The number of workers leaving defined benefit (DB) pension plans has soared since radical pension changes were announced in the Budget in March.
Alongside radical new flexibility for drawing pension income, chancellor George Osborne warned that savers with DB benefits could be banned from leaving their schemes in April 2016, spurring a 'get out while you can' mentality.
Pension consultant Barnett Waddingham said that since 19 March it has seen a 50 per cent increase in transfers out of DB schemes, compared with the same period last year.
Among FTSE 100 companies the reaction to the Budget has been "conflicted", according to Mike Smedley, a partner at PwC. "In some firms not even one person has called up to ask for a transfer, but from other blue chips we've seen a huge increase in people wanting to get out," he says.
Investors Chronicle has also learned that companies have been writing to staff with small DB pensions, giving them the option to take it as cash if they are over 60, or transfer into another scheme if they are under 60.
This is because new rules announced in the Budget now mean anyone with £10,000 or less in up to three DB pension schemes (equivalent to around £500 a year in guaranteed income per scheme) can take it as cash instead of having the benefits.
The change also means employers can force staff retiring this year with pensions worth less than £10,000 to take their pensions as cash, meaning they would lose out on generous guaranteed income for the rest of their lives. However, Paul McGlone, a partner at pension consultant Aon Hewitt, says the vast majority of companies are choosing not to do this.
Malcolm McLean, a pensions consultant at Barnett Waddingham, says: "If you're in ill health or you're retiring late, taking the cash could be a good move because you'll get the cash upfront and you can do what you like with it. But if you're taking relatively early retirement and you're fit and well, choosing to have the guaranteed income will probably work out better value for you in the end, as the deals tend to be generous."
Should you transfer out of your DB scheme?
Deciding to leave your gold-plated pension is a big decision that should not be rushed into. There are a number of factors you need to consider before you decide.
Could you invest the money in a Sipp and get a better return?
If it's a pension from an old job and you're not yet retired, the company will be bumping up its value every year. But here's the thing: some companies bump up the value much more than others. At the stingiest end, your former employer might only be increasing your pension's value by 2.5 per cent each year - meaning you could probably do better by investing it yourself. However, others increase it by as much as 8 per cent per year - which is extremely generous, and would be much harder to beat year on year by investing. To find this information out, you need to ask your former employer about the "revaluation rate" of your "Guaranteed Minimum Pension Benefits".
Typical revaulation rates for DB pensions
| Dates when you worked at the company | Revaluation rate (% per annum) |
| 6/04/07 - 5/04/12 | 4% |
| 6/04/02 - 5/04/07 | 4.50% |
| 6/04/97 - 5/04/02 | 6.25% |
| 6/04/93 - 5/04/97 | 7% |
| 6/04/88 - 5/04/93 | 7.50% |
| 6/04/78 - 5/04/88 | 8.50% |
Source: Tideway Wealth
Who do you want to leave your pension to when you die?
If you have a spouse without a solid pension in place, then you might want to think twice about leaving your DB scheme. This is because you have the option of leaving your spouse half your pension when you die - and some schemes even give you the option of giving them more, in return for reducing the size of the pension you receive until you die.
However, if your spouse already has a good pension, your spouse is in worse health than you, you are single, or you would rather leave your pension money to your kids, then you might want to consider leaving your scheme. Once you start collecting your DB pension it dies with you (or your spouse) and cannot be passed on to your kids.
However, if you move your money out of your DB scheme and into a Sipp, whatever you don't spend can be passed on to whoever you name in your will. Currently, you will have to pay a 55 per cent tax charge on this, but the government is consulting on this, and there is a chance that the rules could change so you'll be taxed at your normal rate of income tax from 2016. It would also be charged inheritance tax, if your estate is above the £325,000 threshold.
How highly do you value a guaranteed income?
Lauren Peters, a pensions adviser at Tideway Wealth, says the majority of people leaving DB schemes have become self-employed since leaving their DB pension schemes. "I think that because they are used to not having a set income, so they don't see a guaranteed pension income as that important. People who have been working at the same firm on a set salary for years are much less likely to leave their DB scheme," she says.
