Welcome to Informed Decisions, Ireland's #1 Personal Finance Blog & Podcast! Hope you managed to catch last weeks' Podcast with Andy Agathangelou, all about developing more transparency in Financial Services, it was a decent chat!
This week I am on a mission to shred some myths about that big question: Should I take my benefits out of my Defined Benefit pension scheme, or leave my benefits in my Defined Benefit pension scheme. Granted it is not a question that everyone of us will need to answer over a life-time but it is one that I see more and more in recent times. In addition to that it is a decision which can potentially have such a significant impact on one's future lifestyle and financial well-being that it deserves a closer inspection! Given that in the region of 60% of people who have a Defined Benefit scheme have left that employment and so will typically have the option to leave if they want. We're gonna try help them understand whether that's a wise move or not!
Before we begin I have to declare a bit of a bias I have on this topic......I firmly believe that generally speaking a Defined Benefit scheme is a hugely valuable benefit to hold onto for dear life, that you'd have rocks in your head to leave it, that it represents better value than you could possibly hope to achieve if you transferred your benefits out of it, that it will sustain you in retirement, and go a long way potentially to sustaining your partner if they survive you, that thousands of others would give their left and/or right arm to have the preserved benefit that you have, and that it is usually a case that your advisor may be steering you to leave because it will benefit them more than if you stay......but hey I could be totally and utterly misplaced in my bias. I'm just outlining that I do have a bias, and a belief that in most circumstances you'd want to have rocks in your head to take a transfer! Let's see if I'm way off or way on....
What Is A Defined Benefit Pension?
In simple terms a Defined Benefit pension scheme is one in which you are 'guaranteed' a certain level of income in retirement, based on your salary at time of leaving employment, and the number of years you were a member of that scheme. Traditionally they have been the Rolls-Royce of pensions, offering great security, value and certainty of income to retiring employees. In recent years their reputation has been tainted with swathes of employers 'closing' their DB schemes, due for no other reason than they are hugely expensive for employers to provide. Defined Contribution schemes, where the employer will make a certain payment each month on your behalf are far more manageable for employers, and usually less effective for retiring employees.
When Can I Take A Transfer Value From My Defined Benefit Scheme?