Enhanced pensions involve a employer granting staff who are close to retirement age the option of leaving work early and receiving a pension immediately, rather than waiting until 60 or 65, the usual retirement dates.
Janet is single, aged 50, and has been in a senior position with a large firm of City brokers. She was obviously concerned about ensuring that she had sufficient income during her retirement, especially as she was now having to contemplate this option earlier than anticipated.
Should she take the enhanced pension offered by her company or were there more suitable options available?
I explained that there was a better option available: taking a "transfer value" - switching the funds from her current occupational scheme to a personal one. This is because transfer values normally include the cost of providing for a spouse's "death in retirement" benefit. When the pensioner dies, this pays a pension to the surviving spouse, usually at a rate of either two-thirds or half of the existing pension. Why should Janet opt to take a transfer value when she was not married? The reason is that the transfer value assumes that everyone is married and calculates the transfer sum accordingly.
If she remained within her company scheme, this additional payment would be lost, as the company would adopt the attitude that as Janet did not have a spouse there was no requirement for them to pay a pension to him, but if she were to take a transfer value it would include this additional payment.
How would this benefit Janet in real terms? By taking a transfer value from her current scheme and purchasing an annuity - an annual income - with it, she would be able to increase her pension by 10 per cent. If she planned to carry on working there were two options available.
Option one would be to defer taking the pension and continue to make contributions into it, enabling her to benefit from an increased pension at in the future. Had she remained with her company scheme, this option would not have been available to her as she would had to draw benefits immediately.
Option two would involve the new income withdrawal facility available with self-invested personal pension schemes - SIPPs - when investing transferred funds. She would be be able to have immediate access to the tax free cash element of her pension, usually worth up to 25 per cent of the total pension fund.
This is exactly the same amount as that available under the company scheme. But in addition, Janet can also draw an additional pension from her remaining fund, if required. The main difference is that SIPPs allow the option of investing her remaining money in a choice of investments ranging from unit and investment trusts, which are linked to future stockmarket performance and involve an element of risk.
One suitable type of investment might be PIBS - permanent interest-bearing shares from building societies. PIBS pay high interest rates, fixed at purchase. Should Janet retire later than originally intended, the value of her PIBS should buy a higher annuity than she would have received at the outset.
Under the new rules for SIPPs, an annual income of between 3 per cent and 10 per cent of the value of the fund must be drawn, depending on the age of the client. What would be the benefit of Janet taking the tax-free cash now?
It would enable her to pay off hermortgage - so that even if she only worked part-time and took a reduced pension, her standard of living would remain at its current level, enabling her to take an increased pension when she finally chose to retire.