The gold-plated pension schemes! Although some Financial Advisers such as Capital & Income Solutions and Independent Benefit Consultancy do not see them like this!
There are two types of defined benefit pension schemes, final salary schemes or career average schemes, the former being superior. These are both based on your salary whilst with your employer rather than the amount of money being invested in the pension and the growth of your investments.
Since the pension freedom rules were released in 2015 which meant that you could access your pension in a much more flexible manner, there has been a substantial increase in the amount of Defined Benefit (or Final Salary) pension transfers, this has drawn the attention of the UK regulator,
the Financial Conduct Authority (FCA). Certain Financial Advisors have advised their clients to transfer their pensions so they can access the flexibility brought in by the rules, however, in many cases, they have not explained the benefits they are giving up by cashing in their Defined Benefit pension.
With a Defined Benefit pension, you get the following benefits (to name just a few):
Guaranteed pension. This means that your pension will live as long as you, you never need to worry about it running out! The pension will pay you an income for the rest of your life.
Guaranteed death benefits. Your spouse (and sometimes your children) will benefit from the scheme when you die, most schemes have a 50% spousal benefit which means that your Spouse will receive half of the income that you received for the rest of their life. Meaning that you do not have to worry about making sure they are left with enough money after you are gone, leaving you to enjoy your retirement!
No investment risk. With a Defined Benefit scheme, the sponsoring employer is responsible for making sure that there is enough money in the fund to pay you and they have a duty in legislation to do so. This means that you don’t have to worry about managing your investments or paying a financial adviser to do so.
Protection from the PPF. If for whatever reason your employer does fail in their duty to keep the scheme funded, the Pension Protection Fund will cover you for at least 90% of what you would have received, should this have been paid by the original scheme.
Index linking. A defined benefit scheme is index linked which means that it is guaranteed to increase by either RPI or CPI (depending on the scheme) meaning that your spending powermwill keep up with inflation.