I've been offered an enhanced pension buy out. What should I do?
19 July 2021
Question by Nicholas
I have an old pension and they have written to me saying that they are going to enhance my pension if I transfer it out. The company is also offering free independent advice. I have £117,000 in the pension at the moment, which would give me £6400 a year at 65. I am 61 in April and would like to finish work at that point. I am not sure how much extra they will give me. Have you any ideas or suggestions to help me decide? Thanks.
Answered by Boring Money
It sounds from your question like you are being offered what is known as an ‘enhanced buy out’ by the Trustees of an old ‘defined benefit’ (or final salary) pension scheme.
These schemes guarantee an income for you in retirement, based on a combination of your years of service and the salary you were paid by the company concerned. What they are suggesting, I think, is that they will offer you a higher lump sum than might usually be the case, if you agree to give up that guarantee right now. As you can probably imagine, supporting - potentially unlimited - guarantees is a costly business. Exercises such as enhanced buy outs can help pension schemes (and sponsoring companies) reduce their future liabilities.
For you, though, giving up such guarantees is a serious business. For some people, more flexibility might mean the lump sum is an attractive proposition, but for most people that is not going to be the case.
Indeed, given that your quoted fund value exceeds £30,000, the law actually insists you must take regulated financial advice on this question. Because it is essential you are clear on exactly what the implications of the different options are before you act – and advice is the only way they can be sure that you have been given all the facts.
In your case, the exercise was instigated by the Trustees. Financial advice is therefore being offered to you free of charge as part of the deal.
You should therefore take them up on that offer.