I have a deferred final salary pension, which is worth around £56,000.
As I have now turned 65, I am eligible to draw the pension but I have discovered there are two problems.
Firstly, if I buy the scheme’s annuity it works out at around £3,150 a year. Secondly, the scheme doesn’t allow me to take a 25% tax-free lump sum.
I would like to transfer to another provider who offers me a better annuity rate and the option to take the tax-free lump sum. Is that possible?
It is important to have a real understanding of the benefits that would be provided by this pension, compared with what you could achieve elsewhere.
Your deferred final salary pension will give you an income of 5.625% a year.
This income is guaranteed and is likely to be increased each year, probably by inflation, and include a pension for your spouse or civil partner if you were to die first.You should make sure that you find out exactly what benefits your pension scheme offers.
If you were to buy an annuity that provided similar benefits to your final salary scheme, then the income rate you would achieve could be around 3% a year. This would mean that a pension fund of £56,000 might provide you with a starting annual income of just £1,680.
Some final salary schemes will allow members, and deferred members, to take a tax-free sum from their pension and others will not.Where a tax-free sum can be taken, this often results in a reduction in the level of income paid and so calculations would be required to see if this is sensible.
In your circumstances, if your pension won’t allow you to take a cash lump sum, you need to ask yourself how much you really need it.
You would be giving up valuable benefits that you wouldn’t be able to match elsewhere if you transferred to a different pension arrangement.
There is more of an argument for looking to transfer if you don’t have a spouse or civil partner and if you are in particularly poor health. In this case, your final salary scheme would come to an end when you die, whereas in other pension arrangements you could pass on any remaining benefits to other people.
The right decision for you will depend on your own circumstances and objectives.
However, you should always think long and hard before giving up the guaranteed benefits of a final salary pension. For complex decisions such as this, you should take independent financial advice.
Patrick Connolly is a certified financial planner for Chase de Vere.