DB v DC pros and cons

af1963

And another: it may lock you in to paying tax on the pension income, even if you don;t need to spend it all.  With a DC, if you can live on the value of the annual tax free allowance plus the associated tax free cash ( just under £17K for one person or twice that for a couple) you could pay no income tax at all and could leave everything else untouched in the pension.  With DB , it will pay out the full annual amount whether you need it or not, with anything over your allowance being taxed.

(figures include any state pension as well as DC/DB )

DT2001

af1963 said:

And another: it may lock you in to paying tax on the pension income, even if you don;t need to spend it all.  With a DC, if you can live on the value of the annual tax free allowance plus the associated tax free cash ( just under £17K for one person or twice that for a couple) you could pay no income tax at all and could leave everything else untouched in the pension.  With DB , it will pay out the full annual amount whether you need it or not, with anything over your allowance being taxed.

(figures include any state pension as well as DC/DB )

Whilst I agree that the above would be normal I took my DB pension early at 51 when the earliest you could access a DC pension was 55. The reason advised by the trustees was that it was a pre existing contract. I have paid no/little tax except in one year when I earned a payment on the sale of a business which mostly went into a pension. If I’d drawn on a DC I’d have only been able to put in £4K.

The downside of some DB pensions, especially in today’s inflation landscape, is the limit to increases or in the case of GMP elements no increases. At 65 my pension will increase because of GMP but 1/3 will not increase at all, a 1/3 by CPI max 3% and the rest by RPI max 5%.

Don’t get me wrong I like the certainty, even if slowly (I hope), decreasing income as it allows me to be more adventurous with other investments. Without it I’d be less happy with my vague ever so flexible retirement plan.

Thrugelmir

DT2001 said:

af1963 said:

And another: it may lock you in to paying tax on the pension income, even if you don;t need to spend it all.  With a DC, if you can live on the value of the annual tax free allowance plus the associated tax free cash ( just under £17K for one person or twice that for a couple) you could pay no income tax at all and could leave everything else untouched in the pension.  With DB , it will pay out the full annual amount whether you need it or not, with anything over your allowance being taxed.

(figures include any state pension as well as DC/DB )

The downside of some DB pensions, especially in today’s inflation landscape, is the limit to increases or in the case of GMP elements no increases. At 65 my pension will increase because of GMP but 1/3 will not increase at all, a 1/3 by CPI max 3% and the rest by RPI max 5%.

Stock markets do not provided a guaranteed correlated inflation linked return. Just when you need the money for your early years spending. You get hit by a double whammy. 

DT2001

Thrugelmir said:

DT2001 said:

af1963 said:

And another: it may lock you in to paying tax on the pension income, even if you don;t need to spend it all.  With a DC, if you can live on the value of the annual tax free allowance plus the associated tax free cash ( just under £17K for one person or twice that for a couple) you could pay no income tax at all and could leave everything else untouched in the pension.  With DB , it will pay out the full annual amount whether you need it or not, with anything over your allowance being taxed.

(figures include any state pension as well as DC/DB )

The downside of some DB pensions, especially in today’s inflation landscape, is the limit to increases or in the case of GMP elements no increases. At 65 my pension will increase because of GMP but 1/3 will not increase at all, a 1/3 by CPI max 3% and the rest by RPI max 5%.

Stock markets do not provided a guaranteed correlated inflation linked return. Just when you need the money for your early years spending. You get hit by a double whammy. 

I agree. No guarantees which is better DB or DC as we do not know what the future holds.
A combination of both ‘guaranteed’ income, even if lower than a theoretical SWR, and the opportunity for increasing income and funds is better for most people’s peace of mind. The we’re OK at SPA??? probably..

DoublePolaroid

I’m grateful for being in a generous DB scheme which is protected above CPI. One of the big upsides of it for me is that it allows me to hold 100% equities in the rest of my portfolio and sleep easily at night as a result. 

sheslookinhot

Yes, watch your SIPP withdrawals will not be taxed at 40% if your in a generous DB scheme.

DrSparsamkeit

Terron said:

If you are lucky. I have two DB pensions. One has rises "entirely at the discretion of the trustees" and they have been deciding on no rises for years. The other rises in line with inflation capped at 5%, so won't be keeping up with inflation this year. 

Having a guaranteed inflation proof income looks like a great upside to me.

Yes, likewise my DB pension has rises "entirely at the discretion of the trustees" and they have been deciding on no rises for years.  The adjustment for inflation in my retirement financial plan spreadsheet, even at the BoE target of 2%, is sobering.

There appears to be a commonly held belief that all DB pensions have increases to counter inflation.

NedS

DrSparsamkeit said:

Terron said:

If you are lucky. I have two DB pensions. One has rises "entirely at the discretion of the trustees" and they have been deciding on no rises for years. The other rises in line with inflation capped at 5%, so won't be keeping up with inflation this year. 

Having a guaranteed inflation proof income looks like a great upside to me.

Yes, likewise my DB pension has rises "entirely at the discretion of the trustees" and they have been deciding on no rises for years.  The adjustment for inflation in my retirement financial plan spreadsheet, even at the BoE target of 2%, is sobering.

There appears to be a commonly held belief that all DB pensions have increases to counter inflation.

I wonder does that increase the likelihood of receiving positive advice for a transfer as, like you say, the value has the potential to be seriously eroded over the next 20-30 years. I suppose the issue is one of unknowns - we don't know what inflation is likely to be, nor what rises the trustees may or may not approve, so the IFA would be working on even more assumptions than normal. The trustees could decide that now is exactly the time to support their members with hefty increases to counter high inflation having experienced stellar market returns in the last few years.

arnoldy

All DBs are not alike, the difference between a public sector DB and private DB is like the difference between gold and diamonds and silver and quartz.

Private sector DB are not guaranteed [look at the hundreds of thousands washed up on the pension protection fund], are capped at 0%-3%-5%, and even then rises are depended on the scheme funding level - usually 105%. If we have a few years of high inflation say 5-7% the private sector DBs will wither.

A private sector DB is dependent on somethings you can't control: inflation, and the financial health of the fund/support from parent companies - but as most of these DBs are closed and the Directors are not in the scheme the companies are not overly incentivised to plough more money in.

[Deleted User]

Jim8888 said 'If you're spending every penny you earn every year just to live at the standard you want, then how do you save for anything like an extra holiday or new car?'
This will depend on lifestyle and size of the DB. My DB at the moment is nearly £20000per annum. I save about £650 a month in to various accounts to cover annual bills, holidays, and a future newish car. So I disagree when you say you cannot save when just receiving a DB pension.
When I reach 66 I will be receiving another £9500 a year. More than enough for me. Luckily my DB is fully index linked and the state pension offers some safeguarding against inflation.
I suspect many others with a DB pension also manage to save.
Agreed my pension will cease when I die. I can't leave it to anyone. However, most DB schemes have rules about passing a percentage of your DB pension to your spouse, civil partner etc. In mine the amount is  50%. As a single person this aspect doesn't concern me.
Furthermore, I will have enjoyed a retirement that does not include me having to worry about the stock market, currency values etc...
Those with families and only a DB pension can also protect their families by taking out life assurance policies for fairly reasonable monthly amounts.
Just my non-expert take on things.