Savers Can Switch From A DB To A DC Scheme, But Must Receive Financial Advice
The UK government has decided to allow savers to switch from a Defined Benefit (DB) to a Defined Contribution (DC) scheme. Anyone doing so, however, must receive regulated financial advice from an adviser like DAM to be permitted to make the switch. Russell looks through all the details in this blog post.
The UK government confirmed in July that new pensioners in private sector defined benefits schemes would be allowed to transfer into defined contribution schemes from next April.
The move was well received and included the requirement that any individual looking to make such a switch must receive financial advice from an adviser regulated by the Financial Conduct Authority and independent from the DB scheme involved. This requirement was added following recommendations from the Association of British Insurers and Confederation of British Industry.
The government doesn’t expect many savers to make such a switch - after its consultation showed there would be between 10% and 20% looking to do so – but has said that anyone making the switch would probably have to pay for the regulated financial advice themselves.
A DB scheme differs from a DC scheme in that the payoffs are calculated independently from the market’s performance and calculated based on a particular formula. A DC scheme, meanwhile, is based purely on how the market performs over the vested period. Typically, a DB scheme will have a relatively high retirement income for the amount of contribution the employee makes, making it the generally better paying option.
Even if individuals will generally be better staying put with their DB option, in some cases, however, it will be better to make the switch to a DC scheme. This is where the financial advice comes in and it can only be a good thing that individuals must get financial advice before making an ill-judged switch.
If it turns out that transferring scheme could be more profitable then that’s great and the financial advice will be worth it. If not, thought, then it’s good to have sought financial advice before making a switch that would backfire.
The financial advice requirement should help everyone sleep more soundly at night.
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