Cash Allowance

Previous tax rules meant that calculating your tax free cash on retirement was complicated but the position from 6th April 2006 is much simpler.

From 6th April 2006 you will be able to take 25% of the value of your entitlement (including the fund built up by payment of Additional Voluntary Contributions) under the Plan as tax free cash at the date you retire subject to a government imposed upper limit being 25% of the Lifetime Allowance, so a maximum in 2006/7 of £375,000. The value of your entitlement is calculated for this purpose as 20 times your pension before any tax free cash is taken.

Example

Chris has a 30 years worth of service at the date he retires and his Final Pensionable Salary is £20,000.
His pension on retirement will be 30 / 60 x £20,000 = £10,000.
The value of Chris's entitlement is £10,000 x 20 = £200,000.
Chris may take up to 25% of this entitlement as tax free cash.
This amounts to £46,434 with a residual pension of £6,965.

Under the pre 6th April 2006 rules Chris would have been able to commute £22,500 with a residual pension of £8,489.93.

The factors used to reduce the pension are Plan specific and are not based on the factor 20 that the government has put in place to value pension. This explains why the pension given up to produce tax free cash is more than 25% of the total pension.

In most cases, this will mean you will be able to take more tax-free cash at retirement than you could under the pre 6th April 2006 Rules. O2 has put in place a rule within the Plan to ensure, if the tax free cash you were entitled to immediately before 6th April 2006 was higher, that you may take that if you prefer.

You should note that if you transfer your benefits from O2 to another pension arrangement the tax law does not allow you to retain the entitlement to the pre 6th April 2006 tax free cash in the arrangement to which you are transferring; your tax free cash will be based purely on the 25% rule.

More detail on tax free cash can be found under Retirement.