An individual whose total pension funds are valued at less than than
1% of the Standard Lifetime Allowance, will be able to be take all of their
pension as cash.
25% of the fund will be tax free and the balance will be taxed
at the marginal rate. More than one policy can be commuted for cash providing
that the total is below 1% of the lifetime allowance.
For example an individual with a stakeholder pot of £ 15,000 could take £
3,750 as a tax free cash sum and the balance will also be paid in cash, less
basic rate tax providing another cash payment of £8,775.
It is important to remember that all pensions in payment must be taken into account when calculating the value of an pension. This means that in the example above, if the individual had a small pension in payment, this would have to be taken into payment and would take them over the 1% limit.
Ill health
At present only occupational schemes can commute pensions for cash if the
member is seriously ill. After A-Day it is proposed that ill-health commutation
will be available to anybody who's life expectancy is considered to be less than
1 year. Providing the benefits are below the lifetime allowance the lump sum
will be tax free