In the iNews Money section today, a reader is asking for expert advice on cashing in her pension. She has two pensions and wants to be able to get all of her smaller pension pot, but not pay any tax on it. She asks –
“When I retire I will need to take some of my final salary pension as a tax free lump sum to pay off my mortgage. I actually have two final salary pension pots – one a very small one and one which would provide me with a decent income in my retirement. For various reasons it would suit me to convert all of my smaller pension into cash and withdraw it while leaving my bigger pot intact – this would represent less than 25 per cent of my combined pension pot. But can I do this and receive all the money tax free? Or can I only take up to 25 per cent from each pot?”
iNews’ Financial expert explains what is called the “commutation factor” of pension schemes –
“With each DB scheme you have, the size of your tax-free lump sum, and the impact taking it will have on your subsequent income, will be determined by the commutation factor. The higher the commutation factor, the better the deal generally is for you. The level is usually decided by the scheme actuary. The maximum you can take from your DB pension is determined by HMRC rules. The actual figure is then calculated using your accumulated pension and the commutation factor. However, not all DB pensions work out how much tax-free cash you can take in this way. Some schemes, mainly in the public sector, give you separate entitlements to tax-free cash.”
In short, he advises her that she needs to speak to her pension companies to find out what the commutation factor is for her funds.