What is Tax Free Cash?

The Pension Commencement Lump Sum (or PCLS) is colloquially know as “Tax Free Cash” and PCLS is exactly that; an amount of tax free money withdrawn from your pension. For most Defined Contribution Pensions, from age 55 (increasing to age 57 from 2028), you are entitled to withdraw up to 25% of your total fund value with no tax to pay. This can be taken as a one off lump sum, or as smaller regular or adhoc payments.

As this capital is paid to you tax free, this can be highly advantageous. This is especially true for higher or additional rate tax payers as it can provide highly tax efficient income to use for a variety of purposes.

The remaining pension funds can be left invested with the aim of increasing the value of your retirement pot to use later in life (although the value can fall as will as rise) or your remaining funds can be used to purchase an annuity to provide a guaranteed income in retirement. Any further income in excess of the 25% PCLS will be taxed as income at your marginal rate of income tax.

There are a number of specialised pensions, generally from many years ago, which have built in features such as protected tax free cash or tax free cash which exceeds the 25% limit and for Defined Benefit schemes the rules are different again. Therefore it is important to seek financial advice if you are considering consolidating your pensions or considering beginning to withdraw income from your pensions.

A full pensions review with our one of our Independent Financial Advisers would be needed in order to assess each of your plans individually to gain a clearer picture of your PCLS entitlement applicable to each individual policy and any other benefits associated with them and also to provide a income in retirement plan that suits your individual personal circumstances.

Due to the complex nature of pension rules, it is important to fully understand what is offered from each of your plans to ensure that you make the best decisions with your pension provisions.

If you would like to learn more about this subject or require Independent Financial Advice from our local, experienced and friendly team, please feel free to contact us on 01788 57 11 22.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. It does not constitute advice. All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

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