Question
I need an income now. My SIPP pension has a value of approx. £500k. Is it a good option to take the 25% tax free over a period of time to be used as an income and draw a pension when the 25% lump sum has been cashed in? Or would it be a better option to start drawing a pension now and keep the 25% tax free option as a reserve for the future?Answer
When you take the tax-free cash lump sum from a pension it must be taken as a single one-off payment when you start taking benefits - i.e. when you buy an annuity or start drawing an income from your fund (often called 'income drawdown').
It is possible to stagger the payments over time if your pension is split up into many identical policies (called 'segmentation'). As each policy is effectively treated as a separate pension you can take benefits, hence the tax-free cash, from each policy at different times.
For example, suppose your pension fund is £100,000. You could take £25,000 tax-free cash and use the remaining £75,000 to buy an annuity or leave it invested and draw an income. If the pension were instead split into 100 identical policies you could take benefits from individual £1,000 segments (i.e. £250 tax-free cash with the balance used to buy an annuity) as you wish.
However, while flexible, segmentation is not very helpful if you need most or all of the income now, as you'll end up taking benefits (hence tax-free cash) from most/all of the segments straight away.
Given you need income now, then you'll have to take the tax-free cash now. I think your bigger decision is whether to buy an annuity with the balance or leave the fund invested and draw an income.
I won't cover all the pros and cons of each here (take a look at our annuities page for more info) but it's basically a gamble on whether future investment performance will leave you better off versus buying an income for life at a prevailing rate now.
I need an income now. My SIPP pension has a value of approx. £500k. Is it a good option to take the 25% tax free over a period of time to be used as an income and draw a pension when the 25% lump sum has been cashed in? Or would it be a better option to start drawing a pension now and keep the 25% tax free option as a reserve for the future?Answer
When you take the tax-free cash lump sum from a pension it must be taken as a single one-off payment when you start taking benefits - i.e. when you buy an annuity or start drawing an income from your fund (often called 'income drawdown').
It is possible to stagger the payments over time if your pension is split up into many identical policies (called 'segmentation'). As each policy is effectively treated as a separate pension you can take benefits, hence the tax-free cash, from each policy at different times.
For example, suppose your pension fund is £100,000. You could take £25,000 tax-free cash and use the remaining £75,000 to buy an annuity or leave it invested and draw an income. If the pension were instead split into 100 identical policies you could take benefits from individual £1,000 segments (i.e. £250 tax-free cash with the balance used to buy an annuity) as you wish.
However, while flexible, segmentation is not very helpful if you need most or all of the income now, as you'll end up taking benefits (hence tax-free cash) from most/all of the segments straight away.
Given you need income now, then you'll have to take the tax-free cash now. I think your bigger decision is whether to buy an annuity with the balance or leave the fund invested and draw an income.
I won't cover all the pros and cons of each here (take a look at our annuities page for more info) but it's basically a gamble on whether future investment performance will leave you better off versus buying an income for life at a prevailing rate now.
Read this Q and A at http://www.candidmoney.com/questions/question333.aspx
No comments:
Post a Comment