Final salary pension lump sum
How much is your Final Salary Pension Tax-free Lump Sum?
In general, transferring out of a Final Salary Pension scheme does enable more Tax-free cash to be available than remaining in the scheme however, there are some significant exceptions where a scheme might offer enhanced Tax-free cash lump sums. This is yet another reason why it is so important to have the value of your safeguarded benefits fully analysed.
When you request a Cash Equivalent Transfer from your Final Salary Pension scheme either directly or via your adviser, you should receive a multipage document that explains your options. The default option is to remain in the scheme and if that is your chosen option, the document explains how much Tax-free Lump Sum you are entitled to at retirement as well as the annual pension amount due.
The figures stated relate to the scheme’s Normal Retirement Age (NRA) so, if you still have a few years to go until NRA, these figures are the projected amount when you reach that age.
As part of the analysis process, if you are younger than the Normal Retirement Age but at least 55, your adviser may also request an Early Retirement Quote on your behalf. This is a separate calculation the scheme undertakes to work out how much Tax-free Lump Sum and annual pension amount you would get if you retired now. The minimum retirement age, in this case, is currently 55 because that is the minimum age all pension funds can be accessed, and benefits are taken.
Another significant difference between a Final Salary Pension Lump Sum and the Tax-free cash available in a defined contribution pension is that if it is going to be taken from the Final Salary Pension scheme, then it must be taken all in one go at the commencement of the pension. In this case, there is no flexible access where you could take it gradually over several years like you can in a modern flexible pension arrangement.
After a transfer, the entire fund could be left to grow without taking Tax-free cash allowing for the possibility of a larger amount of Tax-free cash to be taken below the Lifetime Allowance (LTA) limit in force at the time. However, be aware that investment returns are not guaranteed so it is possible that the transferred fund could decrease in value resulting in a lower amount of Tax-free cash available.