Introduction

Tax free cash is a valuable benefit of pension saving and so it’s vital that advisers understand how much tax free cash is available when benefits are taken and, for defined benefit schemes in particular, the impact that taking tax free cash can have on the associated pension.

This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.

Outcomes

On completion of this module you should be able to:

  1. List situations where the amount of tax free cash available may be different from the normal 25% entitlement
  2. Explain the different methods that defined benefit schemes can use to provide tax free cash
  3. Explain the impact that the lifetime allowance can have on tax free cash entitlement
Literature

Learning material

This module looks at the situations where tax free cash may differ from the normal 25%, the different ways that tax free cash can be provided by defined benefit schemes and the potential impact of the lifetime allowance.

Please read the learning material before attempting the self-assessment questions.

CPD minutes: 30

Technical guide - Tax free cash

Post learning assessment

Question 1

There are several situations that could result in an individual receiving less than 25% tax free cash - which of these is NOT one of them?

  1. The individual has enhanced or primary protection with registered tax free cash
  2. The pension includes a disqualifying pension credit following divorce
  3. The individual has scheme-specific tax free cash protection
  4. The individual has a significant GMP entitlement under the scheme

Question 2

For defined benefit schemes and tax free cash, which of the following statements is FALSE?

  1. Most private sector schemes provide tax free cash by giving up part of the pension (commutation)
  2. Some schemes provide a separate lump sum based on an accrual rate (e.g. 3/80ths) and length of service
  3. Some schemes which provide a separate lump sum also allow some pension to be commuted to allow additional tax free cash, up to the overall 25% maximum
  4. Maximum tax free cash is based on the total crystallised value, excluding any GMP

Question 3

Jade has a defined benefit pension where tax free cash is provided by giving up some of the pension. Her accrued pension is £25,000 a year. If the commutation factor is 15:1, how much pension does Jade have to give up if she wants to take tax free cash of £90,000?

  1. £6,000 a year
  2. £7,692 a year
  3. £12,000 a year
  4. £19,000 a year

Question 4

Which of the following generally describes the impact of the lifetime allowance on tax free cash rights? The maximum tax free cash normally available is:

  1. The higher of 25% of the amount crystallised or 25% of the individual’s remaining LTA
  2. The higher of 25% of the amount crystallised or 25% of (£1.5M - amount previously crystallised)
  3. The lower of 25% of the amount crystallised or 25% of the individual’s remaining LTA
  4. The lower of 25% of the amount crystallised or 25% of (£1.5M - amount previously crystallised)

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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.