Unlike most of the ‘do it yourself’ style SIPPs which are available you can choose to appoint a dedicated case manager to help guide you through the SIPP regulations and even recommend the most appropriate investment strategy. When an investor decided they no longer wish to contribute to a state pension they can have their National Insurance payments contributed into their pension scheme in what is known as Protected Rights.

How Much Can I Invest?

You can contribute into your SIPP until the age of 75. How much you contribute annually has been capped at GBP245K.

The earnings in which you can determine your contributions are known as Relevant UK earnings. If you are employed this refers to your salary as well as any taxable benefits you are liable for. If you are self employed the figure is the profit you make after tax contributions. If you are outside the UK then you can contribute but you won't receive the tax relief on those contributions.

SIPPs offer great flexibility when it comes to how much you decide to invest and the manner in which you do it. You even have the ability to make regular payments or one off lump sum payments.

Drawing An Income

SIPPs eliminate the need to purchase an annuity upon retirement, as is common with more conventional pensions. Providing you have sufficient funds in your pension pot you can start withdrawing an income at age 55, making partial retirement a possibility. Another major benefit of SIPPs s that they allow you to withdraw up to 25% of your fund as a tax free lump sum.

If you can afford to live on a reduced income for your SIPP you can avoid purchasing an annuity, however many will look to take an annuity to be able to continue to draw down from their pension fund. Having an existing pension which you are currently drawing down from is known as an Alternative Secured Income.

Alternative Secured Pensions

Alternative Secured Pensions (ASPs) were created into 2006 to permit those over the age of 75 to avoid purchasing an annuity on their pension. An ASP is a source or regular income where the pension holder continues to invest their savings. The minimum amount that can be withdrawn as a regular income is 55%, with the maximum being 90%.

Because some may have an ethical objection to annuities the government changed to regulations to deter those who were avoiding purchasing an annuity.

Upon death your ASP can be used to provide an income for any dependents you have left behind. You can even pass on any surplus to a pre-elected charity free of tax. However this surplus can be regarded as an ‘unauthorised’ payment and can be subject to a tax charge of up to 70% in some cases and it is recommended that you speak with a specialist financial advisor who will minimise your exposure to tax. This higher tax rate was introduced by the government to try and stop pension holders from passing on their savings free of inheritance tax.

Drawing An Income

You are able to withdraw up to 25% of our pension as a tax free lump sum, these may also be referred to as ‘unsecured’ pensions. You are then free to purchase an annuity or leaving the remaining sum invested to withdraw a limited annual income. It should be noted that you can only access these feature before the age of 75, after which you will be made to purchase an annuity or transfer the fund into an ASP.

You are able to decide upon the annual income you can withdraw from your policy as long as it fits within the minimum and maximum allowed limits imposed by the Government Actuaries Department. The minimum can be GBP0 with the maximum being 120% of the calculated pension. The GAD publish a table to act as a guide for people looking to draw an income from their pension. The table is based on the rate that your pension could purchase an annuity based on your life expectancy.

If you are able to survive on a reduced income then an ASP might be more appropriate due to their flexibility. Investors can still have full control over their investments in ASPs and continue to invest their pension pot to provide them with a regular income. While annuities are set in the amount they can pay out each year, ASPs are more flexible and can allow you to draw as much or as little as you want as month, quarterly, half annually or at annual intervals. Also, there is generally more options available regarding death benefits with ASPs over those who choose to purchase an annuity.

Increased death benefits are one of the most beneficial factors or ASPs. You are able to pass on your lump sum death benefit to your surviving dependents, which is usually subject to a 35% IHT charge. If your surviving dependents do not wish to cash in the policy they can continue to withdraw an income from the fund or alternatively purchase an annuity.

To summarise, annuities guarantee you a fixed income until death whereas unsecured pensions can produce higher returns but still be exposed to outside factors and market fluctuations. As with all financial matters it is strongly urged that you seek independent financial advice before deciding which type of pension is best suited to your needs and the needs of your family.

The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. We are a company limited by guarantee and financed by the financial services industry.