DIY Investor Magazine
/
2015 Issue
52
When the time comes for drawing benefits the recent
pension reforms introduced new and different ways to
achieve this from age 55 onward.
No longer is retirement a ‘single point’ event in life.
Whilst there is still the option of a guaranteed income
for life from an annuity, with current levels of interest
rates the annuity market has lost some of its support
and investors have been keen to take advantage of the
new freedoms and possibly even combine options.
From 6th April 2015, individuals of retirement
age now have full access to their pension
savings and with no necessity to take any or all
the benefits from the pension scheme at any
time. Available options are:
i. Take up to the full value of the pension plan
in one go - 25% is paid out as a tax-free lump
sum, with the remainder as a taxable income
payment;
ii. Take 25% of the pension as a tax-free
payment and as much or as little as required
as a regular income from the remainder;
iii. Take smaller lump sums, known as an
Uncrystallised Funds Lump Sum Payment
(UFPLS) made up of 25% tax-free cash and
75% taxable income;
iv. Purchase an annuity and take up to 25%
as a tax-free lump sum and set up a regular
guaranteed income from the residual
pension fund.
v. Residual pension funds being left for
beneficiaries either tax free or, in later life
taxed, removing a key consumer concern
about annuities.
Other issues for consideration include:
•
Customer service
•
Use of technology to manage the account
•
Ease of communication
•
Clarity of literature and documentation
•
Speed of response
•
Investment choice
•
Any additional charges
An interesting recent development for those looking for
income is the emergence of Peer to Peer (P2P) lending
or alternatively listed bonds issued against the book of
P2P loans; however, few SIPP providers are currently
able to accept these ‘alternative investments’.
A SIPP should evolve as the investors’ needs change
from a low cost SIPP or ‘vanilla’ plan to the more
sophisticated plans which allow greater investment
choice and encourage greater pension freedom but
also in the knowledge that where appropriate it is
possible to scale back all within the same SIPP plan.
At each stage of pension planning the same criteria
however should be considered before taking action -
charges; investment choice; SIPP provider.
Each of these can have a significant effect on how the
pension performs and its suitability for the investor. As
an example of this - a SIPP may either be charged on a
fixed cost or ad valorem basis (ie % of value) which can
have a marked impact, dependent on plan value, as a
fixed cost on a smaller plan value can represent a far
higher % cost to value.
According to many leading economists, for higher
value funds ad valorem costs can be detrimental to
wealth creation.
Equally, low cost SIPPs may typically restrict
investment choice to Cash Deposits; Index Funds and
ETFs (Exchange Traded Funds).
The choice of SIPP provider is also key as it undertakes
the regulation which governs UK Pensions, ensuring
the SIPP complies, and undertakes collection of
tax reclaims, processes income payments and
administration in the event of death.
That said, according to many leading economists,
for higher value funds ad valorem costs can be
detrimental to wealth creation.
