What are the most common options when retiring from a DB scheme? - Certificate in Pension Scheme Member Guidance

What are the most common options when retiring from a DB scheme?

1. Full Pension

The member receives a pension until they die

2. PCLS plus Residual Pension

The member commutes part of their pension to receive up to 25% of the value of their benefits as a tax free lump sum.

The remaining fund is paid as a pension until the member dies.

Some schemes provide a PCLS in addition to the scheme pension, i.e. the member does not have to commute part of their pension. This generally relates to public sector schemes.

Freedom and Choice flexibilities were introduced in April 2015. In July 2016 the FCA launched the Retirement Outcomes Review to assess how competition was evolving after the pension freedoms. The review focused on outcomes for consumers who did not take regulated financial advice. To date, there has been a notable trend for members with DB benefits to consider a transfer to a DC arrangement in order to attempt to benefit from the new DC decumulation options.

https://www.fca.org.uk/publication/market-studies/retirement-outcomes-review-summary.pdf

Should a DB member take the cash?

Most people do take the cash. A member does not have to take the maximum amount offered, they can take a smaller amount if they prefer.

PROS:

It’s tax free
It could be used to supplement income
It is often a once in a lifetime opportunity for a cash sum for home improvements, pay off the mortgage etc.
The spouse’s pension is usually not affected.

CONS:

Pension income is permanently reduced. A member needs to consider – How much income do they need? What is their health and life expectancy?
If the PCLS is taken and invested, it probably won’t generate the same amount of income given up, particularly as pension income increases each year.

"The scheme administrator says I can’t take my retirement benefits now, why not?”

This can be quite common for members of defined benefit schemes that were contracted-out before 06/04/1997 and the member wants to retire early.

If the scheme was contracted-out, the pension must at least equal the GMP at the GMP due date (age 65 for men, age 60 for women).

If the member wants to retire a number of years early, the benefits after the early retirement factor has been applied may be too low to meet this requirement. Consequently, early retirement is not permitted at that time.

The member could ask for details at the earliest age at which this requirement will be met but if the benefit is predominantly GMP, they will have to wait until their GMP due date.