SIPP - Self Invested Personal Pension

Unsecured Pension
This is also known as income drawdown and lets you invest money into the pension fund whilst withdrawing the tax-free lump sum and using your fund as a source of taxable income. This option is available to everyone below the age of 75. Once this age has been reached, you have to purchase an annuity or transfer to an Alternatively Secured Pension which will be explained below.

You must be aware that your fund is still at the mercy of the markets and could fall in value. Any withdrawals you make will obviously reduce the balance of your fund which will also suffer from extra fees. Therefore, only those with a minimum of £100,000 should even consider utilising this option. Should you withdraw too much money or else your investments fall in value, you may find that your fund is too small to sustain you through retirement. A prudent method of using income drawdown is to only withdraw the amount of interest/return on investment your fund yields.

Should the worst happen and you die before ending the drawdown phase, the leftover money will be used as a source of income for any dependents you may have. Alternatively, you can nominate someone to receive the full sum whereby they pay 35% tax on the money accrued.

The main reason why income drawdown is attractive to some investors is because of the potentially higher return on investment than on regular annuities though the risks are higher. You are allowed to withdraw as little cash as you like with an income drawdown. Once you elect to take a lump sum of tax free cash however, you will be subject to certain Revenue & Customs restrictions if you decide to place anymore money into your pension pot. For more information on that subject, contact a financial advisor.

Another option for anyone in income drawdown is to purchase short-term annuities. As long as they end before you turn 75, they can be bought with a five year term. Although the insurance company will pay the money directly to you, you still need to factor the money into your calculations pertaining to your maximum allowed income level from an unsecured pension. Once this term is up, your annuities will have zero value.

Spreading It Out
If you don’t like the idea of changing all your pension fund into annuities or income drawdown there is always to options of dividing up the money into increments. You can convert your pension using as many segments as you like where you will benefit from multiple tax-free payments and an ever-improving income until your entire pension fund has been converted.

An Alternative Approach
An Alternatively Secured Pension (ASP) is an option for those who don’t wish to purchase an annuity before the age of 75. It has similarities with income drawdown though it is specifically designed for people older than 75 and is also loaded with a higher level of restrictions. One example of this is the fact that an ASP will not pay you any lump sum of tax-free cash. If you are looking to withdraw a lump sum you must do so with income drawdown and before you reach 75.

You can take about 25% less from an ASP than you can from income drawdown at a maximum and 50% less as a minimum. This income will be reviewed annually and will always make the assumption that you are 75, irrespective of how old you actually are. Should you die while under the ASP banner your dependents will have the remaining money left to them as taxable income. If you have no dependents, a charity will receive the money and will not be charged inheritance tax.

If you haven't found all the answers that you are looking for you can find similar content in the Your SIPP sections, contact an adviser at the top of the page, or you could try these related posts:

		Income Drawdown This is also referred to as an unsecured pension. Income Drawdown is only available to individuals aged less than 75 and it allows a pension scheme member to continue...
		Income Drawdown / Unsecured Pensions Income drawdown, also known as an unsecured pension, is a riskier though potentially more rewarding alternative to lifetime annuities. Essentially, you are allowed...
		Income drawdown If you have a personal pension or a stakeholder pension and don’t want to purchase an annuity, one option open to you is an income drawdown arrangement or unsecured...
		Unsecured Pension This is another name for Income Drawdown and is an alternative to buying an annuity when you stop work. It will enable the holder to draw income from their investment...
		What Happens To My Pension Fund When I Die? Financial institutions offer various choices regarding what happens to your pension fund after you die. These articles provide advice relating to this important...