SIPP holders can take an income from their pension between the ages of 55 (as of April 2010) and 74, provided they have enough funds in their pot.
Upon retirement, 25% can be taken as a tax free lump sum and the remainder used to provide an annual or monthly income, which is subject to income tax. This can be done by purchasing an annuity as a form of secured income from an insurance company, or drawn from the SIPP, the alternative is called income drawdown.
What is Income Drawdown?
Income drawdown, also known as an unsecured pension (USP) or pension fund withdrawal, is where the remainder of the pension fund (savings minus 25% withdrawn as tax free lump sum) is left invested and used to provide an income from the SIPP.
One of the major advantages of income drawdown is that it offers greater flexibility. Unlike an annuity where the income is set, investors can take a different amount of income each year, and also which investments the income is drawn from which can be on an annual, half yearly, quarterly or monthly basis. Those who choose income drawdown over an annuity are also offered a wider range of death benefits.
For example, in the event that the holder dies before the age of 75, the reminder of the pension fund can be passed to a nominated beneficiary (with a tax charge).
For example, a surviving spouse or dependant(s) can take a lump sum death benefit of the remaining cash in the pension fund (minus a 35% tax charge), or a surviving spouse or dependant(s) can continue the income drawdown and make regular withdrawals.
lternatively, an annuity can be purchased for the spouse or dependant using the remaining funds.
However, once a person reaches the age of 75 they must use the remaining value of their plan to purchase an annuity, transfer the pension fund into an Alternatively Secured Pension, or a combination of the two.
What is an Alternatively Secured Pension?
Alternatively Secured Pensions (ASPs) are a form of income drawdown for people aged 75 and over. With an ASP, the holder continues to invest their savings and takes an income from the fund, in a similar way as USP. But there are some different rules between the two:
The maximum amount that can be withdrawn as an income is around 90% of a single-life lifetime annuity and the minimum is 55%. These limits are reviewed every year.
In the event of the death of the ASP holder, any remaining invested fund value must firstly be used firstly to provide for any financial dependants’ pension – for example an alternatively secured pension for a spouse, civil partner or dependant over the age of 75, or an unsecured pension for someone under 75, or a pension annuity.
After this any remaining funds can be passed on to a pre-selected charity fee of tax. If no charity has been chosen the surplus can go towards the death benefits of other members, including family members.
Any remaining funds used for the benefit of a spouse, civil partner, or financial dependant, are free of inheritance tax (IHT).However, if on the subsequent death of the ASP holder there are still unused funds remaining, those funds will be taxed for IHT as if they had formed part of the original pensioner’s estate on death.
What happens to my SIPP when I die?
There are two things that can happen when a SIPP holder dies. If that person passes away before they are able to draw any benefits from their pension pot, then the money will be paid out as a tax-free lump sum to their chosen beneficiary.
If the holder has already drawn down some of the tax free cash and income from the SIPP then inheritance tax will be charged if applicable and the remaining funds will be paid to the beneficiary.