Defined Benefit pension schemes have received plenty of media coverage in recent months. The majority of such schemes are underfunded, that is, they do not have enough assets to cover all member and pensioner liabilities.
Many defined benefit schemes are being closed, or wound up. This may be due to a company going into liquidation but many are simply being closed by the employer due to the high costs associated with paying the benefits that have been ‘promised’, but not guaranteed, to their employees. If you have left a company that had a Defined Benefit (DB) pension scheme, you may be considering what to do with your transfer value.
The most important thing to remember if your scheme is winding up, in which case you have to transfer your benefit, or you have simply left employment and received your Leaving Service Options letter, is to be aware that there are several options available to you, in addition to the ‘default option’ which your scheme Trustees must make available.
I have left service, what should I do with my transfer value?
Previously, it was believed that DB pensions were guaranteed. DB pension entitlements are only payable in full where there are sufficient assets in the scheme to meet the liabilities for all members. When you receive notice of your transfer value, you may be surprised to see that it appears low in comparison to the pension amount that you have been ‘promised’ from your retirement date. There are risks involved in both transferring and leaving your pension benefits within the scheme.
Risks of leaving a preserved pension in a DB scheme until NRA
- Preserved pension could be reduced by the Trustees
- Preserved pension may be revalued using a lower inflation rate
- Transfer value on offer in the future may be lower than today’s value because of a further deterioration in the solvency position of the scheme
- Scheme may wind up before you reach retirement
Conversely, the solvency position of the scheme could also improve. There are risks if you transfer to a Defined Contribution (DC) pension scheme, where the benefits payable at retirement are dependent on investment performance and annuity rates at the time. You should also check with your former employer if there is a ‘conversion option’ available on your life cover/death in service benefit.
You need to speak with an independent Financial Broker who will outline your options to you and the risks involved.
My pension scheme is winding up, what should I do?
If your pension scheme is winding up, the value of your benefit has been calculated and you must transfer this to an approved pension scheme. You may also have the option to take the retirement benefits from the plan, if you are entitled to do so.
There are a number of factors to consider when you are taking your transfer value including:
- Can you take your retirement benefits now? Do you need to?
- Is the ARF option available to you?
- Are you working at present? Is it tax efficient to take your benefits now?
- Do you have a pension scheme with your current employer?
- What death benefit would be payable under the new arrangement? Is it restricted to four times salary?
- Do you have any debt?
- Does the default option offer good value for money? What fund choice is available and what level of service can you expect to receive from your provider?
Deciding what to do with a transfer value from a DB scheme is a big decision, one with which you need honest experienced advice. At Metis Ireland, we have experience in dealing with pension scheme wind ups and are pleased to offer impartial advice to our clients regarding the issues they should be aware of and need to consider. We will equally outline the issues involved in taking a transfer value from a scheme which is not winding up.
You can contact us on 061-518365 or at email@example.com to discuss your Defined Benefit pension scheme.