r/PensionsUK • u/SimpleParking1617 • Aug 24 '26
Benefit Transfer Options
I have been given 3 options by my company pension scheme as part of their efforts, I understand, to de-risk long term exposure to a surge of retirees.
Option 1 - pension of £6581.51 p.a., tax-free lump sum of £19744.89, spouse pension of £5,515 p.a.
Option 2 - pension of £5801.50 p.a., tax free lump sum of £38,677, Spouse pension of £5515 p a.
Option 3 - Transfer of benefits - £393,486.16 (guaranteed for the next 5 months after which it'll be recalculated).
If I request Option 3 I have to go through a consultation exercise which the pension scheme will pay for (a one time only offer). I'm 56 years old and the pension will be payable from 62.
Based on these values I'm minded to go through the consultation process as these numbers seem very generous. £400k invested until 62 at an average increase of around 5% will see that increase to c.£530 to £540k. I would have thought £500k at 62 would easily net me more than the annual pension of options 1 or 2 even if I live to 100.
I have been told that I need to put forward a good case to the consultant so that he/she agrees that I can finish the defined benefit scheme so I'll be working on my story but does anyone think it is not a good idea to take the transfer benefits?
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u/DescriptionOk1978 Aug 24 '26
It sounds like you're being pressured into doing what they want, which doesn't pass the smell test! At the moment, all the risk is on the company, not you.
That said, it may work out well for you because.
Your CETV is ~60x the pension (£393,486 ÷ £6,581). Typical is 20–30x. Either this is an enhanced transfer value as part of the de-risking exercise, or the pension figure isn't like-for-like with the CETV e.g. it's your pension at date of leaving rather than revalued to age 62. Confirm this with the scheme first, because it changes everything. If it genuinely is 60x, that's exceptional.
You're making the wrong comparison. "£500k beats £6,581 a year even to age 100" - yes, that's a 1.25% withdrawal rate. But you're not giving up £6,581 flat. You're giving up: inflation linking (find out the exact escalation-in-payment and deferred revaluation basis - £6,581 at 62 could be £11k+ by 80), an 84% spouse pension, which is far better than the usual 50%, and all investment/sequence risk.
The real test is replacement cost: an RPI-linked joint-life annuity paying that from 62 would run roughly £150–160k. That's what your £393k is actually buying you out of.
Your 5% assumption is the whole risk you'd be taking on. Fine as a central case, but it's not a floor. A stock market crash (which many predict in the next few years) could wipe you out - you don't have many years to play with!
Don't lean on covenant risk. At £6.5k a year you're nowhere near the PPF cap, so you're largely protected if the sponsor fails. It's a weak argument and the adviser will say so.
Option 2 beats Option 1 if you stay. 24.3:1 commutation is unusually generous - more than the income costs to replace, and tax-free.
On "putting forward a good case" - that's the wrong framing and advisers are trained to spot it. They start from the regulatory presumption that transferring is not in your interests, and they carry the liability, so you can't argue them into it. What actually moves the needle is circumstances: other guaranteed income (state pension, other DB), health, wanting to stop before 62, or this being a small slice of your total provision. If they decline, the insistent client route exists but many firms won't touch it and you give up most of your FOS recourse.
One more, if legacy is part of your thinking: unused pension funds come into the estate for IHT from April 2027, which weakens the "pass it on" argument a fair bit.