A defined benefit pension is the gold standard of retirement savings, offering an income for life for you and typically your spouse that’s generally index-linked to keep up with inflation.
There are two main types of defined benefit pension:
A defined benefit pension is one of the most secure retirement arrangements around, offering you a lifelong income from retirement to death based on your earnings and your length of membership in the scheme.
Your final salary pension (or career average pension) has a benefit that’s defined from the start of your retirement. You’ll receive that income each year from your company’s pension plan for the rest of your life, plus inflationary increases each year along the way.
However, there’s more to the value of a final salary pension than you may realise. In the current environment, scheme members are being offered inflated transfer values to leave their schemes and give up all promises of an income from them.
The lump sum pension plans offer to members to transfer out of their final salary pension scheme is referred to as a cash equivalent transfer value or CETV. You receive this in exchange for swapping your defined benefit scheme and all of its secure guarantees for a defined contribution pension arrangement.
The generosity of final salary pensions has proved expensive in an era of rising longevity of depressed investment returns, so employers are increasingly keen to shift pension liabilities off their books.
Offering a sizeable pension transfer value is partly to encourage people to swap their final salary pension for a defined contribution one. It also means that a final salary pension is now considered to have value beyond an annual income: a quantifiable cash lump sum in the form of a CETV.
A CETV is usually calculated as a multiple of the annual benefit you’re entitled to from the scheme, but how large a multiple will depend on your pension provider and your circumstances.
You can request a cash equivalent transfer value from your defined benefit pension scheme to work out how much your scheme will offer you if you decide to leave.
As well as asking your pension fund for a cash equivalent transfer value, it’s also worth using a final salary pension transfer calculator.
Our Final Salary Pension Transfer Calculator lets you do your own pension transfer calculations to make sure the CETV you’re being offered is favourable compared to other transfer offers being made in the market.
If you’ve already received a pension transfer value, Drewberry’s defined benefit transfer value calculator can help determine whether the offer is fair.
Even if you haven’t yet requested a CETV from your pension provider, the Drewberry final salary transfer calculator could be a good place to start.
If you know what your final salary pension could be worth, you can work out what would likely be a good transfer value for you and see if that matches up with what your provider is willing to offer.
Whether or not you should transfer your final salary pension is dependent on your personal circumstances.
Like all decisions, it’s one you should consider by weighing up the pros and cons of transferring your DB pension, some of which are outlined below.
There are pros and cons to transferring your final salary pension scheme.
While a high transfer value invested in a defined contribution scheme with access to all the pension freedoms might seem like a massive advantage, you’ve got to consider the fact that you’ll be given up a guaranteed income for the rest of your life.
The value of investments in a defined contribution scheme can fall as well as rise, meaning you could get back less than you invested.
This is opposed to a defined benefit pension scheme, where you face no investment risk and the pension you receive is guaranteed. Thanks to the Pension Protection Fund, your pension is guaranteed at least in part even if your employer goes bankrupt.
Although your defined benefit pension offers you a guaranteed income for life, there may be a number of benefits to transferring out of your pension plan. These include:
One of the biggest risks of a final salary pension transfer is that you’ll no longer have a secure, lifelong income. Pension transfers are irreversible, so you should think carefully before proceeding.
Other potential drawbacks include:
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
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