Can I Take A Final Salary Pension Early?

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We are often asked if there is a way to take a final salary pension early and/or secure a pension lump sum at 55 years old. In short the answer, in many cases, yes it is possible. In fact, there are generally two alternative routes but both require careful consideration.

The first, and most straightforward, option is to check the pension scheme documentation (or ask the scheme administrators) if the final salary pension scheme rules allow early retirement and/or a lump sum payment. If early retirement is allowed it generally results in a significant reduction in annual pension payments, often the annual value of a pension taken at 55 years old will be approximately half that expected if retiring at 65.

The second option, assuming the scheme allows this, is to undertake a pension transfer into a defined contribution type scheme (often a SIPP) set up to accept the transfer. A transfer has a number of benefits and risks that must be considered carefully but the lump sum available from age 55 can be higher than the early retirement option. A case study may illustrate the point:

Miss X aged 55 contacted us in August 2016 for advice on her Chemical company final salary pension scheme. She had applied to her previous employer  for an immediate pension. The scheme offered a full pension of £15,018 p.a. or a tax-free cash lump sum of £89,140 and a reduced pension of £12,794 p.a.

With Final Salary Pension Transfer values at a high point on many schemes, the transfer value offered was in excess of £550,000 representing approximately 37 times the income offered by the scheme. Miss X decided to transfer her benefits, as a consequence she increased the tax-free cash available by approximately £50,000 and secured any residual value of the fund (on her death) for her nominated beneficiaries.

Of course, every pension scheme is different, as are each individual’s personal circumstances. The reasons final salary pension transfers are at a high point are complex but it is possible changing economic and political conditions over the coming months may force values back down to more traditional levels of 15 to 20 times the income offered by the final salary scheme.

Final salary pension schemes deliver many valuable benefits (including annual increases to combat the effects of inflation) and they should not be given up without a detailed assessment of both the benefits and risks, ideally with the help of a suitably qualified and experienced Independent Financial Adviser. This is a legal requirement if the final salary pension fund value is £30,000 or more.

The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.