What's the difference between a Defined Contribution Pension and a Defined Benefit Pension?
Question asked by Mr F Mohammed
I’m almost 55 and have a final salary pension. I’ve read the articles about the new pension freedoms, but as I’m part of a defined benefit scheme I don’t know if they apply to me. Will I be able to draw on my final salary pension from the age of 55?
The short answer is that it depends on your pension scheme’s rules. If you contact your pension provider, they’ll be able to tell you when you can start taking your defined benefit pension.
However, most final salary schemes have a ‘normal retirement age’ — i.e. the age at which you’re entitled to start drawing your pension — of later than 55, probably 60 or even 65. You might have a bit of a wait yet.
It may technically be possible to access your final salary scheme at age 55, but it will generally be subject to a reduction known as an early retirement factor. This simply means you’ll get less income each year than you’d be entitled to if you retired at the scheme’s normal retirement age.
While some DB pension schemes might not let you take your pension at 55, if you’re keen to do so one of the options you might consider is transferring out of your final salary pension scheme.
This involves your employer giving you a cash lump sum in exchange for you waiving your right to a pension income for life.
If you’re interested in learning more about final salary pension transfers and getting a projection of your CETV, why not visit the Final Salary Transfer Calculator by Drewberry? That can give you an idea of the sum you might receive on leaving your DB pension.
If you do decide to move from a final salary pension to a money purchase pension, you can then usually take advantage of the new pension freedoms to provide you with a retirement income.
These pension freedoms include the right to take 25% of the pot as a tax free lump sum, as well as more flexibility when it comes to loved ones inheriting your pension when you die.
Before considering a final salary pension transfer, you should get pensions advice to make sure it’s suited for you. It won’t be right for most people — you’ll be giving up a guaranteed, index-linked income for the rest of your life, something that’s very difficult to replicate outside a final salary scheme. If your scheme is worth more than £30,000, it’s a mandatory requirement to get advice.
If you want to discuss transferring your defined benefit pension, why not pop us a call on 02084327334 and speak to one of our expert pension advisers?
We’re able to advise on all final salary pension transfers, and can also help you plan for retirement with your new defined contribution pension.