Our Drawdown Services
Contributed by SIPP Specialists Limited
09 May, 2013
Contributed by SIPP Specialists Limited [www.sippspecialists.co.im]
This leaflet is solely for the use of financial and other professional advisors; members of the public should not rely upon it
We have been asked to set out the Drawdown Services we can provide to Advisers and their clients. This is not meant to be a detailed technical breakdown of all the options, pros and cons, but we do have a detailed technical leaflet which provides all this should you require it.
Benefits can be taken from a SIPP at any time after age 55, and caution should be exercised with any arrangement which offers benefits before that age. However there is no compulsion to take benefits at this or any other age. It is also possible to take up to 25% of the fund tax free as a Pension Commencement Lump Sum (PCLS). When benefits are taken, including PCLS this is classed as a Benefit Crystallisation Event
What about the rest of the fund?
The balance of the fund is used to provide taxable income over the remainder of the members lifetime. This can be done in one of three ways:
- the member can keep the SIPP going, investing the assets accordingly, taking income each year out of the SIPP assets (either via Capped or Phased Drawdown), or
- provided the member has guaranteed minimum pension income (see later) of at least £20,000 per annum, they can opt for Flexible Drawdown and take as much income as they like from their SIPP, or
- an annuity can be purchased
An annuity can be purchased at any time so this means that the member can start to take benefits via income drawdown and then an annuity can be purchased at a later date. But note that once an annuity has been bought it cannot be unbought it it is a one way option.
How does Capped Drawdown work?
The member chooses the level of income each year within the following ranges:
- nothing i.e. no income at all, and
- 120% of the income they would receive if the SIPP fund was applied to what are called GAD rates. These are published by the Government Actuarys Department (GAD) and are broadly the rates that would apply if the member was to buy an annuity. They depend on age and 15 year gilt rates.
So if the member takes a tax free cash sum and lives off that, they may decide to take zero income for a few years.
The maximum amount which can be taken i.e. the 120% of GAD amount, must be reviewed at least once every 3 years (annually after age 75)
What is our fee for Capped Drawdown?
Our fee is £150 + VAT to do a review of the maximum pension available.
What is Phased Drawdown?
If the SIPP had a value of say £200,000, the member could choose to vest say half of it i.e. £100,000 and take £25,000 as a tax free lump sum. The other £75,000 would then be used for income drawdown and the residual £100,000 would be unvested.
After another year or two, the remaining £100,000 might have risen, with investment returns, to say £120,000. The member could then vest this £120,000 and take a further £30,000 tax free cash i.e. 25%, with the residual £90,000 being used for income drawdown. Under HMRC rules, when a second Benefit Crystallisation occurs, we as the SIPP Administrator have to recalculate, at that date, the new maximum drawdown pension that can be taken. This is done by adding together all crystallised funds and applying them to the current GAD rates.
This is called phased drawdown and can be a useful tool to take income, tax efficiently.
What is our fee for Phased Drawdown?
Our fee is £150 + VAT
What is Flexible Drawdown?
If the member has guaranteed pension income (effectively either from the State and/or an annuity and/or a guaranteed pension (e.g. from a Final Salary scheme) of at least £20,000 per annum, they can take as much pension via drawdown as they like in any year. They could even take the whole of their fund as drawdown income.
We would obviously need evidence of the guaranteed pension income.
Is the income taken under Flexible Drawdown taxed?
Yes, the income received under drawdown is subject to income tax at their marginal rate.
What is our fee for Flexible Drawdown?
Our fee is £250 + VAT
What happens on death in drawdown?
There are three choices:
- The remaining SIPP fund can be used to provide drawdown or to purchase an annuity for the surviving spouse and any other financial dependants, or
- 45% of the SIPP fund can be paid out to dependants or any other party as a lump sum. The other 55% is paid out as a tax charge.
- The remaining SIPP fund can be paid out to a pre-nominated charity, with no tax payable.
A combination of the above is possible e.g. 20% could be paid out tax free to a pre-nominated charity and 80% to dependants etc.
What are the pros and cons of drawdown?
The SIPP is kept open and remains invested. So the IFA will need to give ongoing investment advice. The member draws income each year out of the assets of the SIPP. This means that the member retains total control of their SIPP fund.
There are some major advantages:
- Retaining control of the investments.
- The member can choose within a wide range the level of income each year (see below).
- The member also retains some control of capital on death, unlike an annuity
There are also some disadvantages:
- The SIPP assets may not be able to provide an adequate income level if the member lives a long time.
- If the value of investments within the SIPP falls in value, this may erode the fund and affect the amount of income the fund can generate.
- There are the regular ongoing administration costs of the SIPP.
- Mortality Drag.
How does an annuity work?
In essence, the whole or a part of the SIPP fund is passed to an insurance company and in return they will pay an annual income for the remainder of life. The level of income will be fixed each year (or will increase with an inflation adjustment if the annuity is purchased on that basis).
Income must be received each year, but the member can usually choose to receive it monthly, quarterly, half-yearly or yearly and it can be in advance i.e. it is paid at the start of the month, quarter or year etc., or in arrear i.e. at the end of the month, quarter or year.
Is the income payable under an annuity taxed?
Yes, the income from the annuity will be subject to income tax.
What is our fee for an annuity purchase?
Our fee is £300 + VAT
Do all SIPP Providers offer all options?
No. Quite a few do not offer Flexible Drawdown. However we offer all options.
Do we provide any technical support?
Whilst we cannot advise which option may be best for a client, we provide full technical support. This includes calculations, including what if calculations.
Please note there are significant risks associated with this decision and this can affect the value of future income. This document is for information only and should not be construed as advice.
Oaklands Business Park, Hooton Road
South Wirral, Cheshire CH66 7NZ
T: 0151 328 0594, F: 0151 328 0707
SIPP Specialists Limited - Registered in England and Wales Registered No 4845017
Registered office: Montrose House, Clayhill Park Neston CH64 3RU
Sipp Specialists is not regulated to give advice. The information provided in this communication is based on our understanding of the current legislation governing pensions.
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