Weighing up ‘reward’ at end of working life


According to the oxford english dictionary a promise “is to tell somebody that you will definitely do or not do something, or that something will definitely happen”. At one time, a defined benefit pension was such a promise; after 30 or 40 years of working industriously for the company you could expect to be rewarded for your hard work with a steady income till the day you die.

But times have changed and the ‘steady income’ courtesy of a defined-benefit plan, is now a thing of the past for most private-sector workers. With pensioners living longer, the commodification of the workforce, bad investment decisions, market crashes, increasing bond yields, and the solvency position of many schemes, such guarantees are not what they once were. If you stay in the scheme, you may not, in fact, get the full pension promised. But if you forgo the promised pension you still need to invest the money from the scheme in a way that will provide ‘a salary’ when you reach retirement.

Should you decide to take the transfer you could transfer the money to a Buy Out Bond (BOB). The biggest advantage being, from age 50 you can access the money whereas a DB scheme that does not meet the funding standard, sees early retirement, was such, not allowed.

Another advantage of the BOB is that when you decide to retire you can take 25% of the fund tax free, within certain limits, and, for those with larger transfer values, the 25%  tax free lump sum may be greater than the lump sum entitlement under the DB scheme

The balance of the money will be accessible and you will control the money through an Approved Retirement Fund (ARF) option. Should you die before retirement, your spouse/partner will receive the full amount tax free thereby preserving the capital on death whereas in  the DB scheme they will get a reduced ‘spouse’s pension’ upon death either before or after retirement

On the other hand, you may decide to stick with the scheme with a view to reviewing the decision later on because you believe the scheme to be sound and it will pay out the deferred pension in full, as opposed to the BOB which might not reproduce retirement benefits of equivalent value to the deferred pension. Or, again, you need a fixed income in retirement and cannot accept the risks involved in an ARF providing fluctuating and a not necessarily guaranteed retirement income.

Even in a worse case scenario, should the scheme be wound up on a double insolvency basis, where both the scheme and employer are insolvent, the Government may top up the transfer value to a minimum level if the standard transfer value available from the scheme is below that minimum at that time.

Which or whether it is a complex decision and before making such a decision you need to consider all options and question all advice from all sides. Most importantly, consider what other potential sources of regular fixed income in retirement are going to be available to you, for example, State pension, or other private pensions? Have you had the scheme reviewed and the current alternative transfer value offered? Is there an enhanced transfer on offer, and, if so, is there a time limit on the acceptance of such?

Before you jump ship, getting a copy the scheme’s latest actuarial valuation report is a must which will help to identify if the scheme is failing to meet the funding standard, and, if so, by how much. Does the scheme currently meet the funding standard? If not, is there a proposal, like a cash injection from the company, to make up the deficit? Are there other proposals on the table? Is your employer sticking to its commitments? Is the scheme on track to make up the deficit or has it veered off course? Are the trustees contemplating  winding up the scheme or is there any proposal to impose a Section 50 reduction in benefits? If so, by how much?

Questions, questions!

You need real unbiased advice because to paraphrase the words of the Clash, If I go there could be trouble and if I stay it could be double…


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