This is the third and final of the PPF’s blogs devoted to explaining pensions to its membership. I hope that readers find them refreshing and that there are good things in them which they can use for themselves, their clients and perhaps their memberships.
Through the hundreds of daily conversations we have with our members, we know pensions can be a complex – and often confusing – topic. In fact, we recently surveyed 2,000 people on defined benefit (DB) pension schemes and found many misunderstandings about how they work.
In the final post in this series, we’re answering more key questions to help you understand and manage your DB pension.
1: How does my DB pension differ from a DC scheme?
There are many different types of pensions on offer in the UK, but the two main types of workplace pensions are defined benefit (DB) and defined contribution (DC) pensions.
So, what are the differences?
If you have a DB pension, you’ll have a guaranteed income for life when you retire. The amount of pension you receive is usually based on how much you’ve earned and the number of years you’ve worked.
The value of your pension is guaranteed; this means your employer is responsible for making sure your DB pension scheme has enough money to pay you what you were promised. If your employer goes bust, your pension is usually protected by us.
If you have a DC pension, the value of your pension pot will depend on how much money you and your employer have contributed over the course of your employment and how it’s been invested. Unlike a DB pension, where you essentially have a guaranteed fixed income in retirement, there’s no guarantee on how much your pot will be worth when you retire. The FSCS may protect your DC pension and pay you compensation if your pension provider fails.
Whether you have a DB or a DC pension, you’ll still be able to benefit from your pension if you change employers. You’ll also be able to withdraw up to 25% of the value of your DB or DC pension pot when you’re ready to retire, and this will be tax-free.
2: How much pension will I get?
Calculating the exact size of your pension isn’t always straightforward. However, there are a handful of ways to get an estimate:
- Use a pension calculator. The government’s MoneyHelper calculator is a good place to start.
- Speak to an independent financial advisor. They can help you understand how your savings and DB pension can work together to fund your retirement plans.
- Check for lost pensions. There are tens of millions of pounds of unclaimed pensions in UK funds. You can use the government’s Pensions Tracing Service to track down all your old pensions.
- Speak to your employer. Your employer is a great starting point if you want to engage more with your pension. They’ll be able to direct you to find out how much your DB pension could be worth, as well as share further information on your scheme provider.
3: What happens if I’ve left the employer who offered my DB scheme?
You’ll still receive a retirement income from your scheme if you’ve left your employer. The benefits you’ve built up follow you no matter where your career takes you, and you’ll always be entitled to an income from them when you retire.
You should continue to get updates about your pension even when you leave an employer. It’s important to stay up to date with any changes to the scheme and let them know your new address if you move.
4: Should I be worried about the security of my DB scheme? What happens if my employer or former employer goes into administration?
If the employer that sponsors your DB pension scheme becomes insolvent, you’ll receive the vast majority of what you were entitled to. First, we’ll assess the scheme to understand if another employer can take on it or if it can secure benefits from an insurance company at a level equal to ours.
If your scheme does enter the PPF, you’ll become a member and receive an income for life – and your dependents often will too. If we didn’t exist, you would only receive a share of what was left in the scheme, which might be very little.
5: What happens to my DB pension scheme when I die?
With most DB pensions schemes, a pension will continue to be paid to your ‘beneficiary’ – the person you nominate to receive it. There are different rules with different schemes, and it depends on whether or not you’re receiving your pension when you die. However, your loved ones or nominee could receive a ‘survivor’s pension’.
6: What happens if I’ve lost my DB pension scheme paperwork or online access?
Most pension schemes send you correspondence each year, such as statements, information on your scheme’s funding, and any important policy changes that have taken place.
If you’ve lost the details of your pension, there are several avenues you can explore. You can contact either the provider that your pension is with or your former employer, both of whom should be able to help you.
There’s also the Pensions Tracing Service, a free government service designed specifically to help people who have lost track of their pensions.
The more information you can give, the easier it will be to track down your pension, including your past and current addresses and employment history.
Once you’ve traced your pension, you’ll need to bring yourself up to speed on any changes, including:
- How much your pension is worth now, and how much you’ll get when you retire
- Whether there have been any management changes
- If you’ve nominated any ‘beneficiaries’ to receive your pension if you die
It’s a good idea to make digital records, so they’re easy to find when you need them.
7: What happens if I have multiple DB or DC pension schemes?
Many people will have worked for multiple employers throughout their careers and, in some industries, people may have had multiple DB schemes. The Pension Tracing Service can help here, providing you with an update on your various schemes.
Getting independent financial advice can also help you understand your retirement income, and Independent Financial Advisors (IFA) will have dealt with these situations before. When speaking to an IFA, you must take all your pension paperwork and provide them with a comprehensive overview of your retirement finances.
8: Is it a good idea to transfer out of my DB scheme?
While it’s your choice what to do with your money, financial advisors don’t usually recommend that you transfer money out of a DB scheme. This is because you’ll normally have to pay a transfer fee and could end up worse off. A DB scheme is often considered a ‘gold-plated’ pension as you’ll have a guaranteed income for the rest of your life and potentially support for your dependents too. This isn’t the case with other types of pension.
As above, it’s always important to speak with an Independent Financial Advisor (IFA) when deciding on your retirement. You can start looking for one here.
9: How can I avoid pension scams?
Anyone can be a victim of a pension scam, no matter their knowledge of finances. Scammers use manipulation and sophisticated tricks to steal people’s money.
To spot a potential scam, the FCA has outlined some simple steps:
- Reject any unexpected, ‘out of the blue’ offers. Scammers often use cold calls, touting pension reviews, unusual investments or ‘get rich quick’ deals.
- Check who you’re dealing with. The FCA has a list of authorised financial services businesses. Always check that a company is legitimate before handing over your details.
- Don’t be rushed – high pressure sales tactics are typical of scams. If you’re feeling pressured, end the call, take some time to think and research, then decide if you want to call the company back.
- Get impartial information. You can speak to an independent financial advisor, the government’s PensionWise service or MoneyHelper. These services can help you decide if the ‘deal’ you’re being offered is legitimate or not.
10: When can I start taking my pension?
In most cases, the earliest you’ll be able to start taking a pension is from age 55 (although this is planned to increase to 57 in 2028 due to changes to tax rules). Different pension providers have different rules about how much you’ll receive if you retire at different ages, so you should check before making any decisions. Of course, you can wait longer and potentially pay into it for many more years before you retire.
When it comes to your state pension, you’ll only begin receiving this when you reach state pension age. This depends on your date of birth and gender, but for most people working today, it’s somewhere between 66 and 68. You can find out your exact state pension age here.
11: Can I take my lump sum once I’ve started my payments?
You only have the option to take a lump sum when you request to start taking your pension. Once your payments begin, there’s no option to take a lump sum. You’ll receive monthly payments for the rest of your life.
Get to know your pension
By taking the time to learn more about your pension, how it works and what you’re entitled to, you can make more informed decisions. It’s always a good idea to get independent financial advice when making important decisions.
Are you a PPF member? Read our answers to some of the most common retirement questions.