IFA de Vere challenges three misconceptions about defined benefit pensions

2nd July 2013

IFA de Vere says it is busting myths about defined benefit pensions following consultations with 368 potential and new clients.

deVere Group’s founder and chief executive, Nigel Green, says: “From our consultants’ and advisers’ conversations with potential and new clients, it has become clear that there is a lot of misinformation and, in some cases, downright lies in the public domain about UK private pensions.

“This must be addressed urgently as it could seriously compromise people’s long-term financial planning strategies.  The myths need to be busted.”

On what he calls the erroneous understanding that final salary, or defined benefit, pensions are guaranteed, Mr Green says: “This is simply not true in the vast majority of cases.”

He continues: “Defined benefit (DB) schemes are, by their very nature, reliant on the financial stability of the members’ firm.  The question someone, especially a younger worker, should ask themselves is ‘will my company still exist and be financially sound in three or four decades’ time when I come to draw my pension?

He adds: “It should be remembered that pension formulas can, and often do, change over time and such modifications can significantly alter how much a member accumulates in their pension fund.”

Of what the group calls the second most common myth – that DB pensions always annually increase in value – the deVere Group’s senior technical advisor, Reece Fallaize, says: “Whilst the value on paper may indeed increase, what members need to bear in mind is the real return that is being achieved after inflation has been taken into account.  The majority of pension schemes are now applying increases in line with CPI (consumer prices index) rather than RPI (retail prices index) and the government forecasts that CPI will be 1.2 per cent less per annum than RPI over the long term.”

And thirdly, of the belief that spouses and children will receive a member’s final salary pension should that member die, Mr Fallaize says: “In many cases a spouse will receive 50 per cent of the income the pension member was receiving on death – but again, this is not guaranteed.  Due to the increasing liabilities that pension schemes are facing, many are now changing the terms in which spousal benefits are paid.

“Such changes include amending the amount of annual increases the spouse will receive annually on the pension, pension reductions for considerably younger spouses (more than 10 years), and declining spousal pensions if the spouse is a non-UK domicile and the marriage was not registered in the UK.”

Consultations with 368 potential and new clients formed the basis for this research.

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