10th April 2014 by The Harried House Hunter
Naturally the main focus of post Budget 2014 discussions has been the shock caused by the complete flexibility proposed under Defined Contribution (DC) pensions. This has been written about in every newspaper, website and blog, but what about Defined Benefit (DB) pensions?
The old school feeling that nothing can be better than a DB pension has this taken a bit of hit over the last few years as many were already looking to consider different pension income options. Transferring into a DC environment from the traditional DB Scheme can work well for those that don’t need or require a spouse’s pension or have health issues, but increasingly for those that want complete income flexibility and advanced death benefits. This has been further fuelled by the proposed Budget changes.
However, there is a consultancy taking place as to whether DB transfers should be stopped or restricted. So, in short a ban on DB transfers. For the public sector the unfunded nature of the Schemes means this is has to happen (and already has), but why restrict private sector transfers? It seems odd to even be having this thought when complete freedom and flexibility is being offered to DC members to then restrict DB. Surely what’s good for one is good for another?
However, the concern has been raised that the volume of members looking to transfer from DB schemes could be so great that it affects the UK economy and stock markets, specifically the bond and gilt markets.
I think this is very unlikely as it will only be those over 55 that can access the money and in reality people will take the income slowly to avoid massive taxation problems. So if the money comes out of DB Schemes the majority will end up in new DC pension arrangements and will be invested in the relevant markets. Of course there will be some that take the money, pay the tax and spend it, but that’s not a concern for DC pensions. In reality I don’t see most people blowing their pension funds on fast cars and luxury holidays. Most people in their retirement years tend to be conservative, rather than reckless.
Do I think final salary transfer will be banned? No. I don’t think so, but I suspect they may be restricted and there may well be a real rush over the next 6-9 months. This is not ideal as people should make informed long term decisions based on all the facts and possibilities. Rushing into a decision because of potential changes in legislation is not desirable. Clarity would be very welcome, but be aware that this window could close.