Tax-Free Cash Lump Sum – this is an amount of cash which you can take from your pension fund free of income and capital gains tax.

Tax-free cash is known as the ‘pension commencement lump sum’ and can be taken when you take your pension benefits, or earlier if you need your tax free cash before wishing to take an income.

The pensions simplification legislation introduced a level playing field for tax-free cash. Under the new rules, all pension policyholders are able to take 25% of their fund as tax-free cash. This was always the case for personal pensions, but this is a new requirement for all the other schemes such as additional voluntary contribution (AVC) schemes and protected rights schemes.

For occupational schemes, the new rules mean some employees are entitled to more tax-free cash and others less. Entitlement was based on a calculation involving the number of years' service and the employee's final salary. This meant that some employees could build up entitlements as high as 50% of their benefits, while others were entitled to significantly less than 25%.

Not all schemes, however, will offer the full entitlement to tax-free cash. There is no obligation on the trustees of occupational schemes to amend their rules to give employees an automatic right to the full 25% tax free cash.

The maximum tax free cash sum that you can usually take is therefore limited to a maximum of 25% of the underlying fund value. The remainder of your pension fund, after deduction of the tax free cash, will either remain invested until you need to take a pension income, or will be used to buy a pension annuity.

Thus a private pension fund worth £50,000 would offer a tax free cash lump sum payment of £12,500 (before any fees or product provider charges where applicable are taken into account). The actual size of the tax free cash lump sum potentially available will depend on the size and type of pension benefits you hold.

Once you have taken your tax-free cash entitlement, this tax free cash is no longer considered to be ‘pension money’, and you may do with it as you wish. Whilst you do not have to take tax-free cash, it may suit your circumstances. Once you have taken this tax free cash lump sum, you can't take any more tax free cash from your pension.

As mentioned above, if you take the Tax Free Cash from your pension you can leave the remaining fund invested until you chose to retire or take income from your pension. Currently you have to be over age 550 to do this.

If you want to take your Tax Free Cash and your current pension plan is not able to release your benefits directly to you, it maybe necessary to transfer the pension fund to a new plan in order to take your tax free cash early.

However if you are considering taking your tax free cash early, you must be aware that this may significantly reduce the value of the pension you receive in retirement. Whilst taking a large tax free cash lump sum can be very tempting, it is vital that you consider how taking 25% of your pension fund out as tax free cash will affect you in the longer term.

You may also wish to consider using all or part of your tax free cash to provide a supplementary income, and we can give you some options on this.

Open Market Option

A pension annuity is the technical term for what most people think of as their “pension”. A pension annuity turns your pension fund (which you have built up during your working life) into a regular pension income, which will be paid to you for as long as you live.

A pension annuity is simply a series of payments made usually on a monthly basis. You use your pension fund to buy a pension annuity. The pension annuity rate will depend on many factors, including your age, your health, general economic factors at that time such as interest rates, any annuity guaranteed period, any regular increase to apply each year (escalation) and how many times and when in each year the pension will be paid.

The pension income you receive from the pension annuity can be set to be level or indexed, and you will receive a guaranteed income for life. There are no additional charges taken from the pension annuity contract once it has been set up, as the charges are reflected in the pension annuity rate.

You need to ensure you are happy with the pension annuity contract as you can not change it once it has been set up.

You can buy a pension annuity as long as you are over 55 and under 75 when the annuity starts.

You don’t have to buy a pension annuity when you reach retirement age, you have a choice on when you want to buy it.

By purchasing annuities through an open market option, your existing pension fund provider may make an administrative charge. However, the extra income usually secured by exercising your open market option far outweighs such costs. The other consideration is what costs are there from the new provider of your pension annuity.

Some pension providers will also offer enhanced pension annuity rates, sometimes called impaired pension annuity rates, to individuals who have medical problems and therefore a shorter life expectancy. In addition, some providers will offer enhanced pension annuity rates to smokers who have smoked for more than 10 years.

Enhanced annuities provide pension income specifically for people in ill health or for those whose lifestyle may mean they have a shorter retirement. This can include regular smokers, and people who are obese.

Enhanced annuities are sometimes called impaired annuities; these annuity products are essentially the same thing and can give your monthly retirement income a boost of up to 40%. Just over 5,000 different medical conditions allow you to qualify for an enhanced annuity.

When you retire the majority of your pension fund must be converted into a regular income by taking out an annuity. You can take 25% of the total pension fund as a tax-free sum but the remaining amount has to be reinvested to provide you and your family with financial security for the rest of your life. If you have an existing medical problem or lead a lifestyle that is regarded as likely to shorten your life expectancy, you are likely to be eligible for an enhanced annuity. This will mean that you receive a larger monthly income than you would if you were healthy.

Obtaining an enhanced annuity quote is now very simple. It no longer involves having a thorough medical examination and your GP or hospital consultant also being asked for further health information. These results forwarded to your chosen enhanced annuity provider and the resulting income you received based on this medical report. We can provide you with a guaranteed quote without going through this process. If you accept the enhanced annuity you are offered your provider MAY then contact your GP, however we are aware of very few cases where the customer has been required to attend a medical. Obtaining an enhanced annuity is relatively simple and normally requires you to answer a few more medical questions.

If any of the following apply to you, then you could benefit from an enhanced annuity:
• Do you smoke cigarettes regularly?
• Do you need tablets or injections for a long-term illness?
• Has your health been so bad you have had to stay in hospital during recent years?
• Do you take 2 prescription medicines
• Do you drink more that 36 units per week