Should you convert your defined benefit pension arrangement?

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Do I feel lucky? That’s a question anyone contemplating transferring their pension benefits from a defined benefit arrangement to a defined contribution arrangement should be asking themselves. I read an article recently in The Daily Telegraph headed “Should you sell your gold plated pension?”. The article stated that “Workers are rushing to exit “gold-plated” final salary pensions for fear of being permanently blocked from using the new pension freedoms to cash in their funds.” I must say my experience is not that there is a huge rush to do this.

For many years defined benefit occupational pension schemes have been regarded as “gold-plated” and  defined contribution arrangements have been viewed as the poor relation. The UK Government’s announcement in March on increased flexibility at and beyond retirement for members of defined contribution arrangements  is to be applauded. But let me make it clear that this does not turn such arrangements  into gold-plated arrangements. There will be some people for whom converting their defined benefit arrangement to a defined contribution arrangement will be a good idea, but for every one in that position there will be many more for whom it is a very bad idea indeed.

A defined benefit arrangement will give you a guaranteed income for life and often a pension for your spouse for their life after you are gone. Converting to a defined contribution arrangement means you don’t have a guaranteed income unless you buy an annuity and in that case there would be little point making the transfer. That means that if you or your spouse have a long retirement the money could run out. It also means that you will have to manage your pension benefits into your eighties and nineties (and perhaps beyond) when you might not have the wherewithal to do it.

Yes if you make the transfer to a defined contribution arrangement and die early enough there may be money left over for your children; get it wrong, however, and your children may have to fund your later years. Yes if you transfer you will have greater flexibility over when and how you draw your benefits. Do you want to trade in the guaranteed income of  defined benefit arrangement for a more risky defined contribution arrangement? It might well come down to one simple question. As Inspector Callahan would say:

“Do you feel lucky?” Well do you?

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