To DB Or Not To DB – That Is The Question
With the UK’s new pension reforms, those retiring with a Defined Benefits (DB) scheme can now switch to a Defined Contribution (DC) scheme if they so wish. But is such a switch worth making? We take a look.
Following the recent pension reforms announced by the UK government, savers in a DB scheme have been left to think about whether or not to make the most of the opportunity to switch to a DC scheme.
The two types of scheme differ in that a DB scheme has payoffs which are calculated independently from the market’s performance and the payoffs are calculated based on a particular formula. On the other hand, DC schemes have payoffs which depend solely on how the market performs over the period.
Defined Benefit schemes generally, but not always, have a relatively high retirement income considering the amount of contribution the employee makes. You would think, therefore, that DB would generally be the better paying option and a government consultation found that only between 10% and 20% were predicted to switch from DB to DC.
Add to that the fact that anyone wanting to switch from a DB scheme to a DC one must receive regulated financial advice before doing so and this all suggests that switching to DC is a not a decision to be taken lightly.
So what’s best to do?
Well, just as the rules say, seek regulated independent financial advice. This blog post won’t be able to give any concrete one-size-fits-all answers because for every individual the circumstances will be very different. That’s why the government wants savers to be seen by a financial adviser like DAM as they know circumstances will vary,
Contact DAM today if you have any questions.
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