From age 55, you have lots of choices as to how you access your pension funds. How you choose to take your pension will have implications on how long your pension will last and how much tax you pay.
We are committed to helping you make the most of these choices, so we strongly recommend that you:
- Get advice from a regulated financial adviser.
- If you do not have a financial adviser and are aged over 50, you are entitled to free, impartial guidance from the government service called Pension Wise. Visit www.pensionwise.gov.uk or call either 0800 280 8880 or 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.
- Read the 'It’s your pension: It’s time to choose’ guide to accessing your pension pot from the Money Advice Service.
- Use the Money Advice Service’s very helpful Retirement income options tools to work out how much you might get from your retirement choice and how to avoid any traps.
Don’t get stung! Fraudsters often target people who have taken money out of their pension. Read our factsheet ‘Scam proof your savings’ to find out what you can do to protect yourself from pension fraud.
A SIPP gives you two main options for accessing your pension
- Income drawdown
- Purchasing an annuity
You do not have to choose one option and can divide your pension pot and mix and match these options to suit you.
Since 6 April 2015, investors have had to take income as flexi-access drawdown. For clients who were already in capped drawdown before 6 April 2015, capped drawdown remains available or can be converted to flexi-access drawdown at any time if you wish to do so.
How it works
In flexi-access drawdown, you can take up to 25% tax free (referred to as pension commencement lump sum) with the remaining 75% retained within the pension to allow you to start withdrawing an income which you can do at regular intervals (monthly, annually etc.) or as and when you need it. Importantly, the sum designated for income can remain invested within the tax efficient pension until you withdraw it.
In flexi-access drawdown, there is no limit on how much income you can take out of your pension fund or when you can take it. You however become responsible for the sustainability of your pension to ensure that the fund will provide you with an income throughout your later life.
Will it last? ONS data (2014) predicts that a person aged 65 has a 25% chance of living to 94 (Men) and 96 (Women)
Things to think about
- You may live a lot longer than you think
- Funds for income can remain invested and benefit from the preferential tax status of a pension.
- Your investments could continue to go up but equally may not perform as you expect. Your income is therefore not secure (unlike with an annuity) and your income is reliant on the size of the fund and performance of the investments
- Income from your pension is taxed the same as employment income. If you take large amounts in any one tax year, you could pay higher and additional rate tax on the money you withdraw.
- You can take varying amounts of income at regular intervals, or lump sums to suit your needs
- What you plan to do with the money once outside the pension could have tax implications. For example, interest from money in a bank account will be taxed and any investments that go up in value will give rise to a capital gains tax liability
What happens when I die?
You can read more about this here. However, in contrast to most annuities, the remaining value of the pension at death can be passed on to your beneficiaries.
Implications for tax relief
If you access any defined contribution pension like a SIPP through flexi-access drawdown, you become subject to the Money Purchase Annual Allowance (MPAA). This restricts the maximum you can contribute and receive tax relief on (to all defined contribution pensions) to £4,000 per tax year. This is important if you are still working and want to continue to contribute to your pension.
Do I have to take all my tax free allowance in one go?
No, you do not have to take your entire pension fund into drawdown in one go. For example: if your pension fund is worth £100,000, you can choose to ‘crystallise’ half of its value (£50,000) into drawdown. You can then take 25% (£12,500) from that half tax-free and have the remaining £37,500 allocated for income.
You can then crystallise the remaining half at a later date.
If you started taking an income prior to April 2015 and have not subsequently converted to flexi-access drawdown, you will be in capped drawdown. Find out more about capped drawdown here.
Purchasing an annuity
An annuity is where you take your remaining pension fund after taking 25% tax-free and use it to buy a set income, which will provide you with a regular guaranteed income for life. How much you get will depend on the size of your fund and the rate annuity providers in the market are offering at that time.
Things to think about
- The main advantage of an annuity is the security of knowing you will receive the income, guaranteed for the rest of your life, some annuities will also include indexing to increase the income level over time.
- Once you buy an annuity, you cannot change your mind, so it’s important to get advice before committing
- Annuity rates will vary, so make sure you shop around for the best rate
What happens when I die?
Death benefits will be paid out in accordance with the annuity contract but they are normally retained by the annuity provider and cannot be passed on to beneficiaries. If they can be passed to beneficiaries it is normally restricted to a spouse.
If for any reason you expect your life expectancy to be impaired (i.e. you are a smoker or have an existing illness) you may be able to purchase an annuity that pays you more because your life expectancy is shorter. If you purchase an annuity at an older age, you may get better annuity rates for the same life expectancy reason. However, you should consider carefully all the options as an annuity may not be suitable.
What do James Hay offer?
We offer flexi-access drawdown and have built up significant experience over the years. We do not offer annuities, these are normally offered by life insurance companies.
Read more about your options for accessing your pension through us here.
Your income retirement options at a glance
|#||Tax free cash?||Regular income?||Is my income secure?||Can I run out of money?||Will my money remain invested?||Can it be passed on to beneficiaries?|
|Flexi-access drawdown||up to 25% of the fund||Yes||No||Yes||Yes||Yes|
|Annuity||up to 25% of the fund||Yes||Yes||No||No||No|