imperial Chartered wealth management
How defined benefit pensions work
Defined benefit pensions pay out a secure income for life which increases each year. You might have one if you’ve worked for a large employer or in the public sector. Your employer contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income. You can also contribute to the scheme. They usually continue to pay a pension to your spouse, civil partner or dependents when you die.
When can you take your pension?
Most defined benefit schemes have a normal retirement age of 65.
This is usually when your employer stops contributing to your pension and your pension starts to be paid. Depending on your scheme, you might be able to take your pension from the age of 55, but this can reduce the amount you get. It’s also possible to take your pension without retiring. You might also be able to defer taking your pension. This might mean you get a higher income when you do take it.
Once your pension starts to be paid, it will increase each year by a set amount (your scheme rules will tell you by how much) for life.
Normal schemes offer a tax-free lump sum; if taken this then usually triggers a reduced pension income, different schemes offer different options. It’s important to review all your options.
Taking your pension as a lump sum
Transferring your defined benefit pension
You might be able to take your whole pension as a cash lump sum (CETV – Cash Equivalent Transfer Value).
If you do this, up to 25% of the sum will be tax-free, and you’ll have to pay Income Tax on the rest.
If you’re in a private-sector defined benefit pension scheme or a funded public sector scheme, you may be able to transfer to a defined contribution pension as long as you’re not already taking your pension and should scheme rules permit this option.
Defined contribution pensions can be accessed flexibly from age 55, so this might seem like an attractive option. But if you transfer from a DB pension scheme, you’re giving up valuable benefits and might find yourself worse off, even if your employer offers you incentives to switch.
It’s essential to take advice from a regulated financial adviser who specialises in this type of transfer before you decide. At Imperial, we specialise in this type of transfer. Speak to one of our advisers to find out more.