Are you benefiting from the
FLEXIBILITY OF A SIPP?
With 17% of the current population expected to live to age 100 and receive a royal telegram there is an ever increasing focus on pension provision in the UK. Three million of the population who are expected to live until the age of 100 are currently under 16 years of age.
This is great news but how can people ensure that they enjoy these later years by having a sufficient income in retirement? SIPPs or Self Invested Personal Pensions to give them their full name could provide the answer.
There are many benefits of SIPPs with three of the key ones being:
- Tax relief on contributions
- Investment flexibility
- Income flexibility
From 6 April this year the rules governing pension contributions have been simplified. Depending on earnings, individuals can contribute up to £50,000 gross (known as the annual allowance) and receive tax relief at their marginal rate. This continues to make pensions one of the most tax efficient investment vehicles available to UK individuals. The table below illustrates how much an individual can contribute and the tax relief available.
* tax relief available at an effective rate of 60% due to personal allowance being clawed back
Another great advantage of pensions is that non earners, including children, can receive tax relief on contributions up to £3,600 gross each year – meaning a contribution of £2,880 is topped up with £720. Many non-earners, including children, are not in a position to contribute to a pension but may not realise that a third party (partner, parent or grandparent) can make contributions to their pension, and the payment still benefits from tax relief. A growing number of Alliance Trust Savings customers are making payments to Child SIPPs.
New carry forward rules
The tax relief available on contributions and the fact that Capital Gains Tax does not apply to pensions makes saving for retirement a very attractive proposition for tax efficient investors. From 6 April this year the Government has introduced another incentive – known as carry forward. This means you can carry forward any unused annual allowance from any of the three previous tax years. Some individuals will therefore be able to contribute much more than £50,000 gross this tax year.
One of the main reasons for the SIPP boom over the last 10 years is due to the investment flexibility that they offer. Our Select SIPP offers access to over 4,000 investments including:
- Investment companies
- Gilts and other fixed interest investments
With life expectancy continuing to improve, many individuals are looking for more flexible ways to draw an income from their pension. Traditionally, individuals have bought an annuity at their retirement and for many this may still be the most appropriate thing to do. However, a growing segment of the market is taking a more gradual approach to retirement, and is looking for a pension that can support this approach. Our Select SIPP offers:
- Drawdown Pension (also known as Capped Drawdown) and;
- Flexible Drawdown
Drawdown Pension allows individuals to take an income from their pension subject to an annual limit set by HMRC. An individual’s maximum income is recalculated every three years (or annually from age 75). There is no minimum income requirement meaning an individual can switch income on or off as they see fit which can help them manage any income tax due on the income withdrawn.
Flexible Drawdown on the other hand has no annual limit as to how much an individual can withdraw. However, this new option is only available to individuals who are in receipt of a secured lifetime pension income of at least £20,000.
With Drawdown Pension or Flexible Drawdown the pension remains invested, so will continue to be affected by investment performance. The value can therefore fall as well as rise, and can impact how much income an individual could receive. Taking income can reduce the value of the plan, especially if investment returns are poor and a high level of income is taken.
If you are unsure if Drawdown Pension or Flexible Drawdown is suitable for you, please obtain professional advice.
Our Select SIPP allows individuals to benefit from all of the tax advantages associated with a pension while offering great investment and income flexibility.
To find out more and to apply for a Select SIPP visit: www.alliancetrustsavings.co.uk/pensions
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