Taking money from a SIPP
You can draw benefits from your pension at age 55 (rising to 57 by 2028) and you now have much more flexibility in how you can do this.
You can take out as much of your pension pot in cash as you want and the first 25% you take is tax free.
You can either:
Generating an income from your retirement savings
There are 3 main ways to draw an income from retirement savings and most people are likely to use a combination of these.
Buying an annuity – your retirement savings can be used to purchase an income stream for either a defined period or for the rest of your life, depending on the type of annuity you buy. This gives you a steady income to cover your essential costs.
Capped Drawdown – if you had already entered capped drawdown before 6 April 2015 this can continue as long as you don’t exceed 150% of the Government’s Actuarial Rates (GAD).
Flexi-Access Drawdown (FAD) – this allows you to keep your pension savings invested in your SIPP and take an income. Assuming that you have already drawn your tax-free cash, all income from FAD will be taxed at your marginal rate. You can draw whatever level of income that you want, and alter it from year to year. As your pension savings remain invested their value may fall as well as rise, and this can impact the level of income available to you. If you were in Flexible Drawdown before 6 April 2015 you will be automatically moved into FAD.
Withdrawing all of your pension savings
Uncrystallised Fund Pension Lump Sum (UFPLS) - this is the biggest change under the new pension freedoms.
This means you can withdraw one or more lump sums from your pension without the need to set up an income with the remainder. The first 25% will be tax-free, with the remainder taxed as income at your highest rate. Whilst it gives you a great deal of flexibility you need to consider the tax impact of taking UFPLS. Since 75% is taxable, if you have a large pension pot you may find yourself paying top-rate tax. If you draw the sums over a number of years you may be able to minimise the amount subject to top-rate or even higher rate tax. This can make a big difference to the amount of tax you pay in total on your pension savings.
While UFPLS may appeal, and it certainly provides flexibility, if a SIPP represents your main pension savings you need to consider how you’ll provide the income you need to live off in retirement.