Since the introduction of pension freedoms in 2015, one of the biggest reasons for people to go ahead with a defined benefit (DB) scheme transfer is to find more flexibility with their pots.
This is because it allowed savers to get a lump sum and do whatever they wished with it, rather than keep it in the rigid structure that a set pension is perceived to have.
But a report by advisory firm LCP found that there are ways to take advantage of some flexibilities within a person’s DB scheme, without “sacrificing the security that comes with such pensions”.
One regards pension age. DB pensions allow savers to start taking out income at a lower rate before the standard retirement age, as well as offering options on how to take their benefits as either a regular pension or as a lump sum.
LCP found an additional two options that reduce the perceived rigidity of DB pensions. These include:
- Pension Increase Exchanges (Pies). Several company pension schemes offer inflation protection in retirement which is believed to be more generous than the minimum required by law. But under Pie, a member can be given the opportunity to give up additional inflation protection for a higher starting pension; and/or,
- Bridging Pension Options (BPOs). As the state pension age increase, there can be a gap between retirement and when the individual starts receiving their state pension. But company schemes can be restructured to fill such a gap by offering an enhanced pension before the standard state retirement age. This would come, however, with a step down in scheme pension when the state one starts to be paid.
Re-shape pension benefits
LCP said that, in both instances, members are “effectively ‘front loading’ their pension rights”. These options can be very attractive to those looking to retire early or to have more money to spend when they are younger and fitter.
There are downsides to these as well, since members may end up with a smaller pension once they retire and be exposed to greater inflation risks.
Clive Harrison, partner at LCP, said: “Whilst DB pensions have many advantages, they are sometimes perceived as being rather rigid.
“In reality, there is often considerable flexibility for members of which they may be unaware. In particular, they may be able to re-shape their benefits in a way that better fits with their plans for retirement or helps them to meet financial commitments. Members should certainly engage with their schemes about the flexibilities which are on offer.”
