Coronavirus  

DC versus DB schemes during the crisis

This article is part of
Guide to pensions after the pandemic

DC versus DB schemes during the crisis

There are a number of ways a person can access their pension benefits, plus they can also mix and match solutions.  

If a person is retiring now and has worked for different employers over their career, they may have some defined benefit (DB or final salary) benefits and some defined contributions (DC); group pension, personal pension, master trust type arrangements. 

Focusing on the defined contribution schemes, a person approaching retirement will have received packs outlining their options which usually consist of four approaches.

1) An annuity – a guaranteed income for life

2) Flexible access (drawdown) - keep your pot invested and withdraw what you need as you need it

3) Take it all as cash

4) Leave it for now and decide at a later date.

Options

Pete Glancy head of pension policy at Scottish Widows says making decisions about what to do with pension investments right now is more difficult than normal, due to the volatile nature of investment markets.

This may mean the fund a person has at retirement is changing markedly on a daily basis.

Purchasing an annuity with a pension pot provides a guaranteed income in retirement. The insurance company will pay a guaranteed income for the rest of the person’s life; removing the concern about future stock market performance. 

But annuity rates are at a near record low, partially linked to the current environment which has led to historically low interest rates, and fund values may have been impacted negatively by the current crisis, so it might be worth delaying this decision.

With flexi access (drawdown), you are taking tax-free cash from your plan and investing the remaining pot to provide you with an income in retirement.  

Tax-free cash available is usually 25 per cent of your fund value – so the amount of cash available is dependent on the fund value on the day you move it into a drawdown contract. 

Mr Glancy adds: “It may be advisable to hold off making any decisions just now if you can afford to do that, but the best thing is to get advice as it is a complicated decision to decide what to do, when to do it and then where to invest the remainder of the pot.”

Maxine McIntyre, head of financial strategies at WPS Advisory, says although people are aware the value of their savings can go up or down, the recent falls have been painful for individuals, which she says may also be partly down to the industry not helping individuals enough to establish a relationship between their savings and retirement plan.

Ms McIntyre adds: “They are in a pension scheme because someone else pays in, someone said they should join or they pay less tax.