There are so many options for my pension pot - what should I do?

Carl Lamb, managing director of Almary Green

Carl Lamb, managing director of Almary Green - Credit: Archant

I'm coming up to retirement age and because of ill health have been living off my small savings for the past 15 months.

I have a defined contribution (DC) and a defined benefit (DB) pension, both relatively small, the DC scheme options I more or less understand. But with the DB scheme I've been given 4 options:

1) An annuity + tax free lump sum; 2) An annuity; 3) As 1 but different combinations; 4) To transfer the value of benefits, just over £100,000, to a pension provider.

I have been unable to find any information about such transfer of benefits. It would be nice to know what the options of such a transfer would be.

Almary Green response

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A defined benefit (DB) pension scheme is a workplace scheme where your entitlement to pension benefits is based on your salary and length of service and normally provides a secure income for life (as well as the potential for a cash lump sum at the start of your retirement).

Many DB schemes will offer the option to transfer the value of your pension to a personal pension arrangement – a defined contribution (DC) scheme. They will give you a transfer value that is based on what they might expect to spend on providing income for your lifetime. These transfer values have been quite generous over the past few years as DB scheme administrators reflect on growing life expectancy and their long-term liabilities.

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However, for most DB scheme members, a transfer is not a suitable option. The Financial Conduct Authority (FCA) expects financial advisers to be very cautious about advising potential transfers as they believe that, in the vast majority of cases, it will not be in the best interests of the member. It's a requirement under pension legislation that anyone who is considering transferring must take financial advice before doing so.

There are circumstances where a transfer might be appropriate – if you have varying income needs in retirement or perhaps other income sources, for example. A DC scheme may also have more suitable death benefits in some circumstances if there's money left in the pot when you die.

Transferring to a personal pension arrangement will allow you to take advantage of pension flexibility giving you hands-on control of how you take your retirement income. That may sound attractive, but it is important to remember that by transferring you would lose the secure nature of your retirement income both in terms of the amount you receive and the length of time it is paid.

In addition, the value of your personal pension once transferred will depend on the performance of its underlying investments and your pension pot is, therefore, subject to a degree of risk. You will need to take ongoing responsibility for the investments in your pot (or use a financial adviser to help you do so) to ensure it can continue to meet your needs. Finally – and importantly – there is a risk that you could potentially deplete the pension pot too quickly and run out of money.

What's right for you will depend on your requirements and circumstances. If you think a transfer may be an option for you, please get independent financial advice from an authorised adviser before acting. This is one of the most important decisions you will make, affecting the rest of your life, so it's critical to get it right.

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