The decision to take part of your benefits as a tax free cash sum differs depending on whether you’re in a defined benefit scheme or a defined contribution scheme. 

• Defined benefit scheme.  This depends on the ‘commutation’ rate.  That means how much cash you’re offered for every pound of pension you give up. For example, if your employer offers you a commutation rate of 15:1, then for every £ of pension you give up each year, you’ll receive £15 as a tax fee lump sum.  Whether that’s a good deal or not is difficult to say. You need to think about how long you’re likely to spend in retirement and whether your scheme pension increases each year?  

You should also consider why you want the money and how you will use it.

We always recommend speaking to a financial adviser before making any decisions of this sort and that you shop around for the best deal for you. 

• Defined contribution scheme.  In defined contribution schemes the decision is easier.  You have a pot of money and you need to decide whether to take some of it as tax free cash.  Usually, you’ll be able to take up to 25% of your total fund as a tax free cash sum.

Most people like the idea of taking a tax free cash sum for all sorts of reasons:

• It’s nice to put all or some of it aside as ‘rainy day’ money, just in case.

• Sometimes it’s used to pay off any remaining mortgage or other debt.

• Often people feel like they deserve a ‘treat’ after working for 30-40 years.  This commonly used to be a world cruise (though this has become something of a cliché these days).

Many people choose to take the money and then invest part or all of it to boost their retirement income.  There are several advantages to this:

• The money can be invested to provide a tax free income using ISAs for example.

• Whenever you die any balance can be left to your dependants.

• You can still access your money, when you want to, if you need it for any reason.

Even if you only want the maximum income and aren’t particularly interested in a tax free cash sum, you could still be better off taking tax free cash to buy a ‘purchased life annuity’.  These annuities have very attractive tax breaks, which means you might end up with a higher income.

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