Why recent FCA changes to DB scheme transfers won’t alter the advice we give


Last month the Financial Conduct Authority (FCA) announced changes to how advice should be given for Defined Benefit (DB) pension schemes.

The main changes were around DB scheme transfers and the charges adviser firms can levy. The FCA hopes they will remove ‘obvious conflict of interest’ and ‘empower consumers to make better decisions.’

But what are the new rules? How much will your DB pension pay out on retirement? And what are the downsides to transferring it away?

What is a DB scheme?

A DB (or a Final Salary) pension is a type of workplace pension. The benefits available are often favourable to those you might receive from a Defined Contribution (DC) scheme.

Instead of building up a pension pot from contributions (as you would with a DC scheme) and then using that fund to purchase a retirement option, benefits from a DB scheme are calculated differently.

A DB Scheme provides you with a guaranteed income for the rest of your life and the amount you receive is based on factors including your final salary and your number of years’ service.

Your retirement calculation will also take into account the scheme’s accrual rate. This is the fraction of your final (or average) salary that you will be paid, multiplied by the number of years’ pensionable service you have.

How much pension will I get?

Let’s assume that your employer’s pension scheme has an accrual rate of 1/80th. You will receive 1/80th of your final salary for every year of pensionable service.

If you have 20 years’ service and leave your employer with a final (or average) salary of £50,000, your pension will be 1/80th of £50,000 multiplied by 20. That means a guaranteed income, paid until your death, of £12,500 per year.

Can DB schemes be flexible?

All pensions, including DB schemes, are designed to provide you with an income in retirement. A Final Salary pension is a regular, reliable income that can make budgeting in retirement simple.

Since Pension Freedoms were introduced in 2015, though, the options available with DC schemes have become much more flexible.

As well as a regular pension, you can take a lump sum or manage your own withdrawals, leaving a portion of your pot invested and taking money out only when you need it.

That’s not to say a DB scheme is completely inflexible, or that it can’t be used to help create flexibility elsewhere, as part of your wider financial plan.

  • Take a tax-free cash lump sum

Final Salary schemes will often allow you to take a one-off, tax-free cash lump sum when you first begin to take benefits.

If you have plans for the early, ‘active’ stage of your retirement – such as world travel, or even paying off the rest of your mortgage – this lump sum could provide the cash boost you need to create flexibility.

  • Use other pension schemes

DB schemes are becoming increasingly rare. If you have one, it’s quite likely that it won’t be your only pension and that you will have DC schemes elsewhere, or even as a separate arrangement within the same company.

Knowing you have a regular and steady income stream of your DB pension could free you up to access your other pots flexibly, using Pension Freedoms. The flexibility will come from these schemes but be underpinned by the peace of mind of your regular DB income.

  • Use non-pension income

You might also have other sources of retirement income. If you have investments that you could access flexibly, consider using these in the same way as a flexibly accessed DC scheme.

Investment income can be used to fund discretionary expenditure while your fixed expenditure (bills, mortgage repayments, etc.) are covered and budgeted for under your DB scheme income.

Should I transfer my DB scheme?

It’s rarely a good idea to transfer out of a DB scheme.

The benefits on offer make them a gold standard where pensions are concerned. Although transferring to a DC scheme – with its promise of flexibility and large lump sums – might be appealing, you’ll often be missing out compared to the generous DB annuity on offer.

Many DB pensions also have additional benefits attached, such as a spouse or civil partner’s pension and an income linked to inflation.

Remember too, that a DB scheme’s income is related to your final salary and not to the size of your invested pot. That means that the stock market performance, even the volatility we’ve seen recently, won’t have any impact on your investments.

What are the recent FCA changes?

The FCA announced in June that a ban on contingent charging would come into force from October this year. Contingent charging occurs when you receive advice on a DB transfer but only pay for that advice if you go ahead with the transfer.

The FCA report states that this ‘creates an obvious conflict of interest.’ For any transfers that do go ahead, the charge levied must be the same amount as if the advice was non-contingent.

An adviser must also consider a workplace pension as a receiving scheme for the transfer and demonstrate why any chosen non-workplace plan is more suitable.

Get in touch

Your personal circumstances, as well as your future goals and aspirations, are the key driving force behind the advice we give. A DB transfer is rarely a good idea but we’re here to discuss the best options for you, whenever you need us.

If you’d like to discuss any aspect of your DB pension scheme, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

A pension is a long-term investment not normally accessible until 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.