I’m 57 and have a final salary pension. I want to know whether I can take 25 per cent and leave the rest.
If I do have to remove it all together would I receive less than its current value?
Whilst I can’t advise on whether taking a 25 per cent lump sum would be a good idea for you or not, nor on whether doing so at 57 is the right choice, I can help explain how doing so would affect the rest of your pension.
There are two ways in which you could access a tax-free lump sum from your final salary pension.
The first is to remain in the final salary pension scheme. Your scheme will give you a quote for how much lump sum you can get and how much regular pension you will get once you have taken your tax free lump sum.
If you are taking your pension before normal pension age for the scheme this would reduce both the lump sum and the regular pension you can get.
In a final salary pension you take a lump sum and start your pension at the same time.
You go from being someone who is currently contributing (or has in the past contributed) to someone who is getting a pension out of the scheme.
There is no ‘half-way-house’ where you’ve taken your lump sum but ‘left the rest behind’.
In terms of the impact of taking a tax free lump sum on the amount of pension you get, this varies from scheme to scheme.
You might imagine that taking a 25 per cent tax free lump sum reduces your annual pension by a quarter, but in reality things can be very different.
In some schemes you could see a much bigger reduction in your annual pension and in others a smaller reduction.
The best idea is to ask your scheme for pension quotes with and without taking a lump sum, and that way you can see how much difference it is making.
Another way of getting a tax free lump sum would be to transfer out your entire final salary pension into a ‘pot of money’ type pension.
I should stress that regulators point out that this is generally not a good idea for most people, and you would be required to take financial advice before doing so if the pension was valued at £30,000 or more.
However, one attraction of doing this is that in this scenario you could indeed take 25 per cent tax free and ‘leave the rest’ to go on being invested.
You would, of course, be giving up the valuable guarantees, inflation linking, and benefits for your spouse if you have one that typically come with a final salary pension.
Instead, you would be taking on yourself the uncertainties around future investment returns, rates of inflation and not knowing how long you will live. But there could be individual situations where this was the better option.
The amount of ‘transfer value’ you would be offered for giving up a set amount of pension would vary from scheme to scheme.
But because this is worked out in a different way to the rules for people who stay in the scheme, you might find that you could get a bigger tax free sum by transferring out.
I should stress that these are all big – and potentially life-changing – decisions.
Even if you think you will stay in your final salary pension, you may still want to take expert financial advice before you make a decision on whether to take a lump sum.
An adviser could help you think through the decision about a lump sum not just in terms of tax advantages but also the potential impact on the future pension of a spouse, how your life expectancy might affect the decision, whether you want to leave money to your family and so on.
Many advisers will offer a single appointment for a set fee and you would not necessarily need to commit to an ongoing relationship if you did not want to do so.
PUBLISHED By Steve Webb for This Is Money…