Standard Life has warned that taking maximum levels of tax-free cash from final salary schemes could be one of the worst financial decisions someone could make. After the new Pension Simplification rules started on 6th April, 25% of pension pots can be taken as a tax free sum, which is potentially more than the old rules of one and a half times annual salary maximum.
They have said that the ratio of money taken out of the scheme against the reduction of pension income was 12 to 1, so for every £12 taken as tax-free cash reduced their pension income by £1.
The provider believes that if people used their tax-free cash to buy an income, they would find it impossible to match the levels available through the final salary scheme.
Our view
The whole point here is the word "tax free" cash. Pension income is taxable and inaccessible, tax free cash is tax free and can be invested tax efficiently and is accessible. There will always be a financial trade off between the two.
We suggest most will still opt for tax free cash.
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