Fourth on the list of reasons to remain in DB is the guaranteed provision for those you leave behind, particularly a surviving spouse. It is important to understand that what you are giving up is not just the pension you yourself will receive, but the ongoing payment to a surviving spouse and, in some cases, young dependents.
There are counter-arguments to this (see below), but for those who would be reassured to know that a widow or widower would go on getting a hassle-free regular pension income after they were gone, this is another reason not to leave.
A final reason to realise the value of what you have in a DB scheme is the favourable treatment when it comes to taxation and particularly in terms of the lifetime allowance (LTA), compared with the same money invested in a defined contribution (DC) pension.
To give an example, suppose you have a DC pot of £1.03m (the current LTA) and sought to buy an index-linked annuity to provide DB-type benefits. You would be lucky to get a pension at retirement of £30,000 on the open market, and this has accounted for all of your LTA.
By contrast, a £30,000 pension from a DB scheme would only use up £600,000 out of your LTA, leaving you another £430,000 to build up while benefiting from tax relief.
While these rules could change, better-off savers clearly need to think whether they really want to give up on the favourable tax treatment of DB rights.
Five reasons to transfer
But while DB pensions are good things to have, there will be some individuals for whom a transfer is worth looking at. So we turn now to some of the advantages that clients might want to understand and consider.
The number one reason given by advisers for recommending a transfer is flexibility. While there is some flexibility within DB schemes – probably more than many members realise – having a pot that can be accessed flexibly gives members much more choice, including about when to retire.
For example, if a client has a state pension and a decent DB pension due to cut in at 65, but wants to retire early, transferring a second DB pension might unlock this option.
The second DB pension could generate a DC pot, which could be run down relatively quickly – say, over a five-year period – providing enough to live on until the main retirement income cuts in. This seems to have been a popular use of the new pension freedoms and gives people more options about the timing of their retirement.