The Department for Work and Pensions is due to announce that people can take up to 25% of their protected rights as tax-free cash, which could make contracting out of the second state pension seem more attractive. The advantage of contracting out is dependent on the rate of tax paid at retirement, and whether the investor would be better off with the cash invested elsewhere to give a better rate of return than a state pension.
Our view
It would seem sensible that when Pension Simplification comes into force in April 2006, all pension schemes including "contracted out" of the State Second Pension (via a Personal Pension this is known as protected rights) will be allowed to withdraw 25% as a tax free lump sum.
Learn more in the Pension Simplification Centre and the State Pensions Centre.