Can I take a 25% lump sum from my final salary pension and leave the rest where it is? Steve Webb replies
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?
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Retirement planning: Can I take a 25% lump sum from my final salary pension? (Stock image)
Steve Webb replies: 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.
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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.
Why is my wife’s 25% tax-free pension lump sum deal so miserly?
Steve Webb replies to a reader asking about stingy tax-free lump sum offers by final salary pension schemes here.
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.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected]
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
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