A defined benefit pension – such as a final salary pension – is often considered the holy grail of retirement plans. Good luck to any young person hoping to get into one; these days most employers consider them too generous and expensive so new memberships have been barred. But that still leaves thousands of people in possession of these crown jewels, offering a guaranteed income into their twilight years based on how much they earned during their working career.
But there’s more to a defined benefit pension than meets the eye. In these enlightened days of individuals having more control than ever over their own pension and how it’s distributed, there is the option to effectively sell a defined benefit pension, often in return for formidable sums of money.
It’s generally included in policy wording that the holder has the right to swap out their pension pot for a cash lump sum (although not in part – it has to be the full amount) and the rates currently being offered can be startling: up to 30 times the value of the expected annual income generated by the pension. So someone with a pension worth £20,000 per year might end up with a cash offer of £600,000 – difficult for anyone to turn down! We would add that once the cash has been taken there’s nothing stopping the holder then buying an annuity anyway in order to guarantee some continued income, keeping a portion behind as a nest egg – a happy compromise.
This approach offers real flexibility and potentially easier inheritance planning, but there are some risks – a defined benefit pension guarantees a life-long income and is protected from stock market performance so risk is low. As ever our advice would be to consult a specialist like DPT Financial Solutions to talk over the options open to you and find out which action will benefit you the most. We find that every single client’s circumstances are slightly different and priorities shift accordingly.