The furore engulfing the British Steel pension scheme brings to light some of the key issues savers need to consider if they are considering about ditching their guaranteed defined benefit (DB) pension in favour of the flexibility of a defined contribution (DC) plan.

The 130,000 member scheme is being closed as part of a deal struck between Tata Steel, the company responsible for paying the pensions, and The Pensions Regulator to secure the future of the Port Talbot plant in South Wales.

Members have been given the choice of entering the industry lifeboat fund (known as the Pension Protection Fund) and receiving lower payouts, moving to a new company scheme, or transferring out to a private scheme such as a SIPP.

Amid uncertainty about the future of the scheme and the pensions it is obliged to pay out, press reports surfaced of members being targeted by salesmen attempting to coerce them to give up their valuable benefits.

Many said they regretted their decision to transfer out and had not fully understood the impact it would have on their retirement.

So if you’re considering quitting your DB scheme, here are a couple of things you should consider:

1.Understand the value of what you’re giving up

You may well be offered an eye-watering, lottery win-type sum of money to leave your DB scheme. There have been reports of members being offered somewhere in the region of 30 times their annual pension as a lump sum to transfer – meaning a £10,000 a year DB pension converts to £300,000 in a DC scheme.

But remember there is a reason you’re being offered such a big chunk of cash – namely that your DB pension is extremely valuable.

2. What are your pension priorities?

Whether or not to transfer will depend on your own personal circumstances and goals. Some people will already feel they have enough secure income to fund their day-to-day spending and are therefore able to cash-in the rest (although remember this will be taxed in the same way as income).

Others will be attracted to the tax treatment of DC pensions which allows you to pass on your entire fund tax-free if you die before age 75 or at your recipient’s marginal rate if you die after this age. Furthermore, you can now pass it on to anyone – it doesn’t need to be a spouse or dependant.

If your DB pension is worth £30,000 or more you’ll be required to speak to an FCA-regulated financial adviser – a crucial part of the process in helping inform your decision.

Whatever you decide, remember that your pension first and foremost needs to provide an income that lasts throughout your retirement – a period that could last 30 years or more. In most cases, keeping your DB pension will remain the best way to do this.

TOM SELBY

Senior analyst, AJ Bell

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