Case Study

Consider all options if you have a final salary / defined benefit pensions

The problem

During an annual review meeting with Mrs Sutton, we identified a final salary pension scheme due to pay out within the next couple of years.

Being single and with no children, Mrs Sutton would never be able to benefit from some of the elements of the final salary pension; in particular the spouse’s and dependent’s pension.

Mrs Sutton was also concerned that being unmarried, with no children, no one would benefit from her years of service in the pension if she died prematurely. Although she has no children, she does have nieces and nephews, and would like them, or a charity, to benefit from the pension on her death.

Furthermore, Mrs Sutton wanted to buy a new home and liked the idea of retiring early with a higher income, when she was still healthy and could pursue her passion for travel.

Our advice

We reviewed Mrs Sutton’s final salary pension and found that the amount of tax-free cash available to her was restricted, which didn’t help in her desire to move house. Furthermore, we also confirmed that the spouse’s and dependent’s pension, would indeed never benefit her.

Taking into account Mrs Sutton’s objectives and after a thorough financial review, which included assessing her attitude to risk, we recommended she transfer the final salary pension to a low cost Flexible Drawdown plan.

This advice increased the amount of tax-free cash available by 150% and doubled the starting level of income. It also left all options open in the future, including the purchase of an Annuity to provide a guaranteed income, should Mrs Sutton’s circumstances change.

Our advice meant that Mrs Sutton was able to purchase her new home and retire from work. It will also allow her nieces and nephews, as well as a local charity, to benefit from the pension if she dies unexpectedly early.

What can we learn from Mrs Sutton?

The new Pension Freedom rules give people retiring now far more flexibility than was previously available; they allow existing pensions to be moulded, to provide an income which more effectively meet your needs.

Mrs Sutton’s case also shows that even people with ‘gold platted’ final salary pensions, should still consider all the options available to them. Especially now,  when transfer values are at historically high levels due to falling gilt yields and ongoing low interest rates.