My wife and I are aged 53 and are in good health. You have seen our redundancy package but I would like to talk to you now about our pension scheme options. I am being offered an enhanced pension of £39,000 or tax-free cash of £112,000 and a reduced pension of £31,000. What do you suggest?
If you do not take one of the options at this stage, it cannot be guaranteed that these advantageous terms will apply in the future. The normal penalty is a reduction in pension of 5 per cent for each year you retire early. It is therefore my recommendation that you take benefits immediately.
Before taking benefits, however, there are several other options you may like to consider. On the basis that your enhanced benefits will be reflected in an enhanced transfer value, I would estimate that around £900,000 will be available. This could be transferred to a new employer's pension scheme or a personal arrangement of your own.
Urgency is required due to the complexities of transferring to a new employer's scheme, assuming one is available and willing to accept your transfer value.
Apart from transferring to a new employer's scheme, you also have the opportunity to transfer into an individual contract of your own. If you transfer into one of the two types of individual policy available, you have to be aware that, in one form or another, you will lose most of the guarantees provided by the early retirement pension. In return for this, you can take an element of investment risk in the hope of providing better benefits.
You will not be able to provide benefits on an equal basis without taking risk. For example, if you used the £900,000 transfer fund to purchase an annuity on the same lines as your existing scheme with full inflation-linking, it would provide a pension of only £37,000 a year.
If, due to your other considerable wealth, you are prepared to take risk with regard to your future income – a risk that might be lessened should employment be available – then one route you may wish to consider is transferring to a self-invested personal pension.
With a Sipp, you have control of how the pension fund is invested. More important, the whole fund would be available to provide death benefits should you die before or after taking benefits.
If you take the early retirement benefits from the company, this will provide a pension plus a widow's pension for your wife. However, should you both die after five years, no further benefit would be payable as your children are in good health and no longer dependent on you.
If you decided to draw income from the fund, while you would be taking a tremendous risk, the whole fund would pass to your wife should you die at any stage. Should your wife then die, the whole fund, less a statutory 35 per cent tax charge, could be payable to your family. This route is also available on your first death should you so elect.
Under current legislation, once you reach age 75, an annuity must be purchased.
You need to make immediate decisions and decide whether you are prepared to take any form of risk. If there is no further employment available and you have enough of your personal wealth invested in risk areas, then, without doubt, the early retirement option under your current scheme would be the best way forward. If, however, you are prepared to take considerable risk in return for providing far greater flexibility regarding the taking of benefits, along with the opportunity to control the investments, then a Sipp with income drawdown should be considered.
Taking into account recent events and complete uncertainty as to the future, I would be happy to provide the advice to enable you to transfer your benefits to a Sipp.
If you then decide to draw an income, I am going to need to be totally satisfied that you fully understand the considerable risks such steps entail compared with the absolute guarantees provided by your early retirement benefit.