The Pension Freedoms introduced in April 2015 have encouraged an increasing number of people to think about how best to access their pensions and one of the key decisions currently is whether to transfer out of a defined benefit pension scheme and into a personal pension plan.
We say currently, because while final salary or defined benefit pension schemes have long been seen as the ‘gold plated’ pension, changes in the market have made it beneficial for some people to move into an alternative arrangement.
Individual circumstances will dictate whether someone should swap a guaranteed pension income for life for an invested personal pension account. For some it may make sense to transfer to a personal arrangement, as it can give the member far greater control over their pension pot and, importantly, take advantage of the pension freedoms rules which allow the fund to be passed on to their beneficiaries free of inheritance tax. For others, it will still be right for the individual to remain in the scheme.
For people who already have a good level of guaranteed income for life, or substantial assets, or reduced life expectancy, a transfer could be an option to consider, particularly in terms of intergenerational wealth planning.
Most individuals who are lucky enough to have a defined benefit pension and especially those who are active members within their current employer’s scheme, should not be transferring out. But for certain members of schemes there are several reasons to consider a switch from a defined benefit to a personal pension plan. Here are five to consider:
- Flexible access. Full access is available to the fund at any time if transferred into a personal arrangement, giving the ability to choose when and how to take income after age 55. This can work better for tax planning.
- Death benefits. Transferred funds might offer much better income to spouses. Defined benefit pension schemes normally automatically reduce income to the spouse by around half, and the pension pot usually cannot be passed on to future generations.
- Health reasons. Where you have health concerns or issues, it can put the pension funds more under your control, both to draw upon for income and pass on to those you want to benefit from it.
- Inheritance tax planning. The part of the pension that remains untouched, in some cases can be passed to the next generation very efficiently.
- Income surplus to needs. In cases where income from other sources will exceed that required to meet the costs of living, a pension transfer could provide a method of drawing benefits tax efficiently and flexibly, as well as passing them on to beneficiaries in the event of death.
It has to be stressed that this area of financial planning is extremely complex and transfer of defined benefits to a personal pension arrangement carries a number of risks. It is important that a person’s individual circumstances are fully considered and professional advice sought before going ahead with a transfer.