some cash you can invest or do something more flexible with.”