It’s a taxing matter

Taking a lump sum outof your pension is not as simple as you may think

to run and so many final salary schemes have changed to become “career average” schemes.

In this case the pension you receive is based on an average of the income you received while you were working. So if you worked for your employer for 2 years and earned £5000 the first year and £10,000 the second year then your pension, using the same multiples as above, would be 2/80ths of £7500, or £187.50 a year.

You will see from these examples that the career average scheme will result in lower pensions for employees as well as lower costs for employers. It may be in some schemes that members will have benefits calculated from both types of scheme – final salary for service before the rules changed and career average for

the time afterwards. It’s usually possible to “exchange” some of the pension for a tax-free cash lump sum at retirement but how much that sum will be is dependent on the rules of the individual scheme, and this gets to the heart of your question.

The 25 per cent rule that you mention in your question applies to personal pensions, not final salary schemes, and is based on the percentage of the fund that has built up that can be taken from the fund at retirement without any liability to tax and, as you rightly say, this can be anytime from age 55 under current legislation.

Your husband’s pension is not a personal pension and so the amount that he will be able to take from the scheme will not be 25 per cent but instead will be based on the scheme rules, and these rules should be clearly indicated on all of the projections that he has been sent.

You also need to be aware that although current rules allow money to be taken from pensions at age 55 this particular rule applies in the main to personal pensions.

It may be that your husband is allowed to retire at 55, and this is true of most if not all final salary type schemes, but the chances are that if he does this he will suffer a reduction in the pension he can expect.

The thinking behind this is that if someone takes their pension before the scheme “normal retirement age” then the chances are that the pension will be in payment for longer and will, therefore, be more expensive for the employer. The “actuarial reduction”, as it is called, can be severe and might decrease the pension by up to a third, depending on how early it is taken.

Your husband has 35 years’ service and although I don’t have details of his income the chances are he will retire on a healthy pension in relation to that income.

He is, however, unlikely to be able to take 25 per cent of his pension as a tax-free lump sum, although he should be entitled to some sort of tax-free sum, and this can be confirmed by examining the scheme details. It may be worthwhile taking advice before making a decision on which option to choose.