Defined benefit pension schemes are seen as one of the best types of pension schemes to be a member of and were not so long ago referred to as the gold standard of pensions. However, there is now a clash between defined benefit schemes and defined contribution schemes after the new pension flexibility rules have come into force and high transfer values are currently available.
What is a Defined Benefit Pension Scheme?
A defined benefit pension offers a secure guaranteed income for life at retirement. This income typically increases year on year and there are often spousal benefits if the member passes away. Because of this they are very much sought after by employees.
Employers want to go
However, they are also very costly to maintain for employers. Consider an employee with 40 years of employment and a life expectancy of a further 25 years and you can see how this becomes very costly to the employer. The liability for maintaining this pension also falls with the employer and this is another reason employees are looking to allow defined benefit members the opportunity to transfer out by enhancing their transfer values.
Whether you should stay in your defined benefit scheme or transfer to a defined contribution scheme will very much depend on your financial situation and whether you can afford to give up the guaranteed income of the final salary pension. The table below shows some of the pros and cons of the two schemes:
|Defined Benefit Schemes||Defined Contribution Schemes|
|· Guaranteed known income for life
· Escalation of income
· Spousal Pension
· No responsibility for charges and investment growth
· Not affected by markets
· Pension Protection Fund is available
|· Income is flexible
· Can be passed onto beneficiaries other than spouse
· If markets rise you could end up with more money in retirement
· High DB scheme transfer values
|· Income is fixed and inflexible
· Cannot be left to anyone but spouse
· No Control of investments
|· Responsibility for investment growth and charges
· Can fall in value with markets
· No protection from Pension Protection Fund
· May not have a large enough pot at retirement
As you can see there are many reasons why a defined benefit or defined contribution scheme may or may not be suitable for you and we will endeavour to help you make this decision in order to help you achieve your retirement goals.
So come on and let us know and we will help you decide whether you should stay or you should go from your defined benefit scheme.
Please ring on 0333 11 222 11 or contact us via email@example.com
Written by Independent Financial Adviser Gavin Smart Dip PFS – July 2017