Defined Benefit Pension Plans
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A Defined Benefit pension, also known as a Final Salary Pension Scheme, is a rare type of workplace pension scheme that provides you with a guaranteed pension income for life.
This income is based on your final salary or your average salary during the time that you have been working for the employer providing the pension.
The pension income will be calculated based on your salary as well as a number of additional factors. These factors include the number of years that you worked for that employer (while being a member of the DB pension scheme) and the pension scheme’s accrual rate.
If you are unhappy with your pension plan, you can transfer your defined benefit pension plan into a defined contribution pension plan. Your DB pension provider will provide you with a cash equivalent of your DB pension pot in exchange for giving up the guarantees that come with the DB pension scheme.
It is worth mentioning that not all defined benefit pension schemes are transferable. DB schemes that fall under unfunded public sector schemes such as Teacher’s pension and NHS pension schemes can not be transferred. However, funded private sector DB schemes and some funded public sector schemes can be transferred.
Should You Transfer From your Defined Benefit Pension?
Advantages of Defined Benefit Pension Plans:
Defined benefit pension schemes
Are seen as a generous plan when compared to a defined contribution pension scheme as you would need an above average DC pension pot in order to receive a similar pension income to what the DB scheme would provide.
Another main advantage
Of the DB schemes is that the pension income is guaranteed for the rest of your life, provided the actual pension scheme remains funde. Those on this pension plan have no concern that the money coming in will run out during their lifetime.
Disadvantages of Defined Benefit Pension Plans:
Defined benefit pension schemes
Are not known for their flexibility when it comes to pension income, as you will not be able to change the pension income that you receive based on your circumstances. DB pensions also do not allow you to take lump sums. In DB schemes you are only allowed to take an initial lump sum plus your annual income which is paid monthly, but you can not choose to take your pension in a number of lump sum payments.
If you were to pass away
Your DB scheme can provide pension to your spouse until they too pass away. However, This does not apply to your children. You can not leave the rest of your pension pot as a legacy to your children.
Advantages of Transferring your Defined Benefit Pension Schemes:
Early access to your pension.
You can potentially access your DB pension earlier if you transfer it out to a DC pension scheme.
More flexibility
Defined contribution pension schemes are a lot more flexible than defined benefit pension schemes, especially after the Pension Freedom act in 2015. You can now take as much or as little monthly income as you want from your pension in addition to any lump sums that you take out. Both of these options would be subject to income tax.
Your Beneficiaries Can Also Benefit From Your Pension
You will be able to leave whatever is left of your DC pension pot to your beneficiaries, so the whole pension will be used till the last penny.
Your Pension Improves With The Stock Market
If the stock market and the investment funds that you invested your DC pot into perform well, you could end with a lot more money. As an example, if your DC pension is invested in investment funds that do really well the value of your pension fund would increase, which means your 25% tax free lump sum would be worth more.
Your Pension Is Safe If Your Employer Goes Bust
If your previous employer became insolvent, it would not affect your pension if it's a DC pension. This is because your DC pension will be invested with a pension provider. However if you have a DB pension where the pension scheme becomes insolvent, then there is a potential that you could lose your pension fund or get reduced pension benefits.
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