Category

Defined Benefit

Elderly man pressing hands against the wall, talking about defined benefit pensions advice

Defined Benefit Pension Transfer Advice – A Leap Of Faith?

By | Defined Benefit | No Comments

Three decades ago, it wasn’t uncommon to speak to someone with a defined benefit pension.

Today, these schemes are rarer. An aging population and a more mobile workforce has led many companies to offer employees defined contribution schemes instead. These are commonly seen as less costly for the employer, although there are certain advantages for the employee as well.

As of April 6th 2015, UK citizens over the age of 55 have been allowed to access their defined contribution pension pots. If you hold a pension like this then you need to carefully consider getting defined benefit pension advice from a qualified, experienced financial adviser regulated by the Financial Conduct Authority. If you’re looking to speak to a local adviser with these qualification, then we can put you in touch for free.

Defined benefit plans (or final salary pensions) provide a guaranteed income to a retired person on retirement. The annual amount is usually determined by factors such as years in service at the company/organisation in question, and your earnings during your career.

Often, these schemes account for inflation and have provisions for the recipient’s spouse. Together, these features of defined benefit schemes lead many experts to argue that they are amongst the most valuable pension schemes around these days.

 

Pros To Consider When Thinking About Transferring

Obviously, the big advantage in transferring is the potential pension freedoms on offer with a defined contribution scheme.

Sometimes people want to access their money in their 50s, but their defined benefit scheme prohibits them from accessing it until they have reached their 60s. Others want to reduce their liabilities, and are enticed by an ETV (enhanced transfer value) where the scheme’s trustees pay. For some people, they might no longer be employed at the company with the scheme, and want to take a lump sum due to having other pensions with different employers.

Whatever your reason for thinking about a transfer, getting professional defined benefit pension transfer advice can often help you think through the issues more clearly. This may particularly be pertinent to you if you have a large pension pot, because you might be tempted to withdraw a big lump sum early without considering the true value of your defined benefit package.

Bear in mind that if your pot is worth over £30000 and you are considering a transfer out of your DB scheme, then the law requires you to seek defined benefit pension advice.

The important thing to look out for when thinking about a pension transfer is cold calling about pensions. With the rise in pension investment scams in the UK, cold calling and texts from businesses about pensions is set to be banned in the UK later this year.

So if you did not expressly ask to be contacted from a company in this way, or you do not have a pre-existing relationship with the company in question, be very careful. At PensionAdvice.org, we are extremely careful with any information you might pass onto us, and will only ever refer you to a local, qualified financial adviser regulated by the Financial Conduct Authority.

One big reason many people are seeking defined benefit pension transfer advice is due to the transfer values currently on offer for DB schemes.

Xaffinity, for instance, gives the example of a 64 year old DB scheme member. In this scenario, the gentleman’s scheme entitles him to £10000 per year on retirement after the age of 65. If he was considering his transfer value in June 2016, Xaffinity claims he could have got £210000. This year, however, the figure could be as high as £241,000.

Others point to possible interest rate rises looming, which could make transfer values fall. This, it is argued, adds incentive to seek defined benefit transfer advice as soon as possible.

 

No one really knows what will happen, but it’s important that your decisions about a transfer are grounded in objective facts and sound, comprehensive information. If you want to talk to a professional, local and independent financial adviser about your defined benefit transfer options, then we can connect you for free.

 

Cons To Consider When Thinking About A Transfer

Clearly, the biggest thing you are potentially giving up when switching away from a defined benefit pension scheme is a guaranteed retirement income.

You also get a good measure of peace of mind from a DB plan, since responsibility for working out the investments lies with the scheme provider. Many people like the feeling that someone knowledgeable is looking after their retirement finances on their behalf.

When you switch to a DC scheme, you suddenly bear a lot more responsibility for discerning which investments are right for your retirement, and what strategy you should adopt for your investments and savings. It can be quite daunting and overwhelming, but that’s where seeking professional advice from a trained, qualified financial adviser can really help.

Whatever you do, do not take a leap of faith with your pension. Make sure you are as confident as you possibly can be about whether or not the decision to transfer is right for you. By seeking independent, defined benefit pension transfer advice with a financial adviser, this is certainly possible.

 

Two women thinking about defined benefit versus defined contribution

Defined Benefit vs. Defined Contribution – Which Is Better?

By | Defined Benefit | No Comments

The past few decades have witnessed the rise of the defined contribution plan. Simultaneously, we’ve also seen a decline in the number of defined benefit pension schemes.

What’s the reason for this? How do the two compare anyway, and what are the pros and cons of each?

