I’m no expert, but it looks to me as though House of Fraser are treating your pension sum of around £2,500 as a ‘trivial amount’ and allowing you to take 25% tax free, and paying your standard rate tax on the remainder.
The rules on pension ‘trivial amounts’ allows the above (rather than buying an annuity), on the proviso that the pension amount is less than £18,000 (current value). However this £18,000 figure includes all personal pensions that you have – not just to a single pension.
So if you have paid into other personal pensions during your working life, and the value of all your pensions added together exceed £18,000 – House of Fraser should not be making the offer to you.
If House of Fraser pays you this amount, and it is subsequently found to have been outside the rules (see above) – then you could find that you are landed with a tax bill for the tax relief that you were given on the original payments into the plan.
If the payment is all within the rules – my advice it to take the money. It is the reason that the rules for trivial amounts were created – knowing that you would get a very bad annuity rate with such a low pension sum.