More than 100,000 retirement savers gave up rights to their workplace direct benefit pensions last year in favour of a cash lump sum.
With a debate raging in the financial industry trying to decide if switching out of a direct benefit scheme is a sound financial decision, it’s time to look at some reasons why people are making the switch – and some good reasons perhaps why they should not.
Six reasons to switch
Extra cash in your fund –Many employers are paying enhanced transfer values to get pension liabilities off their books. The average is around £230,000, according to tracker index XPS.
Flexibility –Direct benefit pensions are often locked until a saver’s 60thor 65thbirthday, but a move to a direct contribution scheme unlocks the cash from the age of 55
QROPS opportunity –Savers retiring overseas can transfer their UK onshore pensions to a tax-effective Qualifying Recognised Overseas Pension Scheme (QROPS) that is accessible from when they are 55 years old
Employer risk– A workplace pension scheme is only as strong as the employer’s business. If the pension is picked up by the government protection fund, savers face an annual cap on benefits and a general 10% reduction in their payments
Healthy option –Switching to a defined contribution pension may suit savers with potential health risks that could mean they die early.
Estate planning – Direct contribution pension rules allow money left in the pot to go to family and loved ones with a favourable tax treatment. Direct benefit pensions will have provisions for surviving partners, but probably not anyone else
Four reasons to stay
Lifetime guarantees –Direct benefit pensions pay a guaranteed pension for your lifetime, whereas a direct contribution scheme is based on the value of the fund and can run out
Inflation linked –Direct contribution pensions rarely increase in line with inflation, which reduces the spending power over time
Investment risk –Fund managers take care of investing direct benefit pension cash, but with another scheme, you must have some involvement
Annuity v survivor pension –If you buy an annuity with your pension cash, in most cases the annuity dies with you unless you have paid extra for a joint life contract, but direct benefit schemes must pay a survivor a minimum set payment by law
