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.
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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.
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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.
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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.