Commonly known as a ‘final salary’ scheme, a defined benefit scheme is a pension provided by an employer and pays a guaranteed, inflation proof income when the member reaches the scheme’s normal retirement age.

The pension payable is largely dependent on a number of factors, including: the employee’s earnings history, length of service and what is known as the accrual rate of the scheme.

When the member approaches the retirement age of the scheme, there are usually many options available, which can include:

• Take the full pension available
• Take a lower pension amount and receive a tax free lump sum
• Defer taking the pension
• Transfer to a personal pension

Deciding which option is best is not straightforward and is usually irrevocable; meaning it is imperative the correct decision is made.

At CBW Financial Planning, we help clients decide which option is best for them. The advice we provide is based on our client’s personal circumstances and is tailored to their needs, wants and long-term goals. We explore all options available to help assess the best outcome.

This can include assessing whether a transfer to a personal pension is more suitable than keeping the scheme.

Transferring your benefits from a defined benefit (DB) pension scheme

Generally, it is possible to transfer a defined benefit scheme to a defined contribution (DC)/money purchase pension. If a DB scheme is transferred to a defined contribution scheme the guaranteed income available under the DB scheme will be lost.

For the majority of people, a guaranteed inflation proof pension income for the rest of their life is the best option, however, there are occasions where a transfer may be worth considering.

It is not possible to transfer a DB pension scheme which is already in payment. There are also some types of DB pension schemes where transfers are not possible, for example, public sector schemes for teachers, NHS staff and civil servants.

Why would I consider a transfer of my DB pension?

Transferring a DB pension is an important decision, and one that cannot be reversed.

Here are some of the features which should be considered when deciding whether to transfer a final salary scheme:

• Income under a defined benefit scheme is set at outset and increases each year (typically with inflation), whereas the income under a personal pension can be varied to suit the member’s needs
• On death a final salary scheme will, typically, continue to be paid to a surviving spouse at a reduced, rate and then cease once the survivor passes, whereas, the entire value of a personal pension fund can be passed on to whoever the member wishes, including their children
• Final salary pension schemes may start to pay an income when the member reaches the scheme’s “normal retirement age” (usually 60 or 65), whereas members can access a personal pension at age 55, rising to 57 in 2028

What next?

As always, the CBW Financial Planning Team are on hand to discuss any thoughts or concerns that you may have, so please do not hesitate to contact us. In the first instance, please contact Jason Toumba.