Guide to accessing your pension

One of the main advantages of a Self-Invested Personal Pension (SIPP) is the flexibility this kind of pension scheme offers when choosing how to access your pension. Since 2016, the UK government made it easier for investors to access their pension when they reach age 55, providing multiple ways this can be done to suit the goals and circumstances of the individual. Here, we will take you through your options when accessing your pension, and help you to understand the different different options once you reach your 55^th birthday (this will raise to age 57 from April 2028),  whether you choose to continue to work or not.

If you would like further assistance in deciding the best option for your retirement, you can get guidance through the Government’s free impartial service MoneyHelper. You can do this by visiting their website or via a telephone appointment on 0800 011 3797. You can also arrange a meeting in person via your local Citizens Advice Bureau. For full FCA regulated advice you should seek the assistance of a licensed and regulated financial adviser.

Some guidance on terminology

You may notice that pensions are often referred to as being either ‘crystallised’ or ‘uncrystallised’. The difference is straightforward but can be confusing if you have not come across these in the past. In basic terms, a crystallised pension is one that you have started to cash-in – in other words, you are accessing your benefits. An uncrystallised pension is the opposite of this. It is the term used to describe a pension fund that hasn’t been cashed in by either a drawdown or an annuity.

Your options – Lump Sums

One of the new rules introduced in 2016 was to allow savers to access part or all of their pension as a lump sum after the age of 55. Under these rules you are able to take up to 25% of your fund as a lump sum completely tax-free (Otherwise known as a Pension Commencement Lump Sum or PCLS). You then have 6 months to decide how to start taking the remaining amount. This remaining 75% will usually be subject to income tax and the level of tax you pay will depend on your personal circumstances. Of course you don’t have to take a lump-sum at all, in which case your 25% tax-free amount will be included in any smaller chunks you access.

Drawdown Pension

You may designate uncrystallised funds into a flexi-access drawdown fund from which you can draw down any amount over whatever period you choose.

Your pension fund remains invested, and you draw an income from the fund. There is no minimum or maximum level of income (as long as you have the available pension funds), so you can elect to receive no annual pension if you wish or to draw it all in a single payment. You can choose to take a regular income and/or one-off pension payments to suit your individual circumstances.

By taking your benefits this way you can continue to pay into your pension fund, however you will be taxed on any contributions you make over £4,000 a year.

With a flexi-access drawdown fund it is also possible to buy a short-term annuity for up to 5 years. This will give you a regular income at a fixed amount during this period.

Lifetime annuity

Purchasing a lifetime annuity involves passing the value of your SIPP to an insurance company of your choice who in return will provide you with a regular, taxable income throughout your life. The annuity available will depend on the value of your fund and the annuity rates at the date of purchasing the annuity. The annuity income may increase each year; may be guaranteed (i.e. paid irrespective of whether you are alive) and may continue, normally at a reduced level, to your surviving spouse, civil partner or dependant.

If an annuity is purchased you will cease to have any involvement with the investment of your pension fund. This may be a price worth paying if security of income is important to you.

Summary

SIPPs offer not only greater flexibility and control over how you invest and manage your pension, but also how you access your pension after the age of 55. For further information on your SIPP and your options in retirement you should consult the Key Features document for your iSIPP.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.