Don’t forget your protection!

Most people are aware that their pension will allow them access to 25% of the fund value, usually after the age of 55, as a tax-free lump sum. However, there are circumstances where the tax-free lump sum will be a higher percentage, and this is referred to as protected tax-free cash.

Protected tax-free cash for some people will be well known as specific action will have been taken with HMRC to preserve this interest (e.g. primary or enhanced protection). However, there will be occasion where the tax-free cash is in excess of 25% of the current value and the plan holder is not necessarily mindful of this fact. Pension arrangements that may have access to higher tax-free cash include occupational pension schemes, S32 Buy Out plans and statutory schemes (i.e. some public sector schemes). Rather strangely, both personal pension and stakeholder plans can contain higher tax-free cash as a result of a group of people (employees / affinity groups) all effecting a pension transfer simultaneously to the same provider / product. This type of higher or protected tax-free cash is called Scheme Specific tax-free cash.

So what? I hear you say. The issue with Scheme Specific tax-free cash is that it is often lost on transfer or switching away from the current or existing pension provider. If the uplift in tax free cash is relatively modest, an extra 1% – 2%, and a more modern or flexible contract is needed to match agreed goals and objectives then this potential penalty may not be too onerous. However, it is not uncommon for the scheme specific tax-free cash to be significantly in excess of 25%. A current Wingate client has scheme specific tax-free cash of 60% of the pension fund value. Clearly, this can make quite a significant difference on a pension pot of £250,000 + (purely as an example – £62,500 or £150,000)

With good planning, it is possible in some instances, to preserve the higher tax-free cash and still enjoy the benefits and flexibility that Pension Freedoms legislation brought in post April 2015, and which many of our clients wish to take to their advantage. These include the ability to take income as and when needed and the often-valued option of being able to pass on any unspent fund to future generations.

If you are considering either consolidating your pension plans or are at the point of accessing pension benefits to supplement a retirement strategy, please get in contact so we can assist in obtaining the best outcome for your financial planning.

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