Warren Shute is a chartered financial planner with Lexington Wealth Management. Contact him on 01793 771093 or warren@lexingtonwealth.co.uk

Q I am in the process of retiring and I seem to recall that when I originally started one of my pensions I was told that a third of it could be taken as a lump sum tax free. In my retirement quote however the amount I can take would appear to be 25% which is the same as two other pensions I have. It is an old pension; I have been paying in to it for over 30 years. Is my memory letting me down?

A The pension you are referring to is probably an old style retirement annuity contract (RAC). These were replaced by personal pensions plans (PPP) in 1988 but existing RAC pensions could continue.

Both types of pension allow you to take some of the fund as a pension commencement lump sum (PCLS, formerly called tax free lump sum). The balance of the fund is then used to provide you with an income which will be taxable.

Under PPP rules you can take 25% of the fund value as a PCLS.

Historically the amount of PCLS you could take from an RAC was a bit more involved as it was ultimately three times the annual pension income AFTER the PCLS had been determined. The annual pension income, therefore, determined how much you could take as a PCLS and the amount of annual pension in turn was determined by annuity rates.

When you originally started the RAC pension, annuity rates were considerably higher than they are now and the resulting income when multiplied by three would typically give you a PCLS equal to a third of the fund value.

So no, your memory is not failing you.

Unfortunately, two events have conspired against you, so that you are now limited to 25% (the same as a personal pension).

The first is that annuity rates have been reducing steadily pretty much since the 1990s and, as a result, the three times calculation has since (broadly speaking) about 2000 limited the maximum to 25%. The second event was a rule change introduced in 2006. This limits the amount of PCLS from all pension schemes to 25% (please note there can be exceptions to this).

The good news is the pension is still 100% yours, but only 25% can be taken as a PCLS tax free; the balance must then provide you with an income that is taxable.