Savers planning to transfer out of a defined-benefit pension scheme in search of greater flexibility are being urged to think twice.
Defined benefit pensions are among the most generous available and offer a guaranteed income for life. Most employers have stopped offering this gold-plated option and offer a stingier pension based on investment performance instead.
However, more than 200,000 people have transferred out of defined benefit schemes since pension freedom rules made it possible in 2015. One of the primary motivations cited is greater flexibility. Unlike defined benefit schemes, you cannot take your pension as a lump sum or vary your payments over time as your requirements change.
Pension pot: More than 200,000 people have transferred out of defined benefit schemes since pension freedom rules made it possible in 2015
But Steve Webb, who instituted the reforms as Pensions Minister and who is now a partner at pension consultancy Lane, Clark and Peacock, is warning today that many defined benefit schemes have far more flexibility than savers realise.
He says: ‘Many of those in a defined benefit scheme are not aware of a so-called pension increase exchange, known as ‘pie’, where you might get a bigger starting pension in return for giving up some inflation protection.’
He says some schemes also have a bridging option, paying more earlier on in return for dip once savers start claiming the state pension.
Not all schemes offer such options, and you may have to ask for them.
