Final salary scheme pensions are probably the best type of pension you could have, and many contain GMP. If you have one then it is usually in your best interest to keep it.

So why would you want to transfer one?  Well, there are some instances where a transfer could make sense, especially if you have medical issues.

A few worked examples might help explain.

Mr Jones is 60, is single, and has a medical condition that means he has a reduced life expectancy.

He has a pension which is due to give him £6,000 per year at age 65, the scheme’s normal retirement age. £3,000 of this is Post 88 GMP, and £3,000 is not GMP income (Excess as we call it).  This means that the scheme has to pay at least £3,000 per year at age 65; this is because of the Guaranteed Minimum Pension element.

The scheme has no special provision for early retirement in the event of ill health.  Mr Jones asks the scheme if he can retire at age 60.

Suppose the scheme reduce his pension by 10% for every year he takes it early. This would be 5 x 10% – 50% (so his pension is reduced by half). So in this instance his early retirement pension would be half of £6,000. So only £3,000 per year, which would be £250 per month. 

Remember the scheme has to pay £3,000 per year at age 65. So this means:

1. He cannot take any tax-free cash, as he has no pension income that he can give up, as it must pay a minimum of £3,000 per year.
2. He will have an income of of £250 per month that will increase by inflation (with a maximum of 3% per year)
3. He will have a spouse’s pension of £125 per month if he dies (but nobody to receive it as he is single, and scheme rules could only pay it to a legally married spouse)
4. His death benefits will be based on a five year guarantee. What this means is that the £250 is guaranteed to be paid as long as he lives, or at least five years. For example, if he dies after one year it would continue for another four, and then stop (unless he got married then it would continue to pay £125 per month).

So he has a pension which is due to give him £6,000 in five years or one that will give him just £3,000 per year plus increases now.

If he does not take the benefits, then some schemes might not pay any death benefits at all. As he is not married, some scheme rules would not pay out anything to other loved ones.

Suppose the medical condition means that he only has around 5 years to live. £250 per month (£3,000 per year) does not seem to be good value.

Mr Jones would however, have the option to take a transfer value. He would ask the scheme for a transfer value, and this would be calculated. This calculation is complex and varies from scheme to scheme. But, suppose for example it is £100,000, Mr Jones could give up all the GMP and other benefits, and have a £100,000 transfer value. Suppose he transferred this to a personal pension, he could then take £25,000 as a tax-free lump sum.

The remaining £75,000 could then be:

1. Withdrawn all in one go. For him this would be subject to income tax and some would at least be taxed at 40% (losing 40p in the £1 to tax).
2. Withdraw bits and pieces over different tax years. This means that he might be able to reduce his tax liability, perhaps taking £15,000 per year.
3. Buy an annuity with the remaining £75,000. As he has health issues his income could be significantly higher than £250 per month. His annuity could factor in his poor health, and the fact he is not married.
4. Used to provide death benefits based on the initial £75,000, so he could potentially pass that onto his adult children.

The above example is quite an unusual example because of the shortened life expectancy.  But there are other reasons to transfer other than medical grounds.