For years now, people with defined benefit (DB) deals have been the big winners in the pensions world. While the rest of us, with our defined contribution (DC) schemes, have had to put our money in the markets and hope for the best, they have had the peace of mind that comes with knowing that on retirement they will get a set percentage of their salaries every year, inflation-linked for life.
But this year’s Budget shifted the balance a little. Chancellor George Osborne’s new scheme gives those in DC schemes huge new freedoms to take their pension cash as and when they like, subject to paying a marginal rate of income tax on withdrawals. Those in DB schemes don’t get the same freedoms unless they transfer into a DC scheme sharpish.
Why sharpish? Because 5.4 million of the people in DB schemes are in the public sector. If too many transfer out, it will cost the taxpayer a short-term fortune (they will have to be paid the full value of their pensions up front).
So the government is consulting on banning transfers. That could mean that DB holders have a relatively short time left in which to act if they want to take advantage of the new DC rules.
You might think that regardless of the new rules, moving from a DB to a DC scheme would be crazy (I would do almost anything for the guarantee of a cheaply bought, long-term inflation-linked income). But not everyone agrees.
Pension providers have “reported a spike” in enquiries from DB savers wanting to move, says Josephine Cumbo in the FT.
So is there any reason to do so? It isn’t a decision that should be taken lightly. Add up the index linking and the spousal benefits (most keep paying out even after the main beneficiary dies) and in most cases a good financial adviser would not suggest switching.
There are a few occasions when it might make sense, says David Budworth in The Sunday Times. If you are in very ill health, getting your money up front works. It can also make sense if “you are single and do not need the spouse’s pension that comes with your final salary pension scheme”.
Still, if you have taken advice (this is one area on which we really suggest advice) and really think you want to dump certainty and stability for the unpleasant cocktail of fear and greed that characterise DC pension savings, and the chance of getting your hands on a heavily taxed cash lump sum, you will want to call your provider to request a transfer value statement.
Then you will need to find a new provider to take you on. That might be easier said that done. According to Cumbo, most insurers are reluctant to take on transfers unless they are sure the holders have been properly advised.
According to Budworth, even Hargreaves Lansdown, one of the nation’s biggest providers of self-invested personal pensions, is “no longer providing advice or accepting transfers from private sector public pension schemes”. That might tell you something.