Big calls to make for savers planning to retire on defined benefit pensions

For those approaching 50 or just beyond, there is undoubtedly one particular pledge they can make – one that could help determine how comfortable the rest of their lives could be.

One of our biggest dreams is to retire early, and for thousands of people in Scotland in their late 40s and early 50s it could indeed be a reality.

One key reason for this optimism is the existence of defined benefit pension schemes, of which many of those falling into this later age group will be members.

The introduction of pension freedoms provided the opportunity for pension scheme members to transfer their pension pot out of the scheme to allow the flexibility of accessing their pension when they reach 55 years of age, rather than the defined benefit scheme pension age which is commonly 60 or 65. Importantly, the qualifying age of 55 will be rising to 57 in

April 2028.

There are pros and cons to transferring out of

a scheme or staying in it. As a member, the benefit of staying within the scheme is that you will receive the guaranteed amount until you die. This is often index linked so will keep pace with inflation.

Furthermore, you can normally take a tax free lump on retirement and in some schemes, once you die, your spouse or partner will receive a partial payment for life.

By transferring out of the scheme, by far the most significant benefits are the ability to draw your pension early and flexibly. This often involves drawing a higher income in the early years of retirement and tapering off as other forms of income, such as the state pension commence. In addition, should you and your partner both die prior to exhausting the fund, whatever is left can pass to a nominated beneficiary potentially tax free depending on

the size of the fund and what age you are when you die.

The biggest downside of transferring is that you no longer benefit from the security of guaranteed monthly income, and in most cases will be investing in assets that carry risk.

No one should be in any doubt that transferring out is a substantial and serious decision, and the government stipulates professional advice must be taken if the fund is above £30,000.

Indeed, we need look no further than the current investigation into the British Steel pension scheme scandal, with the National

Audit Office saying that many steelworkers had been given bad advice and may have made poor choices as a result.

Although there was an initial rise in transfers following the introduction of the freedoms this has certainly fallen in recent times due to a number of factors, not least the complexity involved, as well as the substantial levels of regulation in place to protect consumers.

The number of authorised pension advisers has also fallen, with recent data from the Financial Conduct Authority (FCA) indicating around 1,000 advisers had left the market in the last two years.

In addition, to improve the quality of advice and provide further protection for consumers the FCA has brought in a ban on contingent charging, whereby fees were only applied if the transfer went ahead. Charges are now applied whether any transfer proceeds or not.

It would be fair to say that it is today more difficult to carry out a pension transfer, but in many ways that is a good thing.

The importance of pensions, and “getting it right” cannot be understated and it is for very good reasons that transferring out of a defined benefit scheme is not a straightforward or cheap proposition.

But that is not to say it is a bad thing to do or that it cannot be suitable and hugely beneficial for certain individuals.

If you are in the fortunate position of having a defined benefit pension and are thinking about life in retirement, the best advice is to get some advice. It could be the best promise you make.

Keith Brooks is a pensions adviser and chartered financial planner at Aberdein Considine.