For many retirement savers, the tax-free lump sum available from the age of 55 years old is the main attraction of a pension.
That major cash boost is set as a payment of 25% of a pension fund.
For direct contribution pensions, such as a self-invested personal pension (SIPP) or personal scheme, the money is set as 25% of the fund value.
For direct benefit or final salary pensions, the lump sum is calculated as 25% of the value of the first year’s payments times 20.
So, for a £20,000 a year annual pension, that’s £20,000 x 20 = £400,000 x 25%, which gives a cash lump sum of £100,000.
But for retirement savers in a final salary scheme, this cash can be doubled.
Be aware of the risks
It means scrubbing the financial benefits offered by the pension, such as a guaranteed income for life and index-linking to inflation.
However, for retirement savers willing to take the risk or in financial circumstances where they need the money, the option is there.
All you need to do is swap out of the final salary scheme when an employer makes the right offer to leave.
Some employers are offering much bigger multiples than 20 times the first annual pension payment to encourage people to leave their schemes.
Figures of between 30 and 40 times are not unknown.
For the same saver with a £20,000 a year pension offered a x40 multiple, the value of the fund is pushed up to £800,000, giving a cash lump sum of £200,000.
Sensible option for some savers
Although lots of reasons point at staying in a final salary scheme, like the retirement guarantees, but in some cases leaving is a sensible option.
For example, many final salary schemes do not pay until the saver is 60 or 65 years old, while a defined contribution scheme allows access for the age of 55.
That’s good news for someone in ill-health who would like to stop working earlier but who is not unwell enough to qualify for a disability pension.
Defined contribution schemes also come with pension freedoms to draw income or lump sums when the saver wishes.
Don’t forget that once the decision to transfer out of a direct benefit scheme is made, it’s final and there is no going back.
