DB Pension (Defined Benefit) vs Individual Pension/Drawdown Plan
A Client Guide

DB Transfers & Triage – A Client Guide.  DB pension (defined benefits) schemes and flexible benefits are offered within an individual pension and drawdown plan.  Defined Benefit schemes normally offer very valuable guarantees.  So usually it’s not appropriate to transfer out unless you have valid reasons for doing so.  Also, the Financial Conduct Authority states “It is unlikely to be suitable to transfer safeguarded benefits offered through an occupational pension scheme in favour of flexible benefits”.

Accordingly, below is a balanced view of some key advantages and disadvantages of each scheme. This helps you decide the factors which are important to you.  

Potential advantages and disadvantages of DB pension schemes 

Advantages

Disadvantages

  • You receive a secured income for life, which is likely to rise each year in line with inflation.  Also your spouse/civil partner can receive an income (subject to income tax) upon your death.
  • Minimal paperwork to start the benefits and no ongoing monitoring of the scheme is required.
  • DB pension schemes will place no personal investment risk on you.
  • Also DB pension schemes have a legal duty to provide a pension for a surviving widow/widower or dependant in the event of your death.
  • A DB pension scheme is rigid in its structure.  You receive a set amount of money each month until you die.  So it cannot adapt if your needs change throughout retirement.
  • Scheme pension payments are selected before taking any benefits and cannot be changed.
  • Many DB schemes have a pre-selected retirement age and taking benefits early can mean reduced benefits.
  • Income received from a DB scheme is subject to income tax at your highest marginal rate.
  • Any income received from a defined benefit scheme may affect your entitlement to means-tested state benefits.
  • Only your spouse/civil partner and children under the age of 23 (unless legally defined as a dependant if older) will usually be entitled to a reduced pension on your death. This means you can’t leave your pension benefits on death to any other party.
  • Also any options to provide benefits on death must be selected at the outset.  This results in a lower initial pension payment.

Potential advantages and disadvantages of an individual pension/drawdown plan

Advantages

Disadvantages

  • The tax-free pension commencement lump sum (usually referred to as Tax Free Cash) of an individual pension or drawdown plan can be greater than from a defined benefit scheme.
  • You can choose how and when your benefits are taken. This offers greater flexibility and choice.
  • When taking benefits there are no restrictions on the amount of money you can withdraw at any one time.
  • Also, on death your nominated beneficiaries will receive the remainder of your pension fund. There is no restriction on who you choose to receive these benefits.
  • The benefits taken from a drawdown plan will need to be carefully managed to ensure it does not run out.
  • THERE IS THE POSSIBILITY IF YOU NEED REGULAR INCOME THE INVESTMENT FUND MAY NOT BE SUSTAINABLE THROUGHOUT YOUR LIFETIME. THIS COULD MEAN YOU CANNOT MEET CORE INCOME REQUIREMENTS IN LATER LIFE.
  • The funds you invest in are subject to fluctuation.  This can result in the value of the fund reducing even when income is not being taken. Where income is being taken this will deplete the fund to a greater degree.
  • The only way to obtain a secure income through an individual pension is with the purchase of an annuity.  So it is unlikely you would replicate the same level of income paid by the DB pension scheme. 
  • Any income/lump sum payments you receive from the non-tax free element of a pension fund are subject to income tax at your highest marginal rate.
  • By taking far higher levels of income (compared to a DB scheme), may push you into a higher tax band.
  • Any income/lump sum payments you receive from a pension fund may affect your entitlement to means-tested state benefits.
  • Also there are ongoing annual charges and administration charges to pay. You also need to monitor where the fund is invested to ensure it meets your attitude to risk and investment objectives.

Examples of where a transfer may be beneficial or harmful 

  • Circumstances where DB Transfers may be harmful

An individual that would need to rely on their pension income to provide for their core income requirements throughout retirement.

  • Circumstances where DB Transfers may be beneficial

An individual that would not solely rely on their pension income throughout retirement; would like individuals to benefit on their death but who are not defined as a dependent. 

This document provides you with information on generic advantages and disadvantages of a defined benefit scheme and an individual pension or drawdown plan.

This document is not providing any advice on your personal circumstances or your actual defined benefit scheme.

If you are unsure as to the most suitable option for your individual circumstances you should seek independent financial advice.

All references to tax free and non-tax free elements of pensions only apply to UK residents

To find out more about DB Transfers and if this is the best option for you, please call us on 01603 957599.  For your free initial consultation, contact us today.