Why switching your DB pension will almost never make sense

Employers more commonly offer DC schemes, where the income in retirement depends on how much you contribute and the performance of the underlying investments of your pension.

The regulator requires anyone considering giving up a DB pension worth at least £30,000 to seek advice. This is to ensure they fully appreciate the value of what they are giving up.

Few advisers now want to offer pension transfer advice, and those who do may charge hefty fees. This comes in the wake of a series of high-profile mis-selling cases — many involving British Steel workers — in which advisers sought to cash in on people’s desire to access their savings.

An adviser may consider it unsuitable that you transfer, but you would still need to pay the fee for their advice.

Think about flexibility

While they are very generous, DB pensions can be inflexible. For example, a scheme may have a set pension age, and if you want to take your money early, it may be on less favourable terms.

Those aged 55 and over can generally access their DC pension pot as they wish. So if you wanted to retire at 60 and live off your savings, known as drawdown, you could do it with a DC pension, whereas you might have to wait until you were 65 if you had stayed in the DB scheme. Bear in mind there will be tax implications if you decide to withdraw a large sum because it could push you into a higher tax bracket in a given year.

You may also wish to spend more money early in your retirement, for example to travel, and less when you are much older and potentially not as mobile. With a DC scheme you can spend your money as you wish. With a DB scheme your income will stay the same for the rest of your life.

The danger, of course, is that by taking money early there is a greater risk that it may run out.

Tom Selby at the wealth manager AJ Bell said: “This control may be attractive to people who have multiple DB schemes built up over a career of working for many different companies.

“It may be difficult to work out exactly what your retirement income will be and hence they may value the ability to consolidate them all into one DC scheme so they can see clearly how much they have saved and how much income they are able to generate from that, either via an annuity or drawdown or a combination of both.”

Pass on more of your money

Only 50 per cent of a DB pension usually goes to your spouse when you die, but the entirety of your DC pension can be inherited by whomever you choose.

If you die before age 75 your DC pension can be inherited tax-free, while if you die after 75 any funds passed on will be taxed in the same way as income when your beneficiary comes to make a withdrawal. Furthermore, if your beneficiaries do not draw on this inheritance (perhaps because they already have sufficient income) it can be passed on to subsequent generations.

Benefit from ill health

A big advantage of a DB pension is that it lasts as long as you do. However, those who think their life expectancy is likely to be shorter than average may not benefit much from the scheme.

For example, if you drew a pension at 65 and died at 67 you would not get much out of the pension compared with someone healthier who lived well into their nineties. By contrast, if you knew that you had limited life expectancy you could choose to spend all your DC pension quicker, or get a bigger income through an enhanced annuity.

You can obtain a transfer value quotation from your DB scheme provider and then find out what annuity you might be able to buy before actually making the transfer. You could then form a view as to which option would give you the better value over your lifetime.

Say you had a DB pension of £20,000 a year. You are then diagnosed with cancer and expect to live another five years. The most you would get, if the predictions are correct, is £100,000.

● Times Money Mentor: the best personal pensions according to our ratings

If you were offered a 20-times transfer value (so £400,000) to move your money to a DC scheme, an insurer knowing your health condition may be able to offer an annuity of £50,000. It would still be quids in if your life expectancy is correct.

Alternatively, you could use the £400,000 to generate an income through drawdown, although this would require you to manage the money and ensure you do not run out of funds before death.

Employer risk

DB schemes are expensive for companies. Some have huge deficits in terms of their liability to scheme members, and others have failed, most notably Carillion in recent times.

If the employer that pays your final salary scheme is at risk of becoming insolvent, there is a chance you might not get the pension you were expecting.

If the firm that stands behind a DB pension scheme fails, the funds will normally be transferred into an insurance-type lifeboat arrangement called the Pension Protection Fund (PPF).

Under the rules of the PPF, those who have already reached the normal age for drawing a pension by the time of the insolvency will get 100 per cent of their pension paid by the PPF.

Those who are under the scheme’s pension age will get 90 per cent up to a certain cap.

Stay put

Your starting position should always be that it is a bad idea to transfer, although it is true in some circumstances it will be worth it.

The number of people transferring has dropped from 32,249 between April and September 2018 to 14,707 in the six months to the end of March this year, according to the Financial Conduct Authority, the City regulator, last week.

As Helen Morrissey, a senior pensions and retirement analyst at Hargreaves Lansdown, said: “The security they offer is hugely important and it is rarely a good idea to transfer.”