In this article, we’re going to explore the answers to those questions. Firstly we’ll look at what sets these two pension plans apart.

Second, we’ll look at why defined contribution is on the rise, whilst defined benefit has been on a steady decline. Last of all, we’ll flesh out some of the main advantages and drawbacks of each.

 

Defined Contribution vs. Defined Benefit

Under a defined contribution plan, employees and the employer are allowed to contribute money towards the pension plan.

An example of how this might work follows. An employer might contribute towards an employee’s pension pot based on the latter’s age, salary, and years of service with the business.

As such, a new, relatively-young employee might get the equivalent of 2% of their  annual salary from the employer, which goes towards their defined contribution pension. However, an older employee who has been with the firm 30 years might get a contribution closer to 12% from their employer.

So where does this money from the employer go, exactly? It might be invested, for instance in a combination of stable value funds, annuities, common stock, and fixed income securities.

From the employer’s perspective, they have a lot of certainty. They can calculate their contributions each year, and provided they follow their obligations in this respect, they can more or less rest easy.

From the employee’s perspective, however, there is some uncertainty. They do not know for sure what their retirement income will be once they retire, because it will depend on how their investments have performed.

A defined benefit plan, however, has some important differences to the above. First of all, this plan provides employees with a predetermined retirement benefit. Similar to the above, this is usually worked out by considering the employee’s salary and years of service.

Under this scheme, moreover, the employer is responsible for providing all contributions to the employee’s account. The advantage here for the employee is that they are guaranteed a particular income level at retirement.

The downside for the employer is that they assume the risk, because they lose out if the account underperforms. If this happens, it will mean the employer has to increase the funding they place into the employee’s account.

So, to quickly recap:

  • Under a defined contribution plan, both the employer and employee provide funding into the latter’s account. Employer contributions are guaranteed and formula-derived, yet income levels at retirement for the employee are dependent upon the fund’s performance.
  • Under a defined benefit plan, the employer provides all contributions to the employee’s account. The plan is formula-driven, and income levels for the employee at retirement are secure.

 

Why Are Defined Benefit Plans Declining?

In the UK private sector (and also the US), there has been a notable supplanting of defined benefit plans by defined contribution plans.

The reasons for this are controversial and up for debate, but there are few plausible explanations.

First of all, people across the western world are getting older. As such, it has become more financially difficult for businesses to provide the incomes people need for longer retirements.

Second, the workforce in the UK is a lot of mobile than in previous decades. More and more people work multiple jobs and switch careers throughout their lifetimes. It is increasingly rare to find people staying with one company or organisation throughout their working lives.

Another possible reason for the decline in defined benefit pension plans could be linked to the rise of women in the UK workforce. It is sometimes claimed that women are generally less attached to a specific employer than men, because they still tend to have a higher responsibility for care-giving.

Shifts in the UK economy’s makeup could also be a factor in this shift away from defined benefit pensions. These have often been linked to the manufacturing industry, which has declined in the UK. Defined contribution plans, however, are historically more linked to other sectors, particularly in services such as the financial sector, which has risen over the past few decades.

Finally, the decline might also be partly attributed to a fall in unionism in across western countries. Unions have historically tended to favour defined benefit plans, due to the perceived securities is offers to employees.

 

So, Which Plan Is Better?

You might be tempted to jump to the conclusion that defined benefit plans are the best. From the employee’s perspective, that’s certainly intuitive. However, it depends on each specific person’s unique goals and circumstances.

The big allure of defined benefit plans is the income security it provides people in old age, meaning you do not have to really worry about saving for a comfortable retirement.

However, bear in mind that under this plan, if the fund’s investments perform worse than expected, it will require the employer to increase their contributions in order to meet their commitments.

It might be tempting to think that’s not your problem. And you may be right. However, for particular companies, this might mean reining in spending and resource allocation in other areas of the business in order to meet these commitments. Previously planned pay rises, for instance, may have to be halted.

From the employer’s perspective, the defined contribution plan offers intuitive advantages. It shifts the risk towards the employee, since the employer will not be required to increase their contributions if the fund underperforms. However, this obviously isn’t an attractive offer to the employee, whose earnings at retirement are not guaranteed.

On the other hand, given that people are now more mobile in their careers, defined contribution plans can be attractive to the employer because they are generally more “portable” than defined benefit plans. Defined contribution plans are also typically more attractive to employees who want to feel like they have more control over their retirement money.

If you are considering switching your pension plan, it is always best to speak with a qualified financial adviser who specialises in your particular pension scheme.

To speak to an adviser in your area, fill out our form and we can find the right person to help you in your specific circumstances.