Defined Benefit: How to make your current or former bosses start high-fiving each other in the office because you voluntarily walked away from a lifelong financial commitment from your employer…
By Alan Steel
I wonder if Shakespeare were alive today (and was working as a poet / financial writer) if he might have been tempted to bastardise the soliloquy in Hamlet’s Act III to read:
“DB or not DB, that is the question / Whether ’tis smarter to Take The Money And Run (like The Steve Miller Band suggested) / And suffer the slings and arrows of your own outrageous investment misfortunes / Or take up the offer of a guaranteed return for the rest of your days / And arm yourself against a Sea of financial troubles…”
Clearly I’m no poet.
And that’s actually the second time I’ve done that disservice to the Bard – both attempts have involved the topic of Defined Benefit (DB).
DB is one of those unusual financial terms in that it does pretty much what it says on the tin – you get a commitment (defined) in the form of a sum of money (benefit) from your employer to make a specific pension payment or a lump sum to you (or even a combination of the two) when you get to retirement age.
And your employer comes up with that number based on a mathematical formula that includes things like your earning’s history, how long you worked there and your age.
Sounds not to bad, eh?
Well, there are some who would tell you that it’s a far better idea to take your accumulated pensions rights – those that are guaranteed by an employer backed Final Salary Pension Scheme – and transfer them out into your own plan and manage them yourself.
Hmmm…should you take a guaranteed return in a Final Salary Scheme or gamble on that money performing better with you looking after it?
They’re calling that latter option “Freedom!”
And it is…if you’re an employer who is suddenly let off the hook from having to guarantee those payments to the growing numbers of former employees for the rest of their lives!
According to a survey from Old Mutual Wealth there are still 1.5 million active members of these Gold-plated Defined Benefit schemes in the UK.
Financial tome Thisismoney reported in 2015 that, “More than a third of council tax payments will go towards paying workers’ pension schemes within five years.”
And now we’re seeing DB members being lured out of these schemes withy large cash sums designed to motivate them to transfer their benefits.
So, why the enticement?
Because some painfully shy actuarial types sat in the back rooms of accountancy departments across Britain have made clear to their employers that it’s a far better bet to have DB members off their books than on them.
And the seemingly high cash offers to motivate these folks to transfer out may just save the business in future from the potentially crippling financial burden of folks who decide to live long enough for a Queen’s postcard…or two.
So, what should you do?
Well, you can start by getting smarter about what’s on offer.
Then you should talk to someone who can put Defined Benefit, and the enticement to transfer out of it, into perspective for you.
Because after all folks, it’s your money we’re talking about here.