Retirement Annuity Contract Pension: Why has the Tax Free Lump Sum Reduced?Written on September 3, 2023 by Kirk Rice LLP
Financial Services QuestionsThe Question:
I will be 65 in February and plan to retire. I have a Pension, which I have been paying into for over 25 years, and I was under the impression that a third of the fund could be taken as a tax-free lump sum. It has a value of £170,000, and I have been offered a lump sum of £42,500. A third would be closer to £56,600. I have contacted the Pension provider, but they could not help. Can you?
Kirk Rice LLP answers:
Your pension is probably an old-style Retirement Annuity Contract (RAC). Personal Pensions (PPP) replaced these types of pensions in 1988, but existing RAC Pensions could continue. Both types of pension allow you to take some of the fund as a Pension Commencement Lump Sum (PCLS, formerly called Tax Free Lump Sum).
The balance of the fund is used to provide you with an Income which will be taxable. Under PPP rules, you can take 25% of the fund value as a PCLS. However, the amount of PCLS you can take from an RAC is more involved as it is three times the annual pension income after the PCLS has been determined. The annual pension income will, therefore, determine how much you can take as a PCLS, and Annuity Rates will determine the amount of annual pension.
When you started the pension some 25 years ago, annuity rates were considerably higher than they are now. When the resulting Income was multiplied by three, it would typically give you a PCLS equal to a third of the fund value, hence why you were expecting to be able to take a PCLS of £56,600. Lower annuity rates mean you are getting a lower pension income and a lower PCLS. Using the three times income calculation, the PCLS is probably much lower than the £42,500 offered. The provider has, however, offered you 25% of the fund value, as would apply to a personal pension. In reality, the decline in annuity rates means that RAC pensions have been unable to provide a PCLS of a third for some time.
There can be some exceptions, of course, and it is not unusual to come across RACs with Guaranteed Annuity Rates, which may mean the PCLS can be higher than the standard 25%. Hopefully, I have helped in that I have answered your question, but unfortunately, it has not changed the result.
If you would like to discuss pension transfers or require any other financial planning assistance, please email info@kirkrice.co.uk to arrange a call with one of our Financial Planners. Kirk Rice offers a free no, obligation first meeting and fees and costs of work involved would be discussed. We do not carry out any work without your consent and agreement to fees.
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Please note: our articles are for general guidance on the date of publication only and, specific advice should be taken before acting on any of the suggestions made.
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