Enhanced tax free cash – any reasons not to take it?

chris1 · 16 November 2017 at 1:34PM

An old policy with enhanced tax free cash option of nearly 40%, instead of the usual 25% - is it a ‘no brainer’ not to take it?

There won’t be a specific need for a lump sum, the whole amount will be used one way or another to provide an income in retirement, either through an annuity, a purchased life annuity, ISAs, or drawdown (or all of these).

Any thoughts please?

Linton · 16 November 2017 at 2:19PM

What is the reduction in annual retirement income if you take the enhanced tax free lump sum? Is it a DB pension or a DC pension with a Guaranteed Annuity Rate?

Froggitt · 16 November 2017 at 2:39PM

As once you take a pension, your contribution limits are slashed, why not make a contribution equal to the 25% tax free before taking the tax free amount, and you will also get tax relief on that contribution.

chris1 · 16 November 2017 at 2:46PM

Linton wrote: »

What is the reduction in annual retirement income if you take the enhanced tax free lump sum? Is it a DB pension or a DC pension with a Guaranteed Annuity Rate?

Thanks for replying. It's just a DC pot, with no GAR or other benefits other than the Enhanced tax free cash amount. (It's not an actual percentage, it's a fixed amount, but works out to be just over 38% of the pot value.)

Any reduction in income is from the pot being smaller by the said 38%, i.e. a smaller pot to buy a pension annuity, but the money is obviously available outside to buy a PLA.

chris1 · 16 November 2017 at 2:51PM

Froggitt wrote: »

As once you take a pension, your contribution limits are slashed, why not make a contribution equal to the 25% tax free before taking the tax free amount, and you will also get tax relief on that contribution.

As I understand it the contribution limits are only reduced to 4K if you take more than your tax free cash lump sum. Please tell me if I'm wrong!

Also I think you'd probably fall foul of the fiendishly complicated recycling rules if you paid in a large lump sum.

Froggitt · 16 November 2017 at 4:46PM

chris1 wrote: »

As I understand it the contribution limits are only reduced to 4K if you take more than your tax free cash lump sum. Please tell me if I'm wrong!

Also I think you'd probably fall foul of the fiendishly complicated recycling rules if you paid in a large lump sum.

Not if its pre-cycling rather than re-cycling.

No idea whether tax free lump only reduces the limit to £4k or not.

kidmugsy · 16 November 2017 at 5:01PM

Froggitt wrote: »

Not if its pre-cycling rather than re-cycling.

Nope, they look at five years: the year of the contribution, the two before and the two after.

Malthusian · 16 November 2017 at 5:44PM

Froggitt wrote: »

No idea whether tax free lump only reduces the limit to £4k or not.

It doesn't. And that doesn't change with enhanced tax free cash. If the OP transfers to drawdown and only takes his 40% tax free cash, with no taxable income, he won't be subject to the MPAA.

The rules on tax-free cash recycling can be seen here.

bigadaj · 16 November 2017 at 7:54PM

The OP states that the enhanced tfls is actually a fixed amount, so wouldn't the additional payments simply reduce the percentage of the tfls?

TrickyDicky101 · 16 November 2017 at 8:32PM

How come the tax free cash is a fixed amount (rather than a %)? Genuinely interested here.

dmelife · 16 November 2017 at 8:41PM

A transfer out to a drawdown contract may result in the loss of the enhanced TFC. Check with the provider. This may mean annuity purchase after the TFC is the only option, which may mean tax benefits gained are lost elsewhere. What is the pension value?