Pension possibilities

6 November 2009 9:37 am

Emma Duncan Best Advice

I will be 50 in January 2010 and have a Sipp fund worth about £1m. I am aiming to reduce my work/earnings over the next five years and want to know what the options are with my pension?

You are currently able to take your pension benefits from the age of 50 and the options give lots of flexibility to take tax-free cash and income depending on your needs. However, from April 2010, the minimum retirement age is rising to 55 (except in certain specified circumstances).

This means that in your case you will be able to “take the benefits” of your pension between your birthday and April 5 but if you do not take them during this window you will then have to wait until you reach the age of 55.

One option would be to take your maximum tax-free cash sum and purchase an annuity with your remaining fund before April 5, 2010. However, at such a young age, the annuity rates may not be favourable to you. This option would also mean you would be taking full income immediately when it may not be required as you have stated that you intend to reduce your work rather than stop altogether.

Another option would be to withdraw a section of your pension fund and use a portion of this to pay a lump sum as part of your tax-free cash allowance and the remainder of this section of the fund to buy an annuity. This would give you a lump sum and a guaranteed income to see you through the next five years while leaving part of your pension fund intact to take after you reach age 55, hopefully benefiting from investment growth in the meantime.

The other possible option is to use your pension fund to go into unsecured pension or drawdown. This is basically where you take the maximum tax-free cash from your pension fund and take an income directly from the remaining fund while leaving that part of the fund invested within a pension policy. You can then select the amount and timing of the income you take based on your circumstances each year. There are limits to the amount of income but the minimum is nil and the maximum is greater than the annuity you are likely to be able to purchase.

The main thing to bear in mind using this route is that only money you have already placed in USP prior to the age change will be available before you reach age 55, so you do not have the option to move more of your fund across or take any more tax-free cash during the intervening years. You can use the USP route for only a prop-ortion of your fund if you want.

Based on your likely requirements for income, we can work out how much of your fund you should place into USP in order to ensure you have the ability to take the income if you want/need to. But if you do not need the income, you can leave your fund to benefit from potential tax-efficient growth over the years.

When you reach the age of 55, you can then decide on what to do for the future. You will be able to continue with USP (and take more of your fund in this way) if you want or you could buy an annuity to secure your future income.

The point here is that when you reach the age of 55, you can decide what to do based on your circumstances at that time rather than having to make decisions at age 50 without knowing how the next few years will pan out.

Emma Duncan is a director of Thameside

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