If you have benefited from the tax relief of SIPPs and have been fortunate enough to have seen your total investment grow as you approach retirement, you will obviously be keen to make the most prudent decision once your working days are over.
Although the state pension age is much higher, it is possible for pension savers to start taking pension benefits at the age of 55 and this is also the case with SIPPs. You can withdraw one quarter of your total pension sum all at once upon retirement and not have to pay a penny in tax. The remaining money is to be kept in the pension account and is considered to be taxable income. One option you have is to use your SIPP money to purchase an annuity. A lifetime annuity provides you with a guaranteed income each year for the duration of your lifespan. Another possibility is to simply withdraw money from your SIPP directly. The law states that all retirement benefits must be put in place by the time you reach 75.
Annuities For Life
As the name suggests and has already been partially explained, a lifetime annuity can be purchased to give you a guaranteed income. Investment linked annuities are risky but could also lead to a greater reward. Basically, your income depends on fund performance which could rise or fall. Conventional annuities are safer and allow you to decide how you want the interest rate to increase. You could set a guaranteed fixed amount, an increase each year or you could link it to inflation.
One potential problem with annuities is that you effectively prevent anyone from inheriting your original pension when you lifespan concludes. Value protection is one way to prevent this from happening and will be explained below. You can purchase joint annuities which will protect your partner as he/she will continue to be paid after your death. Another form of annuity can be purchased which guarantees payment for a number of years, regardless of whether or not you die during that time.
Any capital that has not been used is paid out by value protected annuities if you die before the age of 75. The difference between the payments you have made thus far and the money used to purchase the annuity will be paid to the recipient who will have to pay 35% tax on this income. As this is a more advanced form of protection, value protected annuities are more expensive than their regular counterparts. The biggest advantage of these types of annuity is the fact that you can protect a certain percentage of your fund.