annuity types

Annuity Tax Free Cash

When you reach retirement most pension funds offer you the ability of taking part of your pension fund as a tax free cash lump sum.

25% Tax Free Cash:

A change in pension rules in April 2006 means that all pension funds now have a limit 25% of the fund value of the pension as the maximum tax free cash lump sum.  The balance must be used to provide you with an income.

Larger Tax Free Cash Lump Sums: Transitional Rules

Some pension funds that were in force before April 2006 may have tax free cash sums that are greater than 25%.  These higher tax free cash sums may need to be protected.  We suggest you read the section on Transitional Protection Pension Rules in our main Need An Adviser site or contact us for pension advice.

Should I take a tax free cash lump sum?

In our view, the decision to take a tax free cash lump sum is personal and will differ for each of us, although the following pointers may help:

• Tax Free Cash means what it says the cash is not subject to income tax when you receive it although where you then invest the tax free cash may be subject to tax unless you invest it in tax efficient areas.
• If you leave it inside the pension for a bigger pension income, the majority and normally all of your pension income is treated as taxable income.
• Some older pension schemes, but only the lucky few, have Guaranteed Annuity Rates that offer very high income returns. 
• You need to compare the annuity income rate offered to the investment return you could receive if you withdraw cash

In simple terms, one route is definitely taxable the other may not be if you invest wisely. 

Tax Free Cash Sum Only Option

There is also flexibility to be able withdraw the tax free cash sum only from your pension fund and leave the pension fund invested.  This is part of the new pensions flexibility under Unsecured Pension Income Rules.

If you need help on a decision whether to take tax free cash or not, take advice from us.