Key points
- There are five good reasons to transfer out of a DB scheme, and five good reasons not to
- DB pensions keep in line with inflation
- Having a pot that can be accessed flexibly gives members more choice.
A second attraction of transferring is the possibility to draw more tax-free cash.
Within the DB world it is generally possible to give up a quarter of your DB pension rights in return for a tax-free lump sum. But the lump sum you get varies significantly between schemes, and some will give you far less than the true value of the pension you have surrendered.
By contrast, if you get a fair transfer value you can take a quarter of the full value of your pension as a tax-free lump sum. This may be particularly attractive to those who have no spouse or partner. The reason for this is because the value of their rights in the DB scheme includes an allowance for survivor’s benefits, which are of no value to them within the DB scheme but which can be turned into cash (including tax-free cash) in a DC arrangement.
Another key reason why people are choosing to transfer is the tax treatment of money that is available to go to their heirs and successors when they die. This can be a particular consideration for people who are single or divorced and/or who have adult children whom they would like to get some benefit from their pension.
As things stand, if a divorced member of a DB scheme dies there may be nothing for their heirs and successors. But if the money has been transferred into a DC scheme, then any undrawn capital can be inherited in a particularly tax-efficient manner.
If death happens before the age of 75, the inheritance is tax-free, following changes announced by George Osborne back in 2014. Even if death happens after 75, the money passes down without being subject to inheritance tax.
It is, however, worth entering a caveat at this point. This relatively generous tax treatment has only been in force for a few years and there can be no guarantee that the rules will not change, especially if there were to be a change in government.
If someone wants to make sure that loved ones get a lump sum when they die, it may be that there are other routes rather than transferring out of a company pension purely for this reason.
A fourth attraction to those considering transferring would come into play if they were not in great health or perhaps had a family history of relatively short life expectancy. Many people feel that it is unfair that if they die relatively early in retirement they – or their heirs – will not have received proper ‘value’ from the money they put in to their pension.
