There is much talk at the moment around transferring pension benefits from Defined Benefit (Final Salary) schemes – especially in the wake of the British Steele pension issue. It is a hugely complex area, one which requires high levels of care and consideration, and it is not just the financial issues to consider, it is a whole different way of planning around your pension and life.
Swap the pensions for sailing holidays for a moment…
The Final Salary Pension is a cruise ship holiday. You know what the costs are, you pay up front, everything is done for you. On board, you have to think about nothing at all other than enjoying yourself – life on board. Lie back and relax. The Captain and his crew take the strain, study charts, tides, have the moorings scheduled, have tremendous technology to help them make the right decisions. You arrive back to port, get off the ship, and the cruise is over.
Turning to the Defined Contribution pension (or what happens when you move your pension from a DB Scheme) this is more akin to a DIY boating holiday. You have your own boat, you choose where you go when you go, how long you stay, what you eat, who you moor up next to – wow, perfect freedom. It is not all plain sailing though – planning around the weather, the routes, organising supplies, piracy, sinking, organising your own excursions, repairs, illness (if you are ill, the sea doesn’t care – you just have to carry on). Despite all that, you do have the chance to plan your own journey, and when that journey is over, there is still a boat waiting for next time – or to pass on to your children.
Rather simplistically, with a DB Scheme (Final Salary): the benefits are generally based on the time you have worked there and the salary you were paid. Some money is taken from your salary to contribute towards the cost. You retire, you receive your pension, you die, your spouse may receive half, they die, it stops.
On the flip side, a Defined Contribution scheme will collect your money, invest where you direct it to, and give you huge flexibility when you want to take the benefits. Nothing of course is guaranteed, neither the returns nor the income. Add to that thousands of investment funds to choose from, volatile markets, and ever changing legislation, it is certainly not something to enter into lightly. There have been significant changes in flexibility and death benefits with this type of pension, but that alone, should probably not be your only reasons for choosing it.
So, whilst the DB scheme offers the security and comfort of a cruise ship (mostly), a DC (or transferred out) scheme gives huge flexibility, potential benefits for the family, yet comes with significant amounts of complexity and guidance required – just like sailing your own journey.
It is the type of journey which we at Serenity Financial Planning ensure we take our time to understand and unfold with you, helping you to make sure that what ever direction, mode of transport or arrangements you and your finances take, they are consistent with what is deeply important to you.
Our relationship is with you, not your money.