Cashing in a Final Salary Pension
Cashing in a Final Salary Pension (or Defined Benefit Scheme as they are also know) is a very complex area, and the options available depend on a number of factors.
Take the pension and lump sum through the existing scheme
This may or may not be an option for you. If you're 55, then the legislation currently permits you to take the benefits through the existing scheme. However:
- the scheme may not allow it under its own rules
- you may need the agreement of the trustees, which may not be forthcoming
- you may not be able to take a lump sum, or a particularly large lump sum, if you're taking the pension early, especially if you have an element of Guaranteed Minimum Pension (GMP)
- there may even be large reductions for taking the pension early
Much depends on the rules of the scheme and your age. If your scheme allows you to take the benefits early, then it will more than likely mean a reduced lump sum and reduced income, than if you waited until your normal retirement age.
If you can't take your pension through the existing scheme for whatever reason, provided you're 55 or above, then you should be able to take your pension by another method. But it is a complex area of financial planning, and taking your pension early will probably mean that you will be financially worse off in the future, rather than if you had waited until your normal retirement age. Also, you could be giving up other very valuable benefits. See our page on the risks of pension unlocking.
Cash Equivalent Transfer Value
Nearly all final salary schemes allow you to transfer what is known as the Cash Equivalent Transfer Value (CETV), which represents the value in cash terms of your existing benefits.
Example: Supposing you're 55 and have a pension with a former employer, which is due to give you £5,000 per year at age 60.This could have a CETV of £60,000 at age 55. So, even if the trustees/rules of this scheme won't allow you to take benefits now, then for whatever reason, you could still take the benefits.
With the above example, it would then be possible to transfer it to a personal pension environment and allow you to take £15,000 as a tax-free lump sum, then take an income. The above example also shows one of the main disadvantages of taking such a course of action. Effectively, you would be giving up £5,000 per year which would also have some inflation proofing and spouse's benefits, in exchange for £15,000 of tax-free cash now and £45,000 invested in an annuity or income drawdown contract, which is unlikely to give you the same level of income. Mathematically, these types of transactions very often do not make sense, much depends on your desire to take the benefits now, in exchange for a probable lower income in the future.
Please note the earliest age at which most people will be able to take their pension benefits is now 55, although a few work schemes allow retirement at age 50. However, it is possible to take pension benefits at any age in the event of medical problems that prevent you from carrying out your occupation. (Some occupational schemes might require you to be able to do any work, to take a pension early).
Please visit our page on the risks of pension unlocking to see more details on the risks of pension unlocking.
Options for the Cash Equivalent Transfer Value
If you are not able to take your final salary pension through the existing scheme and you decide you want to take the CETV in order to take your pension, there are two options.
1. Tax-free cash and annuity purchase - this allows you to take the lump sum, and buy an annuity, which is an income for life. See annuities for more details.
2. Tax-free cash and income drawdown - this again allows you to take the lump sum, but rather than converting the remaining money to an income, it can then be invested. It is possible to either take an income from the remaining funds, or leave it invested without taking an income. If you do not take an income, then the fund could grow to provide you with better benefits at a later date. See income drawdown for more details.
Unlocking a final salary scheme is probably one of the biggest decisions you will ever make. please ensure you read the section on the risks of pension unlocking.
Contact us online, or call 0800 011 2713 , without obligation to find out more about cashing in your pension and the risks for you.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.