Should you ditch final salary for new pension freedoms?

DB, or final salary pensions as they are more commonly known, are gold-plated pensions that pay a retirement income calculated as either a percentage of an employee's final year salary or an average of the income they earned during their employment.

From April 2015 the new pensions freedoms, bar any last minute changes before final regulation is unveiled next month, will allow people to take as much or little out of their pension pot as they wish when they want - subject to tax - so long as they are over 55. Malcolm Kerr, a senior adviser to Ernst & Young, says: "In fact, as soon as they reach the age of 55 they can take their entire pension fund in cash and spend or invest it wherever they wish. Twenty five per cent will be tax-free, with the balance taxed at their marginal rate."

However, DB scheme members will not have access to the freedoms unless they transfer to a defined contribution (DC) scheme.

When to stay or when to go?

Jamie Clark is a business development manager at Scottish Life. He says that those with trivial pension pots - funds less than £30,000 - or members of a scheme that provides for a spouse's pension but are unmarried, are the most obvious DB scheme members who might benefit from transferring out.

Scott Mullen, director of pensions adviser The Pension Expert, explains: "For single people or those with partners with independent means a spouse's pension can sometimes be an unnecessary built-in benefit and they could take the view that they want more income for themselves in retirement."

Another consideration for DB members looking to transfer out is their health. Mr Mullen says that if a DB member has a shortened life expectancy they might want to consider transferring to a DC scheme.

He explained that a DB scheme will often provide a retirement income that starts low in early retirement and escalates each year. "If someone is retiring with ill health or a shortened life expectancy, then the guaranteed, generous but inflexible income of a final salary pension is not as crucial as it is for people who want their index-linked pension to still be paying out 30 years later," he says. "Making the most of early retirement with nice holidays, new cars and meals out is an attractive idea for most people, as this is when they feel they are fit and healthy enough to appreciate it."

The health of the company that will be paying out the DB pension must not be ignored, either. A DB pension is only as good as the company behind it. Alan Higham, a retirement director at Fidelity, explains: "If the company behind the pension goes bust then your pension is likely to be reduced. So, if the company is in a precarious financial position, taking a transfer to your own scheme may actually prove to be a wise decision."

He also points out that even if your company stays solvent you need to make sure the scheme has enough funds to pay your pension. "You and your dependants will have to live a fair while in retirement to make it pay relative to the lump sum," he says. "Those without any spouse/partner and or in poor health may actually benefit from taking the lump sum. Be careful, though, as taking the transfer is a one-off gamble. You won't be able to change your mind afterwards."

Should I stay or go?

Most pension experts agree that there is no simple answer to the DB transfer question.

Mr Higham says that as a general rule people should not give up a defined benefit pension unless they can secure a better income or they already have an alternative income to meet their needs.

"Even then, there may be better ways to achieve your goals than giving up a secure pension promise from a reputable company," he adds.

Andy James, head of retirement planning at wealth adviser Towry, says DB plans offer a high level of certainty as well as benefits for dependants, should the retiree die before them. "These benefits can be very difficult and expensive to replicate via personal pensions where there is always the risk of your money running out before you do," he says.

Mr James suggests that the tax-free cash taken from the fund is used to secure at least some form of income whether via an individual savings account (Isa), personal pension or alternative form of retirement income.

He said: "This will enable further pension funds to be built up and used flexibly when required in retirement. This can lead to tax savings and potentially offer the best of both worlds when funding retirement plans."

And John Fox of self-invested personal pension provider (Sipp) provider Liberty warns: "Defined benefit schemes can be very slow to release pension funds, so don't think you can call up on 6 April 2015 and request an immediate withdrawal."