Question
I do not have a SIPP at the moment but I am interested in what they offer. A lot of the press coverage has related to the freedoms afforded by flexible drawdown. However the majority of people will be restricted to capped drawdown I will almost certainly be one of these if I eventually go ahead and succumb to a SIPP.
I am unclear about how much flexibilty capped drawdoen will offer. People often suffer an income shortfall between ages 60-65 and it will be nice to take more income during this time. How does it work from year to year and how easily can changes (subject to the cap) be made?
Answer
The recently amended rules on how you can take an income from your pension have effectively scrapped the requirement to buy an annuity (i.e. swap your pension fund for an income for life) by age 75. The previous rules did technically allow this anyway, but the new rules are a bit simpler.
If you'd prefer not to buy an annuity - perhaps you think rates are currently unappealing or that you won't live long enough to get value for money - then the alternative is to leave your pension fund invested and draw a regular income instead - commonly called 'income drawdown'.
You can start drawing an income from age 55, with the option to take up to 25% of the fund as a tax-free cash lump sum at that time (generally a good idea). The income drawn can be between £0 and the amount you'd get from a single life level annuity, as calculated by the Government Actuary Department (GAD) - this is the capped drawdown you refer to. And if you want any remaining fund to buy an annuity at a later date you can.
If you receive at least £20,000 annual income for life (via state/other pensions) then you can take as much income as you want, i.e. 'uncapped' drawdown.
The only difference on reaching age 75 is that the equivalent annuity calculation (which determines the maximum income you can draw) must be carried every year - before then it's every 3 years.
Income drawdown is flexible, you can alter income payments (within the limits), although pension providers might charge an admin fee for doing so. But unless you have sufficient income to make uncapped withdrawals, you'll be limited to the equivalent annuity so not very helpful if you want to withdraw a lot of income for a few years (e.g. between 60-65).
Whether or not you use a SIPP in conjunction with drawdown is less relevant. SIPPs are popular for this purpose because income drawdown only tends to be worthwhile on larger pension funds (drawdown usually incurs some extra fixed charges and requires more effort/advice). And if you have a larger pension fund you'll probably be attracted to the investment choice offered by SIPPs. But income drawdown is available via more humble pensions too.
Another motivation for leaving a pension invested might be to pass it onto your spouse or offspring (assuming you're wealthy enough not too need it yourself). However, unless it's used to provide a taxable income for dependents, the fund will be taxed at 55% when paid out.
I do not have a SIPP at the moment but I am interested in what they offer. A lot of the press coverage has related to the freedoms afforded by flexible drawdown. However the majority of people will be restricted to capped drawdown I will almost certainly be one of these if I eventually go ahead and succumb to a SIPP.
I am unclear about how much flexibilty capped drawdoen will offer. People often suffer an income shortfall between ages 60-65 and it will be nice to take more income during this time. How does it work from year to year and how easily can changes (subject to the cap) be made?
Answer
The recently amended rules on how you can take an income from your pension have effectively scrapped the requirement to buy an annuity (i.e. swap your pension fund for an income for life) by age 75. The previous rules did technically allow this anyway, but the new rules are a bit simpler.
If you'd prefer not to buy an annuity - perhaps you think rates are currently unappealing or that you won't live long enough to get value for money - then the alternative is to leave your pension fund invested and draw a regular income instead - commonly called 'income drawdown'.
You can start drawing an income from age 55, with the option to take up to 25% of the fund as a tax-free cash lump sum at that time (generally a good idea). The income drawn can be between £0 and the amount you'd get from a single life level annuity, as calculated by the Government Actuary Department (GAD) - this is the capped drawdown you refer to. And if you want any remaining fund to buy an annuity at a later date you can.
If you receive at least £20,000 annual income for life (via state/other pensions) then you can take as much income as you want, i.e. 'uncapped' drawdown.
The only difference on reaching age 75 is that the equivalent annuity calculation (which determines the maximum income you can draw) must be carried every year - before then it's every 3 years.
Income drawdown is flexible, you can alter income payments (within the limits), although pension providers might charge an admin fee for doing so. But unless you have sufficient income to make uncapped withdrawals, you'll be limited to the equivalent annuity so not very helpful if you want to withdraw a lot of income for a few years (e.g. between 60-65).
Whether or not you use a SIPP in conjunction with drawdown is less relevant. SIPPs are popular for this purpose because income drawdown only tends to be worthwhile on larger pension funds (drawdown usually incurs some extra fixed charges and requires more effort/advice). And if you have a larger pension fund you'll probably be attracted to the investment choice offered by SIPPs. But income drawdown is available via more humble pensions too.
Another motivation for leaving a pension invested might be to pass it onto your spouse or offspring (assuming you're wealthy enough not too need it yourself). However, unless it's used to provide a taxable income for dependents, the fund will be taxed at 55% when paid out.
Read this Q and A at http://www.candidmoney.com/questions/question519.aspx
QROPS is one amongst those rare organizations that area unit going giving solutions for the those who area unit willing to pick the financial gain and pension plans.
ReplyDeleteThanks...
Thanks for updating us with this nice and relevant information as we are also working with qrops pension. So this info. will be very helpful for me. Also congratulations on your achievements.
ReplyDelete