Even if we assume that the retiree plans to spend rather than reinvest the lump sum, the concept of putting 25% of the fund in cash in order to protect your tax free lump sum is fundamentally flawed. It would only work if you were able to earmark that portion of the fund that is to be taken in cash form. Otherwise, all you are doing by putting 25% in cash is reducing your exposure to markets by 25%.
For example, let's say you have €800,000 in your fund and you want to ensure that you will be able to take €200,000 as a tax free lump sum when you retire. If we tweak reality slightly and assume that you can invest in a cash fund that will earn sufficient interest to cover the annual management fee, you can achieve this by investing the entire fund in cash. if you do this, you will still have the €800,000 when you reach retirement age and will be able to take the desired €200,000 as a tax free lump sum.
However, let's look at the position if you invest only €200,000 in cash and put the remaining €600,000 in return seeking assets. And let's assume there is a sharp downturn in markets and this part of your fund falls by 20% to €480,000. You would then have a total fund of €680,000 and would only be able to take €170,000 as a tax free lump sum. So your tax free lump sum has fallen by 15% i.e. 75% of 20%.