Should I Opt for an Index-Linked Annuity?
Question asked by Kay Rivers
I’ve been saving into a final salary pension for all of my working life. My neighbour is about my age, but he’s been saving into a defined contribution pension instead. He’s recently reached 55 and cashed in some of his pension tax-free to make home improvements and go on a cruise. Can I cash in my defined benefit pension for a similar lump sum?
The short answer is that it’s usually very difficult to cash in your final salary pension in the same way your neighbour has cashed in his defined contribution pension.
That’s because your neighbour’s pension has a defined pot of cash belonging to him that he’s been saving into his whole life. That’s not the case with a final salary pension.
If you’re 55, the legislation does technically allow you to access your pension arrangements, but you may always be permitted access before the fund’s set retirement age. Moreover, the scheme could impose stiff penalties for doing so and it could have a significant impact on your final annual pension entitlement.
However, there is another option if you’re looking to access your final salary pension early, before your pension scheme allows.
You could request a cash equivalent transfer value (CETV) from your final salary pension provider. This is the cash lump sum your pension provider is willing to offer you in exchange for you transferring out of your final salary pension scheme.
However, it’s important to note that a final salary pension transfer won’t be right for most people, who’ll be better served by staying in the scheme, not least thanks to its guarantee of an income for the rest of your life. This is something your neighbour, in his defined contribution scheme, doesn’t enjoy.
It’s true that final salary pension transfer values have soared recently as employers look to reduce pension liabilities by cutting the number of people eligible for generous, lifelong final salary pension payments. However, that in itself isn’t a good reason to leave the security of a final salary scheme.
If you’re interested in working out the cash equivalent transfer value for your defined benefit pension, consider using a tool such as The Drewberry Final Salary Pension Calculator. This will give you an idea of how much your defined benefit pension is worth if you transfer out.
Final salary pension transfers aren’t risk-free. Don’t forget that a final salary pension is a promise to pay you an income for life, probably index-linked to keep up with inflation. You’ll also typically receive an income for your spouse after your death for the rest of their life. You’re giving all this up by transferring out.
However, there are also potential benefits, including more flexibility with how you take your retirement income. That means it could be easier to take a 25% lump sum from your pot, just as your neighbour did. Transferring out of your final salary pension scheme also makes it easier for loved ones to inherit your pension after you pass on.
Ultimately, whether or not a pension transfer is right for you depends on your circumstances. Before considering a final salary pension transfer, you should get pensions advice to make sure it’s suited for you. If your pension pot is worth more than £30,000, it’s an FCA requirement.
If you are looking for expert advice on transferring your defined benefit pension, pop us a call on 02084327334.
Our expert advisers are on hand to advise on all aspects of final salary pension transfers, as well as to help you turn the cash lump sum into a retirement income.