A Self-Invested Personal Pension (SIPP) gives you flexibility when accessing your pension funds during retirement. Here’s an overview of the key benefits you can take from a SIPP and how they work:
1. Tax-Free Lump Sum
When you reach 55 (rising to 57 in 2028), you can take up to 25% of your SIPP as a tax-free lump sum. The remaining 75% of your pension will be subject to income tax when withdrawn.
Example: If your SIPP is worth £200,000, you can withdraw £50,000 tax-free. The remaining £150,000 can be taken in different ways but will be taxed.
2. Flexible Access to Your Pension
Once you take the tax-free lump sum, you have several options for accessing the rest of your SIPP. These options allow you to manage your income according to your needs:
Income Drawdown (Flexi-Access Drawdown):
This option lets you keep your pension funds invested while drawing an income as needed. There’s no limit on how much you can withdraw, but any withdrawals (beyond the tax-free amount) are taxed as income. The remaining funds stay invested.
Uncrystallized Funds Pension Lump Sum (UFPLS):
With UFPLS, you can take lump sums from your pension without taking a tax-free lump sum upfront. Instead, 25% of each lump sum is tax-free, and the remaining 75% is taxed as income.
Annuity Purchase:
You can use your SIPP to buy an annuity, which guarantees a regular income for life or a fixed period. Once you purchase an annuity, the funds are locked in, and your income is based on annuity rates at the time. An annuity offers certainty but less flexibility compared to other options. (Not offered by Plum)
3. Combination of Options
You don’t have to choose just one method. You can combine different approaches to suit your needs. For example, you could take a 25% tax-free lump sum, use part of your remaining SIPP for income drawdown, and use another part to buy an annuity for guaranteed income.