On the go: Defined benefit members do not need to transfer out of their schemes to be able to gain more flexibility, as this can be achieved through a pensions increase exchange or a bridging pensions option, a new report from LCP claims.
The research paper, published on Sunday, noted that since the introduction of pension freedoms in 2015, one of the main reasons for savers to transfer out of their DB scheme is to be able to have more flexibility when accessing their retirement benefits.
By transferring into a defined contribution scheme, individuals are able to fund an early retirement, pay for a large one-off item, or draw more heavily earlier in retirement instead of steadily throughout their pensioner years, the consultancy noted.
However, there are options within DB schemes that can help members achieve such flexibility, such as a pensions increase exchange, which offers the individual a bigger starting pension in return for giving up inflation protection on their pension in retirement.
Many schemes offer a higher inflation protection than the legal minimum required, which gives room for this type of exercises, LCP stated.
The consultancy noted that such an option can be a win-win situation for both scheme and members, as the member has the option to reshape their benefits to fit their personal needs, and the scheme reduces its exposure to future inflation risk.
Another option available, if scheme rules allow, is a ‘bridging pension’, which means that an individual can get a much higher pension in their early retirement years in return for a reduction in their pension when they reach their state pension age.
This change might be enough to enable savers to take early retirement, LCP claimed.
Another significant attraction of a bridging pension option is that it may well involve not just a higher starting pension, but a higher tax-free lump sum. But “there is no ‘free money’ in this transaction”, the report stated.
“Even if the BPO is at 100 per cent value, a larger payout upfront will mean less money from the scheme in later retirement, and if the BPO is at less than 100 per cent value, the deal may be expected to result in less pension in total,” it explained
The consultancy also noted that most DB schemes offer flexibility on retirement age, giving the member the opportunity to take a pension before or after the normal pension age.
However, ”schemes have often not been very good at alerting members to their options under the scheme to take early retirement”, it stated, urging members to check with the administrators of their schemes on what options are available.
Clive Harrison, partner at LCP, noted that “while DB pensions have many advantages, they are sometimes perceived as being rather rigid”.
He said: “In reality, there is often considerable flexibility for members of which they may be unaware. In particular, they may be able to reshape their benefits in a way that better fits with their plans for retirement or helps them to meet financial commitments.
“Members should certainly engage with their schemes about the flexibilities that are on offer.”
