> What is a Final Salary or Defined Benefit Pension?

A final salary or defined benefit pension scheme (a DB Pension) is a workplace pension that offers its members a guaranteed income throughout their retirement.

Typically, these pension schemes provide:

  • Income that increases over the course of retirement, helping to protect against inflation.
  • Income for your spouse or certain financial dependants after you die,
  • Guaranteed income that isn’t subject to movements in the investment market.

DB Pension schemes usually have a normal retirement date or age (NRD), which is the date or age a member can access their benefits from the scheme without penalty. This date will depend on the schemes rules and is set when the scheme is first created. Commonly this is age 65 or State Pension Age, but it can be earlier. It is usually possible to access benefits before the NRD, but the annual income will be reduced to take the likelihood of a longer payment time into account.

Due to the enormous cost to the employer of providing DB Pension schemes, most private companies have stopped offering them, although many people have have built up historic benefits and they are still available to many civil servants.

Contact us if you have questions about your DB Pension scheme.

> If I have a Final Salary or Defined Benefit Pension, can I transfer it?

Some DB Pension schemes allow members to transfer their pension to a defined contribution or money purchase scheme (a DC Pension).

A DC Pension is a workplace, personal or stakeholder pension pot, which is built up from a mix of some or all of: your own contributions, your employer’s contributions, investment returns and/or tax relief from the Government. You often have some say as to how your pot is invested, and when you come to retire, there is flexibility in how and when you withdraw amounts to fund your retirement.

If you transfer your DB Pension funds to a DC Pension, you give up your rights to a guaranteed income for life and in exchange you are offered a one-off Cash Equivalent Transfer Value (CETV). This CETV is transferred to a DC Pension scheme of your choice and then invested, so becomes subject to investment risk.

The Pensions Regulator and our industry regulator, the Financial Conduct Authority (FCA), believe that it is in most people’s best interests to stay in a DB Pension and not to transfer.

If your CETV is over £30,000, you are required by law to get advice from an authorised and regulated Pension Transfer Specialist before you can consider transferring your DB Pension.

> Can Churchill advise me on a Final Salary or Defined Benefit Transfer?

Churchill Wealth Management do not offer advice on the suitability of DB Pension transfers. We recognise the benefit of you seeking independent, 3rd party specialist advice on the specific assessment of suitability of a DB Pension transfer. Whether or not you proceed with a transfer, we are happy to provide ongoing financial advice to you including, for example, investment management, retirement planning and cash flow forecasting services.

> How do I get this Independent, Third Party Advice?

Contact us and we can give you details of specialists and explain some of their process, or you can look at the FCA’s Financial Services Register to find firms who are currently authorised to advise on pension transfers.

An independent specialist will explain their process in detail, including:

  • how they gather information about you, your financial circumstances and objectives,
  • how they request information and a CETV from your DB Pension scheme trustees,
  • the abridged advice process – at this stage, the advice cannot recommend a DB Pension transfer, it can only tell you if a transfer is not advisable or whether you need to proceed to full advice to ascertain whether a transfer would be suitable,
  • the full advice process, where appropriate – which includes a full assessment of your situation and provides a recommendation as to whether a transfer is suitable, and
  • how their fee structure will work.

The starting point for any Pension Transfer Specialist’s process, when considering a DB Pension transfer will always be that it is unlikely to be suitable.

> What are the Advantages and Disadvantages of DB Pension Transfers?

This is potentially one of the most important decisions you will make about your retirement, and there are a wide variety of personal factors to be considered.

There are also some advantages and disadvantages that apply to all DB Pension transfers.

Disadvantages of a DB Pension Transfer:

  • Loss of guaranteed income and inflation-proofing.
    The secure income within a DB Pension will increase every year by some measure of inflation. When invested in a DC Pension, there are no guarantees of inflation proofing or any income value.
  • Once a transfer from a DB Pension has been completed it is not reversable.
  • Cost.
    The fees for your DB Pension are borne by your employer. The administration is effectively free to you and the burden limited. DC Pensions, however, have costs that a member must pay. These fees can act as a drag on investment returns and reduce pension value.
  • Investment Risk and Volatility
    The value of a DC Pension will rise and fall with investment markets. It’s not unusual for bear markets (stock markets that are falling) to last years which can adversely affect people’s ability to draw income from their pensions.

Advantages of a DB Pension Transfer:

  • Death Benefits.
    This is a key reason for most people when considering a transfer. DB Pensions have limited options on death. Typically, if death is after retirement, the scheme will pay only 50% of the income received by the member in retirement to a spouse or certain financial dependents. If a member is not married, death benefits are often of little use. By contrast, a DC Pension allows a pensioner to leave whatever is in the scheme on their death to anyone they like (their beneficiaries). Although the rules are complex, if a person dies before their 75th birthday, a beneficiary will receive the pension tax free, if a person dies after 75, the beneficiary will pay tax at their marginal income tax rate on any capital they receive.
  • Flexibility.
    A DB Pension pays a fixed income for life. This income will increase with some measure of inflation, but it is not possible to vary or adjust the level of income provided. Any increases will be the result of calculations by the pension trustees. A DC Pension allows a great deal more flexibility, including the option to reduce income at, for example, state pension age or take ad hoc lump sums when desired. It is also usually possible to access a DC Pension earlier than a DB Pension without any penalty, with the default age being 55 at the moment (rising to 57 on 6th April 2028).
  • Inheritance Tax
    DC Pensions are out of an individual’s estate for the purpose of inheritance tax (IHT). For people who have an estate valued at greater than their IHT thresholds, a DC Pension allows members to defer taking an income forever and pass the funds on free of IHT. You cannot pass DB Pensions on to beneficiaries in the same way.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation. The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits. Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement. The Financial Conduct Authority does not regulate taxation advice.

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