Options at retirement
You do not have to retire from work to take benefits from your SIPP. Under current government legislation you can begin taking benefits at any age between 55 and 75.
In a SIPP you have a number of benefit options including:
- Taking up to 25% of your fund as a tax fee lump sum and using the rest to provide a taxable income.
- Taking income (and tax free lump sum) in stages, known as “phased retirement.”
Income can be taken in the form of:
- Unsecured Pension (USP)
- Annuity (Secured Pension)
- Alternatively Secured Pension (ASP), if you are 77 or over.
Tax free lump sum
Part of your pension (up to 25%) can normally be taken as a tax-free lump sum, also known as a Pension Commencement Lump Sum (PCLS). You can choose to take a tax free lump sum any time between age 55 and 75, regardless of whether you then choose to take an income from the remainder of your pension fund.
Income options
Regardless of whether you have chosen to take a tax-free lump sum, you can elect to receive a taxable income from your pension fund at any point between age 55 and 77. Once you reach age 77 you are required to take at least a minimum level of income.
Between age 55 and 75 you can choose to take your benefits in stages (both income and tax-free lump sum). This is known as phased retirement. You can choose how much of your current fund you use to provide benefits at each stage.
The available income options are as follows:
J.P. Morgan SIPP – Unsecured Pension (USP)
Available at any time from age 55 to 75, an unsecured pension is an alternative to buying a lifetime annuity when you choose to take benefits. Whereas with an annuity, you are required to sell your investments to fund the annuity, with an unsecured pension, you take an income from your invested pension fund. Under new government regulations, you can continue to hold an unsecured pension until you are 77 before making a decision to move in an Alternatively Secured Pension (ASP) or purchasing an annuity.
There is no minimum income level, but the maximum amount of income you can take is subject to government restrictions. All pension income is subject to income tax.
Advantages of USP:
- With USP, your pension fund remains invested, and therefore has the potential to still reap investment growth, while you can also draw income directly from your assets.
- You keep control of your investments. You continue to manage your pension fund and make all the investment decisions.
- It may be possible to increase your income later in life if your pension fund benefits from a good level of investment returns and/or is not drained by excessive income withdrawals.
Risk factors:
- Conversely your pension fund will remain subject to fluctuations in the market which may mean your income levels are reduced.
- The cost of purchasing an annuity changes over time, so if you do decide to subsequently purchase an annuity, it could cost more or less than if you had bought it earlier.
- The value of investments and the income from them can fall as well as rise and you may not get back the original amount invested.
Annuities
Available at any time from age 55, a lifetime annuity converts your pension fund into taxable pension income which will be paid to you for life. They are usually provided by insurance companies. The amount of income is fixed and secure once set up so annuities may suit those who are comforted by the fact their income will never run out. However, because the income is fixed you should take care when choosing your options – once an annuity is set up you can’t change your mind.
There are a number of different types of annuity available which allow you to take into account any requirement you may have for a spouse’s pension and whether you want your income level to be linked to inflation year on year.
You should note that some annuity providers offer higher annuity rates to people who are suffering from various medical conditions or who have health limiting lifestyles. If you smoke, take medication for a medical condition or have been hospitalised in the past five years you could receive a larger pension from an annuity provider.
J.P. Morgan Asset Management do not currently offer an annuity service but you can choose to transfer out to an annuity provider of your choice.
If you wish to find out how much you may be entitled to from an annuity, you can use the online annuity planner available on The Pensions Advisory Services (TPAS) website. This is a free and independent service providing information on your options based on your own circumstances and requirements.
J.P. Morgan SIPP – Alternatively Secured Pension (ASP)
Once you reach age 77 you can choose whether you want to purchase an annuity or switch into an Alternatively Secured Pension (ASP).
The main difference between an unsecured pension and an alternatively secured pension is that you must take a minimum level of income with an ASP. There are also some additional restrictions on who can receive benefits from your pension in the event of your death.
Otherwise with an ASP you continue to retain investment control while receiving an income just like with an USP.
Risk factors:
- The value of investments and the income from them can fall as well as rise and you may not get back the original amount invested.