Thought Leadership

Transfers from DB to DC schemes to continue

The government yesterday confirmed that members of defined benefit (DB) pension schemes will retain the right to convert their pension entitlement to cash just before retirement. This ends the uncertainty as to whether members of DB schemes would be allowed similar flexibility in their retirement options to members of defined contribution (DC) schemes following the Budget in March.

22/07/2014

Rosalind Mann

Rosalind Mann

UK Strategic Solutions

The government yesterday confirmed that members of defined benefit (DB) pension schemes will retain the right to convert their pension entitlement to cash just before retirement. This ends the uncertainty as to whether members of DB schemes would be allowed similar flexibility in their retirement options to members of defined contribution (DC) schemes following the Budget in March.

Background

The Budget saw the Chancellor, George Osborne, announce a radical overhaul of pensions to allow DC members much more choice in how they access their pension pot in retirement. A key question arising from this was whether DB scheme members would still be allowed to transfer into DC schemes to take advantage of this new flexibility.

The government answered this question yesterday when it published its response to the consultation, ‘Freedom and choice in pensions’, launched to seek the views of the pensions industry following the changes in the Budget. Members of private sector DB schemes will indeed be able to transfer to DC schemes, but only provided they take independent financial advice first.

Impact on DB schemes

Most respondents to the consultation expected the number of new transfers to be low (the majority estimated between 10% and 20%).1 If this is the case then the impact on DB schemes will be small.

For most individuals, receiving a DB pension will remain the most attractive option because:

  • DB retirement income is stable and relatively secure compared to the income taken from a DC scheme. Under a DB scheme the employer, rather than the member, retains the risks (such as investment and longevity risk) of providing an adequate income in retirement.
  • The pot size offered to members who request to transfer out may be lower than the full expected value of their DB pension, particularly for schemes with low funding levels.

  • The tax rate applied to any cash withdrawn above the tax-free amount will likely deter many members from taking their pot as a lump sum.

Any changes felt by DB schemes are likely to be gradual, as it is generally more attractive for members to transfer once they are close to retirement.

1Freedom and choice in pensions: Government response to the consultation, 21 July 2014

To discuss the themes in this article further, please contact your Client Director or a member of the UK Strategic Solutions team.

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The views and opinions contained herein are those of Rosalind Mann, UK Strategic Solutions at Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

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