This type of pension, available to both employed and self employed people, is designed to build a fund to produce an income upon retirement. Benefits can usually be taken from age 55, including while you are still working. Contributions, which can be made net of basic rate tax are invested to build an investment fund. Higher rate and additional rete tax payers can claim back the higher relief through their tax returns. When the pension is vested, part of the accumulated fund (up to one quarter) may be taken as a tax-free cash lump sum with the rest being used to ‘buy’ an income (see Income in Retirement).
Self Invested Personal pension (SIPP)
A SIPP is a special type of personal pension, which allows you to have a greater involvement in the running of your pension and offers a much wider choice of where to invest your pension savings. The costs may be higher to reflect the greater flexibility this product provides.
Stakeholder Pensions (SHP's)
SHP's have been available since April 2001. In many ways similar to personal pensions, these are designed to have low charges and extreme flexibility. For a pension to be classified as a SHP it must met standards laid down by the government.
Income in retirement
An annuity is simply a series of income payments made at selected intervals in return for a pension fund. The level of income is dependent upon your age, the prevailing annuity rate, size of fund and the options selected.
It may be the case that your existing pension provider does not offer the most competitive annuity rate for the type of annuity you require. To this end, it is always recommended that a full comparison of annuity rates available on the open market is undertaken at the point of purchasing an annuity. This is known as an Open Market Option. It is also possible to receive enhanced annuity rates for certain lifestyle and medical conditions.
The annuity payments are guaranteed until the annuitant’s death. These are paid net of basic rate income tax, which is deducted at source. Any higher rate income tax would be payable via your tax return in the usual way.
The highest level of payments can be secured with the purchase of an annuity that is not guaranteed and based on the annuitant’s life only. This means that on the annuitant’s death, the payments will cease immediately. Alternatively, the annuity payments can be guaranteed for a fixed period (say) five years. In the event of the annuitant’s death during that period a lump sum equal in value to the remaining gross annuity payments for the balance of the period will be paid to the annuitant’s estate.
It is possible for the annuity payments to increase in payment eg in line with inflation or at a fixed rate. A widow’s or widower’s pension can be provided and this would be payable at the predetermined level (usually 50%) following the death of the annuitant.
Fixed Term Annuity
A fixed-term annuity is set up for a specific period of time. You can take your full 25% PCLS at outset and you decide (within set parameters) how much income you wish to receive during that period of time. At the end of the term you receive your guaranteed maturity value that was fixed at outset. You can then use that value to either purchase another fixed-term annuity, a guaranteed lifetime annuity or other way to draw a retirement income.
This is a flexible facility whereby the pension plan may be divided into segments which may be individually ‘encashed’ to provide a combination of tax-free cash lump sum and annuity, benefits can usually be taken from age 55.
New flexibility has been brought to pensions by the Taxation of Pensions Act 2014. Anyone aged 55 or over is now able to draw funds directly from their money purchase pension fund with no upper limit. 25% of the fund will normally be available as Tax Free Cash, with any income from the remaining 75% being subject to income tax in the tax year in which it’s taken. This approach is known as “Flexi-Access Drawdown”.
The effective requirement to buy an annuity by age 75 was removed from the 06th April 2011.
This summary in no way constitutes a complete explanation of the pension products detailed above, or how they may suit you. For further details of pension plans and how these may help your personal circumstances, please seek independent financial advice.
The Financial Conduct Authority does not regulate taxation advice.
The value of investments can fall as well as rise and you may not get back the original amount invested