Options available when deciding to take pension benefits You can now use the money that has built up in your pension fund to provide you with an income in retirement. An income can be provided in any of the five following ways: 1. Buy an annuity from another provider. This is sometimes known as the open market option 2. Take limited income directly from your pension fund. This is called capped drawdown 3. Take unlimited income directly from your pension fund. This is called flexible drawdown 4. Take benefits from only a part of your pension and delay taking the remainder. This is called phased retirement 5. Taking smaller pension pots as a lump sum Buying an annuity from another provider An annuity is a financial product where you use all or some of your pension savings to buy a guaranteed income for the rest of your life. It is the most popular way people buy a retirement income and, if you have built up more than one pension pot, you can combine them into one annuity. Buying an annuity is a one-off decision that will set your income throughout your retirement and cannot be changed. The open market option When choosing to purchase an annuity you must decide which provider to buy this from. This is sometimes called exercising the open market option. Different annuity providers offer different annuity products and offer different annuity rates for the same type of product. The open market option allows you to choose the best annuity product for your needs. By choosing the right annuity product you could significantly increase the amount of income you receive in retirement. When purchasing an annuity using the open market option you can: Use all your pension fund to buy an annuity; or Take some of your pension fund immediately as a tax-free pension commencement lump sum, then use the remainder to buy an annuity. The amount you can take as a lump sum is usually up to 25%.
Types of annuity There are several different types of annuity that you can buy, each designed to suit different personal circumstances. If you plan to buy an annuity, you should consider the following questions: Are you married or do you have a partner or another dependant? Will they need an income if you die first? If so, you should consider a joint-life annuity, which continues to pay an income for both of your lives. Do you smoke? Are you on any medication or do you have a medical condition? If so, you may be eligible for an enhanced annuity, which could pay you a much higher level of income. Do you want your income to increase over time to help keep up with inflation? If so, you should think about an escalating annuity, which starts lower but increases over time, or adjusts to rise in line with inflation. There is a free online annuity planner at www.pensionadvisoryservice.org.uk which can help you answer these and other questions about which type of annuity is right for you.
Taking limited income directly from your pension fund Capped drawdown You can stop contributing to your pension fund and take some of your pension fund immediately as a tax-free pension commencement lump sum, then use the remainder to create a drawdown fund. The amount you can take as a tax-free lump sum depends on the remaining value of your lump sum entitlement, but is typically 25%. With a drawdown fund, your pension fund remains invested but you can take income directly from it. There are limits to the amount of income you can take each year. If you would like further information about capped drawdown please contact us. Taking unlimited income directly from your pension fund Flexible drawdown Flexible drawdown offers the same benefits as capped drawdown except that there are no limits to the income you can take each year. However flexible drawdown is subject to the following conditions: You must provide signed confirmation that you have at least 20,000 of guaranteed income from a secured pension elsewhere You cannot enter flexible drawdown in a tax year in which you have made contributions to a pension scheme If you choose flexible drawdown you must not make contributions to any pension schemes If you would like further information about flexible drawdown please contact us. You should speak to a financial adviser if you are thinking about choosing a drawdown product. Taking part of your benefits and delaying taking the remainder Phased retirement As an alternative to taking all your benefits in one go, you may decide to take benefits from only a part of your pension and delay taking benefits from the remainder. If you do so you can continue to make contributions to the part of your pension from which you haven t taken benefits. Your SIPP was originally established as a fund containing 1,000 units and you can decide to take benefits from any number of these units at any time from age 55. You can use any of the methods listed above to take benefits from this portion of your fund.
Taking smaller pension pots as a lump sum If the total value of all your pension savings is less than a value set by the government ( 18,000 in tax years 2012/13 and 2013/14), you may be able to take it all as a cash lump sum. If you wish to do this, you have to take all payments from all your pots within a 12 month period. If up to two of your pots is each less than a value set by the government ( 2,000 in tax years 2012/13 and 2013/14), you may also be able to cash each of them in, regardless of any other pension savings you have. If you think you might like to do this, please ask us for further details. What happens next? If you do wish to take your benefits, this is what will happen: You will need to decide how much of your pension you wish to take benefits from, decide whether you wish to take any available tax-free lump sum and choose the method you would like to use to receive benefits. For example, you might decide to take benefits from half of your pension fund, receive a taxfree pension commencement lump sum, and use the remainder to purchase an annuity. When making these decisions, you or your adviser can obtain details of the products and rates available, by contacting annuity providers directly. Once you have made your decision, you can contact us at any time and we will provide you with the forms that you will need to complete in order for you to take benefits using your chosen method. You may need to arrange the sale of some or all of the investments held in your SIPP so that there is sufficient cash to pay your tax-free lump sum and pension income to you. You may wish to consider selling these assets now, as the sale of some types of investment can take a long time, which could significantly delay the payment of benefits to you. Once you have completed and returned the forms required to take benefits by the method you have chosen, and sufficient cash has been made available to pay benefits to you, we will complete a valuation of your plan. This valuation can take between 5 and 10 working days to complete. Provided there are no other outstanding requirements, we aim to complete the payment of benefits to you within 3 working days of the valuation being completed. The lifetime allowance Whichever option you choose, your pension fund will be tested against your remaining lifetime allowance. In the 2013 tax year the standard lifetime allowance is 1,500,000. We strongly recommend that you take financial advice if your total pension savings exceed or are close to this amount.
A complete table of the lifetime allowances that have been announced by the treasury office and the tax years in which they apply is available from our website at the following address: www.suffolklife.co.uk/lifetimeallowance. Your lifetime allowance may be higher than this, if you have protection or some other enhancement. If your pension fund is in excess of your remaining lifetime allowance we are required to apply the lifetime allowance charge to your pension fund. If you have applied for transitional protection, please provide us with an original copy of your protection certificate.