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DB To DC – Lamborghinis All Round?

DB To DC – Lamborghinis All Round?

The news that members of final salary pension schemes are to be allowed to take advantage of the new rules on how pensions can be accessed will be welcomed by all but the most paternalistic.

The Treasury has confirmed that from April 2015, members of both private sector and funded public sector final salary pension schemes will be able to transfer the value of their pension to a defined contribution pension scheme for the purposes of taking the entire pension as cash.  Whilst there is to be no change to the rule that allows pension savers to access 25% of their pension as a tax free cash lump sum, any further amount which is taken as cash (rather than pension) will be taxed at the normal rate of income tax (0%, 20%, 40%,and 45%) rather than the current rate of 55%.

Members of final salary pension schemes who have pension rights with a cash value sufficient to bring annual earnings into the top two tax bands may initially be attracted to the idea of taking their whole pension as one cash lump sum.  However, faced with the prospect of losing nearly half of it in tax, it seems likely that this will only seem like good value for those who find themselves in exceptional circumstances.

Perhaps more likely is that members of final salary schemes will consider transferring to a defined contribution pension with the aim of making a series of cash withdrawals over several years to minimise tax charges.  On the other hand, the requirement for transferring defined benefit members to take independent financial advice (which the member will largely have to pay for) before a transfer will be allowed, may act as a disincentive for many.

The fear that individuals with significant retirement savings will be happy to spend the whole lot on a Lamborghini with no thought for the future seems unfounded. Defined benefit scheme members will be happy to know that they have more choice over how to access their pension savings, but in the long term it seems unlikely that the majority will trade the security of a guaranteed income for life for a life in the fast lane.

Deborah Adam