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

IanSt

chris1 wrote: »

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?

There's no one right answer to this as it will depend on a whole multitude of factors including (in no particular order):

How much is in this pension fund?
Money within pensions can be quite handy for inheritance purposes, so how much are you thinking of leaving for others?
What is your age?
What methods are you intending to use to take your pensions?
What income do you need from your pensions and what will/do they actually provide?
What amounts do you hold and contributions do you make to savings and investments - both ISA and non-ISA?
Could you transfer part of this pension and still keep an enhanced tax lump sum value on the remaining portion - i.e. it might go up to 60% of the remaining amount? Not all companies will allow this, but your's might.

I have a similar enhanced tax free lump sum and I am intending to take the full lump sum from it after moving some of the existing funds elsewhere. I'll move the freed tax free lump sum over a couple of tax years into my wife's and my own ISA funds - one pre 6-Apr, one post 6-Apr.

But my answer may be very different if I was in your shoes.

Malthusian

TrickyDicky101 wrote: »

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

It will be his tax free cash entitlement at 6 April 2006, revalued in line with the increase in the lifetime allowance, plus one quarter of any growth over and above that increase in the lifetime allowance.

Except of course that the lifetime allowance hasn't been increased, so there's one point in the calculation where you use the actual lifetime allowance and another point where you pretend it's still £1.8 million (so that people with enhanced tax free cash didn't lose out from the slash in the lifetime allowance).

As the fund value increases, the tax free cash increases in nominal terms but its percentage of the fund value gets smaller, tending towards the standard 25%.

So it is not a fixed percentage of the fund value nor is it a fixed amount that doesn't change. It is a fixed amount as at 6 April 2006 that is revalued in line with the fund value.

TrickyDicky101

Malthusian wrote: »

It will be his tax free cash entitlement at 6 April 2006, revalued in line with the increase in the lifetime allowance, plus one quarter of any growth over and above that increase in the lifetime allowance.

Except of course that the lifetime allowance hasn't been increased, so there's one point in the calculation where you use the actual lifetime allowance and another point where you pretend it's still £1.8 million (so that people with enhanced tax free cash didn't lose out from the slash in the lifetime allowance).

As the fund value increases, the tax free cash increases in nominal terms but its percentage of the fund value gets smaller, tending towards the standard 25%.

So it is not a fixed percentage of the fund value nor is it a fixed amount that doesn't change. It is a fixed amount as at 6 April 2006 that is revalued in line with the fund value.

Got it - makes sense. Thank you