Tax Free Cash

Tax-free cash is known as the ‘pension commencement lump sum’ and can be taken when you take your pension benefits.

Broadly speaking, the maximum cash sum that you can take is limited to a maximum of 25% of the underlying fund value. (For defined benefit schemes, the pension rights can be given a value for this purpose by multiplying the initial pension income level by 20).

If you have occupational pension scheme benefits from before 6 April 2006, you may have a tax-free cash entitlement in excess of 25% of your fund value. Your Annuity Bureau Consultant can advise you on this.

Once you have taken your tax-free cash entitlement, this money is no longer considered to be ‘pension money’. Whilst you do not have to take tax-free cash, it is very often wise to do so. Even if your aims are purely to generate income, it is sometimes possible to do so in a more effective and tax efficient way if the funds you use are not deemed to be ‘pension’. Again, your Annuity Bureau Consultant will be able to advise you.