There are a variety of ways that you can access your pension fund. You can choose between:
- leaving your funds entirely untouched;
- taking your funds out in stages to suit your needs;
- taking your tax-free cash but leaving the rest untouched;
- taking your tax-free cash and taking some income; or
- taking out the whole amount.
Accessing your pension
You will need to consider a number of very important points when deciding how and when to access your pension. You should understand:
- how much tax you will pay on your withdrawals;
- that any funds withdrawn will lose a number of valuable tax advantages;
- that taking withdrawals may reduce the amount you can pay back in;
- that you may have to pay charges if you reinvest your withdrawals elsewhere; and
- that taking withdrawals early may impact how long your retirement income will last into the future.
Reducing the tax bill for beneficiaries
If you die before the age of 75, your beneficiaries can receive payments from your scheme free from Income Tax, whether in the form of a lump sum or a pension.
If you die aged 75 or older, your beneficiaries will pay Income Tax on the payments they receive.
In either of these situations, the funds usually remain outside of your estate, meaning that in most cases they will not be subject to Inheritance Tax.
Accessing your pension for the first time?
A SIPP gives you the flexibility to access your pension in different ways. With any of the following options, you can use as much or as little of your SIPP as you like to provide you with income, by phasing the amount you withdraw over several years.
Tax-free cash and leaving the rest invested for future income
Take 25% of your pension fund tax free and place the remainder into ‘flexi-access drawdown’. The income you then take is subject to Income Tax, but there are no limits on how much you can take. If still appropriate, the underlying investments in your SIPP can remain exactly as they are, but please note their value can go down as well as up.
Tax-free cash and an annuity
Take 25% of your pension fund tax free and use the rest to buy a guaranteed lifetime income (an ‘annuity’) from an insurance company. The annuity income is taxed as earned income.
Taxable lump sum
Withdrawing part or all of your pension as a taxable lump sum
You can take all of your SIPP, or just a part of it, as a single lump sum: 25% of the amount withdrawn is tax free and 75% is taxed as earned income.
Already have access
Already accessed another pension scheme?
If you have taken tax-free cash under another pension scheme, you may still have funds invested in that scheme from which you can take an income.
If you accessed your pension in another scheme before 6 April 2015
The funds left in your scheme may be in the form of ‘capped drawdown’, which means you’ll have a maximum annual income limit. You can transfer these funds into your AJ Bell SIPP, though the maximum annual income limit will still remain after the funds have been transferred. If you want to access your funds without being subject to an annual limit, you can opt to convert them to ‘flexi-access drawdown’, either at the point of transfer or at any time in the future. This would allow you to take as much income as you choose, though doing so will reduce the amount of money you can contribute to your pension each year without incurring a tax charge (the ‘Money Purchase Annual Allowance’ (MPAA) – see below).
If you accessed your pension in another scheme on or after 6 April 2015
You may already have funds in ‘flexi-access drawdown’. This means that the pension remaining after you took your tax-free lump sum is still invested and is available for you to take income from as you choose, without any annual limits. You can transfer these funds to your AJ Bell SIPP, and continue to access as much income as you choose.
If you have accessed your pension to buy a lifetime annuity, or are receiving a defined benefit scheme pension, those funds cannot be transferred into a SIPP.
To help you understand more about your options, please explore the support offered below.
- Your adviser: It is important to consult your adviser about your options before making any decisions.
- Pension Wise: The Government-backed ‘Pension Wise’ service offers free and impartial guidance on pension benefit options, and is available online; over the phone from The Pensions Advisory Service on 0800 138 3944; and face-to-face from Citizens Advice. The Pension Wise service is not intended to be a substitute for full regulated financial advice. More information can be found at pensionwise.gov.uk.
- Our guide: We have produced a detailed guide which explains all the ways you can access your pension income.