The Positives and Negatives of Switching to a Defined Contribution Pension Scheme
Although the Pensions Regulator and the Financial Conduct Authority are strong advocates of defined benefit (DB) pension schemes there are increasingly strong arguments to switch to a defined contribution (DC) pension scheme.
The issues surrounding switching from one to another are far reaching and complex. Before you make the decision seeking out a financial planner to give you a 360 degree view is strongly advised. In this post, I look at the plusses and minuses switching to a DC pension from your DB scheme.
Bear in mind that this is a snapshot and not a full picture. Nonetheless, these are important factors to consider.
Advantages of transferring to a DC pension scheme
- Inheritance and death – Unlike a DB pension scheme, a DC pension allows you to pass on the full value of the pension to your spouse should you pass away. Under a DB scheme your spouse only receives a fraction of this amount.
Also, the fund remains tax free when it passes to the person of your choosing when you die. Tax is only applied when the money is withdrawn. - More Flexible – As you have a greater degree of control over your fund than a DB scheme allows, and depending on your circumstances your options are better. You can, for example invest part of your fund into other investments.
It might suit your lifestyle better to withdraw cash in lump sums although you have to be wary of tax. This can help you pay off mortgages and other debts as well as pay for care should you need it. - Transferring – Transferring to a DC scheme is easier as the values are the highest level they have ever been. A DB scheme worth about £500 a year could equate to a lump sum between £10k-20k when transferred to a DC scheme.
Disadvantages of transferring to a DC pension scheme
- No regular income – With a DC scheme you do not have the security of having a fixed income.
- Pension fund value may fall – Your pension fund may suffer a dip in performance reducing its value. As such you have to monitor your pension scheme for future years.
- Tax and fees – Tax and fees will have to be factored in with a DC pension.
Get Advice
If you are considering moving from a DB to a DC pension sound financial planning advice is essential. I have helped hundreds of people make important financial decisions like this. Get in touch today and together we can look at the advantages and disadvantages of transferring. With my help you will have the advice and information you need to make an informed decision. Click here and complete the CALL BACK SERVICE form.
Source: Personalandsavings.com
For more information, please contact Michele Carby at Holborn Asset Management on +971 50 618 6463 and on e-mail at [email protected]
