Defined Benefits Pensions (DB)
The pension is designed to provide a guaranteed, index-linked, pension income in retirement. The pension does not have a cash equivalent value and is valued based on the annual income it generates. For example, a DB scheme could be worth £40,000 a year index linked.
Most schemes do still offer 25% tax-free cash, and this then reduces the amount of annual pension the pensioner would receive.
One negative point is that when the pensioner dies, the policy dies with them, and there is no inheritance left for their estate. If the pensioner was married at the time of death and the spouse survives them, the pension is usually reduced by 50% for the remained of their life. Upon this event, the pension is then lost, and no cash value would remain.
For many years they were the preferred way of providing a pension for a company’s employees.
Fast forward to today, and hardly any companies are taking new members into these schemes as they have proven to be very expensive to run. This has led to massive pension deficits for some major companies and left the business with an enormous liability that in some cases, cannot be covered.
If you are lucky enough to in a DB scheme it is unlikely you would want to leave as this would be giving up a guaranteed income in retirement. However, this isn’t always the case for everyone.
Defined Benefit Transfers
Some clients we see have high value defined benefit pension pots and are offered a ‘cash equivalent transfer value’ as an incentive to leave the scheme. This helps the pension provider reduce their long-term liability, so in return, they are offering higher than usual cash equivalent transfer estimates to entice people to leave.
Some of these high-value pots have been built up throughout a career that has allowed the client to build up considerable other wealth from assets like property and savings. In this case, clients would need to consider if they need the income from the DB scheme now or in the future?
If the income is not needed, a transfer to a SIPP may be a good move as converting the pension to a cash amount and transferring it to a SIPP could make a very nice tax-free inheritance for the pensioner’s beneficiaries in the future.
If you are considering if a Defined Benefit is the right one for you feel free to get in touch with a member of our team, and we will be more than happy to discuss the options with you.
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