Hang on to that final-salary scheme

Why would you give up a gold-plated final-salary pension for an inferior money-purchase scheme, asks David Prosser.

Why would you give up a gold-plated final-salary pension for an inferior money-purchase scheme? The former, known as defined-benefit (DB) plans, offer guaranteed benefits for the rest of your life. The latter, also called defined-contribution (DC) schemes, typically deliver less secure and generous pensions: the income you get depends on what your pension fund can deliver through buying an annuity (an insurance contract that pays you a lifetime income) or entering income drawdown (where you can leave your savings invested while drawing down income when needed).

Yet there has been a sizeable increase in the numbers of people transferring from DB schemes to DC schemes. Such transfers were three times more common over the year to April than in the previous 12-month period, according to the Financial Conduct Authority (FCA).The explanation for this increase lies in the pensions freedom reforms introduced in April 2015. These gave people over the age of 55 more choice about how to turn DC pension savings into retirement income, including the option of withdrawing all the money in one go.

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.