Can I cash in a Defined Benefit pension?
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I have worked for a national company for many years and will be entitled to a substantial pension when I retire as the pension is based on my years of service and my final salary. I want to take early retirement and am planning to purchase a holiday property in northern Scotland where I’ll spend half of my time. I understand I can cash in my pension, which sounds perfect as I’ll need more than I have saved up to buy the property I want. Is this a good idea?
Phil Beck of Smith & Pinching responds:
I’m assuming that your pension is what we call a “Defined Benefit” (DB) scheme as your benefits are based on your length of service and salary. DB schemes can’t generally just be cashed in, although there may be an option for a pension commencement lump sum. Your employer or the pension scheme administrators should be able to confirm this.
The alternative type of pension is a “Defined Contribution” (DC) scheme where the value of your fund is based on contributions and any investment growth. DC schemes permit you to withdraw cash amounts either directly from the fund or through a pension contract that allows flexible withdrawals.
It is possible to transfer some DB schemes to a DC scheme, depending on the scheme rules. If your scheme does allow it, the scheme administrators can provide a transfer valuation which would form the basis of a new DC scheme.
However, you would take on all the investment risk if you transferred from a DB scheme to a DC scheme. DB schemes are often described as gold-plated as they have such valuable benefits. The income provided by a DB scheme is guaranteed whereas, with a DC scheme, you bear the responsibility of monitoring and adjusting your pension investments so that they deliver what is needed to maintain your income levels throughout your lifetime. You would be exchanging certainty for uncertainty.
The other question to factor into your decision is the level of retirement income you require. If you were to transfer and withdraw a significant amount of cash, you might struggle to maintain sufficient income. Your tax position should be considered too.
This is not a step that should be taken lightly, so I strongly recommend that you take detailed independent financial advice. In fact, guidance from the Financial Conduct Authority indicates that DB transfers are unsuitable for most people and anyone who is considering this step must take financial advice before doing so.
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Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk