Since pension freedoms, there are more ways to access your retirement savings
Thanks to pension freedoms, which were first announced in 2014 by the UK Government, anyone aged over 55 can access their pensions flexibly, rather than simply buying an annuity or taking it as one lump sum. The first 25% is tax-free while the rest is taxed at the individual’s marginal tax rate.
Pension freedoms only apply to private pensions like SIPPs, and not to the state pension. Pension freedoms also don’t apply to defined benefit pensions, where you’re paid a portion of your final salary.
With pension freedoms also came more personal responsibility. It’s more important than ever for retirees to be up-to-speed with the different options when it comes to accessing a pension. As retirement savings need to last for the remainder of your life, it’s essential that pensions are accessed tax-efficiently and sensibly.
Drawdown keeps your pension invested whilst providing you with a retirement income as and when you need it (plus an additional option of a lump sum). You can take money from your pension as soon as you hit 55; but from 2028, the age is going up to 57 years old. You’ll be entitled to a maximum tax-free sum of up to 25% of the value of your pension, with the remaining fund paid to you like a wage. Other than the 25% tax-free sum, your pension income is taxed when you withdraw money from it.
The new pension freedom rules introduced in 2015 introduced an alternative form of drawdown, which focuses purely on lump sums. It’s referred to as taking an uncrystallised funds pension lump sum (UFPLS), or a ‘FLUMP’ as it’s known in industry circles. In this method, each lump sum payment that’s drawn down will be 25% tax free, with the remainder subject to income tax at your marginal rate.
Before pension freedoms, people commonly chose to purchase an annuity with their pension. Purchased from an insurance company, an annuity works by paying you a fixed sum of money for the rest of your life from your pension pot. You can’t change your mind after deciding to withdraw your pension as an annuity, so there’s less flexibility than with a FLUMP. The amount of income you receive with an annuity will depend on how much you have in your pension pot and your circumstances.
You’re not limited to one method when it comes to accessing your pension. Often retirees choose to ‘mix and match’ how they withdraw from their pension pot. For example, you may choose to use part of your retirement savings to purchase an annuity, allowing you to receive a small and steady income to pay for regular outgoings. In the meantime, you can keep the remainder invested so you can drawdown when you need it.
There are two types of SIPPs you can open with Selftrade. The Selftrade SIPP is a complete service that includes administration and trustee services provided by Gaudi Regulated Services Ltd, Selftrade’s partner. The annual administration fee is a low £118.80.
The other option is to choose a provider, from our panel of over 70 SIPP providers. Annual administration fees for our SIPP Panel Partners typically start at around £200 per year.
Selftrade also charge a low flat quarterly custody fee of £17.49 for assets held in a SIPP, which can be offset by online dealing commission fees. Full pricing details can be found here.