Defined Benefits or Defined Contributions Pension Schemes

Defined Benefits (DB) or Defined Contributions (DC) Pension Schemes

• In the popular press, ‘final salary’, also known as ‘defined benefit’, pensions are often referred to as ‘gold-plated’, the implication being that they are superior to ‘defined contribution’ (money Purchased) arrangements such as Personal Pensions.
• Many therefore can dismiss the notion of doing anything with a Defined Benefit pension other than keeping the annual benefit statements safe and waiting until the scheme retirement age. For many people, there is nothing wrong with this, and the Defined Benefit pension will provide a solid foundation of index-linked income in retirement, free from any headaches about fund performance, the need for annual adviser reviews or concerns about market volatility.
• However, for a significant number of people, with particular goals, personal circumstances and appropriate attitude to risk, a transfer away from a Defined Benefit pension to a Defined Contribution arrangement can be an extremely beneficial exercise.
• We list below a list of considerations which should not be ignored:-

 Defined Benefits (Final Salary) – Pros

• A known & index linked income in retirement
• Guaranteed death benefits (income) for spouse / dependants
• No worries about investment fund performance
• No concerns about market volatility
• No need for ongoing advice / reviews

Defined Benefits (Final Salary) – Cons

(And therefore why a Defined Contribution arrangement may be more favourable)

• Flexibility & Choice – Set income & Pension Commencement Lump Sum (PCLS) at outset may not be required
  • May be planning phased retirement / winding down / part time
  • Therefore could create an unfavourable tax position
• Control of underlying assets – DB scheme investment may not match appetite for risk / capacity for loss of the member
  • Therefore DB scheme is not invested in a bespoke investment portfolio that may be required
  • DC scheme is especially attractive for longer term investors with greater appetite for risk & possibility of greater fund growth
• DC scheme will allow 25% to be paid as PCLS / DB scheme possible will be unable to match that level
• One off PCLS will be added to the estate for Inheritance Tax (IHT) purposes
• If in poor health – transfer to DC arrangement & securing impaired life / enhanced annuity may be beneficial
• If single / widowed / divorced – member may not want death benefits as part of retirement package
• DB scheme death benefits may be low in relation to the Cash Equivalent Transfer Value (CETV)
• DB scheme does not allow spouse to draw inherited benefits & potential for remaining fund to be passed to non-dependent children / future generation

There are many aspects to consider and often an interplay between all of one’s financial arrangements.

If you would like to know more about how we add value when advising you based on your own circumstances, please contact us on 01626 833225.

Please note that the above article does not constitute financial advice.