What are the advantages of the different schemes?
Defined benefit schemes are generally seen to offer better value to employees. They provide higher pensions, additional benefits and a degree of certainty which employees welcome as they get closer to retirement.
Some defined contribution schemes can be more flexible – especially if people move between different sectors and employers or between employment and self-employment. The degree of flexibility depends on the scheme.
Do I get a choice of pension type?
The short answer is no. Schemes are either defined benefit or defined contribution and almost all new schemes are defined contribution. Many companies have closed their defined benefit schemes to new employees arguing that they cannot afford them. Public sector schemes such as Civil Service are still defined benefit, though many have recently amended their rules for the majority of members.
Should I transfer from a defined benefit to a defined contribution scheme?
A transfer of funds from a defined benefit to a defined contribution can happen for several reasons.
Sometimes an employee in a defined benefit scheme moves to a new employer and may be able to transfer their benefits to their new employer’s defined contribution scheme. Ask for advice (from your new employer’s pension provider) on the value of your pension transfer and clarify any costs included in this process. Always seek independent advice.
Some employers offer employees a transfer to defined contribution scheme when they are closing or have closed a defined benefit scheme. This often includes a financial incentive called an enhanced transfer value. Any such offer must meet the principles laid down by the Pensions Regulator including access to independent financial advice.
Independent advice is that a transfer is not generally in a member’s best interests. This is because the final pension is unlikely to be as high as it is in a defined benefit scheme. But some circumstances may make a transfer attractive – for example where life expectancy is limited, there are no dependents or where the individual wishes to manage their investment portfolio more actively.
The golden rule as always is to take informed advice. Trustees can give general advice and independent financial advice should be available.
Do I have to be a member of an employer’s scheme?
No. All eligible employees will be automatically enrolled on the scheme but have the right to withdraw.
Most advice however is to be part of the scheme whether it is defined benefit or defined contribution and to start as early as possible. This gives you access to the employer’s contribution, is tax efficient and maximises the accumulation of investments over time.