Tax Free Cash - Which is better, Retirement Annuity or Personal Pension!

Personal Pension (PP’s) became available from July 1988 to replace the Retirement Annuity Policy sometimes referred to as an (RAP). Although it was not possible to effect another RAP after July 1988, it was still possible to continue with an existing plan.

For many people there where some distinct advantages, such as the ability to invest significantly larger premiums than could be invested into a PP on which taxrelief could be obtained.

With regard to the Tax Free Cash (TFC), it was generally considered that the TFC available under an old RAP would be greater than that provided by a Personal Pension.

The amount of TFC available from a PP is simply 25% of the accumulated fund value at retirement. Therefore if the fund is valued at £100,000 the TFC would be £25,000 and the remaining £75,000 would be used to purchase a pension annuity.

In contrast the TFC available from an RAP is based on a rather complex calculation which only the Revenue or an Actuary could devise. The TFC is  based on 3 x the residual annuity ( the annuity which can be purchased with the remainder of the fund after TFC has been taken). This generally resulted in a TFC figure of up to 30% of the fund depending on the retirement age.

Unfortunately due to reduced current annuity rates the level of tax free cash available from an RAP has declined and may now be actually less than that available from a PP.

There are also other factors that need to be taken into account when deciding which option is best, such as the age at which retirement benefits are taken as normal retirement ages for an RAP are between 60 and 75, compared to 50 and 75 for a PP.

Early retirement (from age 50) can be achieved by transferring from an RAP to a PP, but the TFC will then be restricted to 25% of the fund.

You can therefore see that there is no clear cut solution to which is better and it is essential that if you have an RAP, you compare the various options available to you before making a final decision. I would strongly recommend that you seek independent financial advice in this respect. 

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