Sam Brodbeck  (5 OCT 2017 ) | Read full article on the Telegraph website.

For many the tax-free “lump sum” is the major selling point of a pension.

In most cases, savers can withdraw 25pc of their pension without paying any tax. This lump sum is often used at the outset of retirement to pay off a mortgage or help children onto the property ladder.

But you can obtain far larger sums – even as much as twice the original offer – depending on which type of pension you make the withdrawal from.

In “final salary” (sometimes called “defined benefit”) pensions the cash sum is calculated approximately as a quarter of 20 times the starting income.

So a pension that will pay £10,000 a year is valued at £200,000. That means you can withdraw £50,000 cash free.

But swapping a final salary pension for a “defined contribution” pension could boost that figure further.

It’s all because of historically high “transfer values”, the amount a pension scheme will give you to exit the scheme. It is in the company’s interest to do this as the cost of funding “final salary” pensions has spiralled in recent years.

Common transfer offers seen today are multiples of 30, 35 or even 40 times the starting income from a final salary scheme.

The same £10,000 might be valued at £400,000, if transferred out, which would in turn produce £100,000 of tax free cash.


Analysis produced by Tideway, a specialist pension transfer advice firm, also highlights how those needing to take cash earlier lose out.

Final salary schemes normally apply discounts for taking a pension before the “normal” retirement age. Tideway’s James Baxter explained how retiring just five years early, at 55 instead of 60,  could knock off 20pc of the starting pension. This would lower the amount of tax-free cash able to be withdrawn even further.

Defined contribution pensions, on the other hand, are freely accessible from the age of 55 onwards.

Mr Baxter said: “Tax-free cash sums can often be a deciding factor when considering whether to take-up the offer of a final salary transfer.

“Most people can make good use of a cash sum at or in the run-up to retirement. Even if you don’t need the tax-free cash sum, it will usually make sense to invest it using Isas, or to take advantages of tax allowances like the nil-rate on capital gains.”

Apart from the cash, are there other good reasons to transfer?

Of course, once the transfer has taken place it is the saver’s responsibility to manage their own investments (unless they hire a financial adviser) and retirement income is not guaranteed.

Final salary schemes are prized so highly because they pay income every year, rising with inflation, no matter what – it is the company that bears the investment risk.

But, crucially, they do not benefit from reforms, introduced in 2015, that gives far more flexibility over how income is taken and highly tax-efficient means of passing unspent money down the generations.

Final salary pensions, on the other hand, normally die on the death of a spouse or dependents and simply pay a steady stream of income. Aside from the initial tax-free lump sum, subsequent “ad hoc” withdrawals are not permitted.

Is a crackdown coming?

Under government rules you must seek regulated financial advice is transferring a pension worth £30,000 or more.

Earlier this week the City watchdog found serious failings with the advice being given to savers. After reviewing 88 cases where an adviser recommended a transfer, Financial Conduct Authority analysis suggested 53pc of them should not have taken place.

The analysis also raised suspicions that advisers who encouraged savers to transfer out of their pensions were doing so in order to then sell them investments. The review concluded, for instance, that only a third (35pc) of the investments recommended by the adviser after a transfer were suitable.

In recent months the FCA has intensified its examination of pension transfers.

Four advice firms have stopped advising on transfers after the watchdog intervened, while a further 16 companies have agreed to stop conducting transfers as a result of its work on preventing scams, the FCA said.

That has led to a severe lack of supply of advisers leaving many people, including dozens of Telegraph Money readers, unable to find an adviser to help them move their pension. The regulator has confirmed that it only requires savers to take advice before transferring: it does not matter what the advice is.