There are only two reasons why a member of a pension scheme might not be allowed to take a tax free lump sum.

The Pension Scheme denies benefits before normal retirement age
If the benefits are held in a scheme operated by the member’s employer or former employer the scheme may refuse to allow members to take benefits before the normal retirement age. This ‘refusal’ usually applies to both pension and tax free cash but may, in certain circumstances, only apply to the lump sum.

Section 32 contract (‘Buy Out Bond’)
Some years ago this was the only type of pension policy that could accept a transferred fund from a final salary pension scheme for an individual scheme member. The section 32 contract had to provide almost all of the required guarantees offered by the final salary scheme. Briefly, these minimum guarantees were designed to ensure the scheme member retired with pension benefits at least equal to the state second tier pension (until recent years, known as SERPS). No SERPS benefits may be taken as a tax free lump sum but, as all final salary schemes provided benefits significantly higher than SERPS they could therefore provide members with a tax free lump sum at retirement.

Unfortunately, the investment performance of many Section 32 contracts has been so poor over recent years that, although they are obliged to meet the ‘SERPS-equivalent’ promise of the previous employer’s scheme, they can now provide no additional benefits. Thus large numbers of Section 32 policyholders will therefore not be able to take any of the benefits as a tax free lump sum. This particularly applies (though by no means only applies) if the Section 32 contract is invested in a with-profits fund.

So, can anything be done?

Yes. By transferring the value of the pension benefits to a personal pension a tax free lump sum of 25% of the fund will be available. However, care must be taken to ensure that the transfer value is a fair reflection of the promised benefits. The Pensions Office frequently encounters section 32 transfer values that are at least 40% lower than the true value of the guaranteed benefits, thus making a transfer inadvisable unless there are exceptional client circumstances (for example, severe ill health or an over-riding need for a tax free lump sum).

This can be a very complex assessment. If you have been advised that no tax free cash is payable from your pension scheme or, in any case, if you have benefits in a Section 32 contract and you want to ensure you receive the very best advice and guidance…..