Benefits
Benefits may be taken from the SIPP at any age from 55 to 75 (expected to increase to age 77 in 2011) and there is no requirement to stop working.
The SIPP is designed to provide flexibility for phasing retirement and is ideal for those who wish to gradually ease out of business. The maximum tax exempt pension fund an individual is entitled to is limited to the “Lifetime Allowance”. Currently this is set at £1,800,000 for the years 2010/11 to 2015/16. If combined pension arrangements exceed this figure, the excess is subject to a Lifetime Allowance tax charge of 55%. Alternatively, the excess can be drawn as a pension which is subject to income tax, in which case the up-front Lifetime Allowance Charge is 25%.
Responsibility for the Charge is jointly between the pension scheme Administrator and the individual and is payable from the pension fund, but must be reported via the individual’s self-assessment tax return. HD Administrators LLP will provide the individual with a computation of the charge deducted.
Some individuals will have been able to protect a fund in excess of the Lifetime Allowance. In these cases, HD Administrators LLP will need to be informed accordingly.
Up to 25% of the accumulated fund can be taken as a tax free cash lump sum. If this is not taken by age 75, the entitlement to tax-free cash is lost. The remainder will then be used to provide a pension, which is subject to income tax. In some cases where the individual has entitlement to “Enhanced” or “Primary” Protection, or where the SIPP received a transfer from another arrangement as part of a bulk transfer (i.e. two or more individuals transferred at the same time), the tax free cash may exceed 25% of the fund.
The remainder of the fund will be used to provide a pension, subject to income tax. This pension income can be paid either by converting the fund to an annuity with an insurance company, or by being paid from the HD SIPP fund as income withdrawal (also known as Unsecured Pension), while the balance of the fund continues to be invested according to your wishes. This can continue until age 75.
The level of pension paid via an annuity is determined by the specific terms of the annuity and annuity rates at the time it is purchased. There is a wide range of annuity types and terms to choose from.
The level of retirement income withdrawal from the pension fund can vary each year from a maximum of 120% of the amount determined by the Government Actuary’s Department (GAD) annuity rate and zero. Alternatively, the individual can use their fund to purchase an annuity with an insurance company at any time. The level of income withdrawal is reviewed every five years when the maximum is re-set and is determined by the fund value and GAD annuity rate at the time.
Pension income withdrawal from the pension fund can continue until age 75, with the maximum level being reviewed every five years.
By age 75, in most cases you will need to have converted your remaining pension fund to an annuity. There is an alternative known as “Alternatively Secured Pension” (ASP), which is a form of income withdrawal, but this is only appropriate in very few specific cases and you must take detailed advice before considering this. In the vast majority of cases, receiving ASP will result in very substantial tax charges applying to your remaining fund when you die, unless you nominate the fund to be paid to a registered charity. For more information on what this might mean to you please contact your financial adviser.
The HD SIPP is very flexible
- At retirement not allthe benefits have to be taken at once
- During phased retirement the largest part of the fund remains in a tax free environment
- There is no requirement to purchase an annuity with an Assurance Company at any time
- Death benefit lump sums are normally paid free of inheritance tax
Benefits Available on Death
On Death before drawing retirement benefits
Where no retirement benefits have been drawn from the plan, the whole fund consists of “uncrystallised” benefits. The whole fund can therefore be paid as an inheritance tax free lump sum to the nominated beneficiaries. Please note; depending upon the liquidity of the investments held within the SIPP, payment of death benefits can take up to 2 years to be paid. The lump sum is subject to a test against the Lifetime Allowance, and a lifetime allowance charge may therefore apply.
As an alternative, the balance of the fund can be paid as a dependant’s pension provided there are dependants available. This is subject to income tax.
A dependant’s pension can be paid either by purchasing an annuity or by income withdrawal as described above. For a plan in phased retirement, only the unvested portion can be paid tax free. The vested portion is treated as outlined below.
If you become ill and unable to continue working, the HD SIPP can pay ill health early retirement benefits, or serious ill health benefits
Death after drawing retirement benefits - pre age 75
If the deceased was receiving income withdrawal from the fund, the residual fund can either be paid as a lump sum to the nominated beneficiaries less a flat rate tax charge of 35%, or a dependant’s pension. On death of the dependant, the remaining fund can provide a payment of the remaining fund as a lump sum to their nominated beneficiaries, subject to a 35% tax charge.
Death after age 75
In nearly all cases an annuity will have been purchased by age 75 and the terms of the annuity will determine whether there is any payment on death (such as a spouse’s pension or remainder of a guarantee period). If an Alternatively Secured Pension is being paid, the remaining fund is either paid to a nominated charity or assessed for tax at up to 82%, and can then be transferred to other nominated HD SIPPs.
