My final salary defined benefit pension scheme is being closed down at the end of this year, by which time I'll be 58 years of age.I've been in it for
My final salary defined benefit pension scheme is being closed down at the end of this year, by which time I’ll be 58 years of age.
I’ve been in it for 32 years. I’m a bit confused on whether I should take it, transfer it, or defer it.
Because my company is closing the defined benefit scheme, they’ve got a defined contribution scheme instead. I would be grateful for your opinion on this.
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION
Savings dilemma: My company is closing its final salary pension, so what should I do? (Stock image)
Steve Webb replies: More than four million people under pension age have rights from past service in a salary-related pension scheme.
When they are no longer actively building up new rights in the scheme they are known as ‘deferred’ members, and from 1 January 2022 you will join their ranks.
However, just because your pension scheme is closing, in the sense that you can’t add to the rights you already have in the scheme, it doesn’t mean you should rush to take action.
Even in a scheme where you cannot build up any new rights – ‘closed to new accrual’ in the jargon – there is still a set of trustees overseeing the fund, a ring-fenced pool of assets set aside to pay all the past pension promises and an ongoing duty on the employer to keep the fund topped up in the event of a shortfall.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
One important reason why you don’t need to rush is that although you can’t add to this company pension it is not ‘frozen’.
The law requires the scheme to increase the value of your pension each year to keep pace with inflation via a process known as ‘revaluation’ (albeit with some limits).
I often hear people talk about their old pensions being ‘frozen’ but in the case of a salary-related pension like yours, the cash value will continue to rise each year.
One option therefore is to do nothing.
It sounds as though this pension is going to be your main source of income in retirement.
These days very few people in the private sector are in jobs where they can build up a salary-related pension, so in some senses you are one of the lucky ones.
Your defined benefit pension will pay out from scheme pension age for as long as you live, and will go up each year to take account of inflation, provided only that your employer stays in business.
You usually have some flexibility *within* a defined benefit pension arrangement. You can often take your pension early (albeit at a reduced rate) and you may be able to flex how much of your total pension you take as a tax-free lump sum.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
But, given your age, you should be wary of taking the pension early if you do not need to. According to official figures, a 58 year-old man can expect on average to live to 84, but has a one in four chance of living to 92.
If you do find yourself having a long retirement you may be glad that you waited until your pension was due and you could take it at the full rate rather than going for an early retirement option.
As you say, another option would be to transfer out the value of your salary-related arrangement into a Defined Contribution or ‘pot of money’ arrangement.
But you should be aware that regulators expect financial advisers to start from the assumption that this would be a bad idea.
Whilst I obviously cannot give you individual advice, I do note that all (or almost all) of your retirement income is coming from this one pension.
If you were to transfer all of it out (and many DB schemes do not offer the option of a ‘partial’ transfer) you would be exposing all of your retirement wealth to investment risk.
Whilst investments can, of course, do very well, there is always a risk that they may do badly.
Given that you probably only have the state pension to rely on apart from this pension, there is a strong chance that an adviser would recommend against a transfer.
Whilst there are some situations in which a pension transfer makes sense, you would need a specific reason to do so. The fact that the scheme is no longer open is not in itself a good reason to transfer out.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.