Case Study – John
John, age 60, SIPP valued at £80,000 currently working 3 days a week earning £20,000
a year, doesn’t need any income yet but wants to pay off his mortgage
As John is still working he doesn’t need to draw an income from his SIPP but he
does want to access a lump sum to pay off his mortgage and reduce his outgoings.
John has 2 options open to him.
- He can take his full lump sum entitlement up front which is 25% of his fund paid
tax free. He can use the £20,000 tax-free lump sum to pay off the mortgage. The
remaining £60,000 will remain invested in his pension and be available to take an
income whenever he wants to in the future.
- He can take the lump sum as a combination of a tax free payment with the balance
taken as income taxed at his marginal rate of 20%. The exact amount John would need
to use would depend on his tax code, but as an example he might use £23,530 of his
pension fund which would be split between £5,882.50 as a tax-free lump sum and £14,118
income (after tax) to provide a total payment of £20,000.50.
The remaining £56,470 will remain invested in his pension and can be used to take
a further lump sum and an income whenever needed or payments that are a combination
of both in the future. Tax-free payments in the future may benefit from investment
growth leading to a greater entitlement but the value of investments could go down
as well as up. Whichever option John chooses, he can later decide to use any funds
remaining in his pension to purchase an annuity from an insurance company if he
decides security of income is important to him in the future.
Case Study – Dean
Dean, age 65, SIPP valued at £400,000 already taking income payments from his pension
through income drawdown
Dean has been taking an income from his pension using income drawdown for a few
years and is currently drawing £30,000 each year. The income he can take is capped
at a maximum amount of £38,400 each year.
Under the new rules from 6th April 2015 he has the option of greater flexibility
in the level of income that he can take with no maximum limit by moving to Flexi-Access
Dean doesn’t need to increase the level of income that he is taking from his pension
at the moment so wants to understand any impact of moving to Flexi-Access Drawdown.
The main impact would be on the level of new contributions that Dean could make
to his pension.
If Dean continues to take income drawdown subject to his current maximum of £38,400,
then he has the option to pay contributions of up to 100% of his earnings or £40,000
each tax year whichever is the lower.
If Dean moves to Flexi-Access drawdown then there will no limit to the pension income
he can draw but he will only have the option of paying new contributions up to £10,000
each tax year into his SIPP.
Case Study – Partap
Partap, age 62, SIPP valued at £200,000 retiring and about to take pension benefits
for the first time but also has income from a rental property
Although Partap is retiring he still receives rental income from his buy-to-let
properties. He has a small mortgage to pay off on his own property and calculates
that he needs £12,000 each year to supplement his rental income.
He decides to take his full lump sum entitlement up front which is 25% of his fund
paid tax free. He will use the tax-free lump sum to pay off the mortgage.
He asks his SIPP provider to pay him an annual income of £12,000 each year using
When he reaches age 65, Partap will start receiving his state pension. At this point
in time he can reduce the income he is taking from his SIPP retaining his target
income of £12,000 across all pensions.
As Flexi-Access drawdown is completely flexible he can take additional income at
any time should his rental properties be untenanted at any point.
Case Study – Julie
Julie, age 60, SIPP valued at £80,000 about to stop work and looking for a secure
Julie is retiring from her job as a Sales Manager and want an income with a level
of security that she can be confident will continue for the rest of her life.
Julie decides to purchase an annuity from an insurance company that will pay her
an agreed level of income for life. As she has not yet reached state retirement
age, Julie decides to take out a new Flexible Annuity that can pay her a higher
level of income until her state pension becomes payable.
When Julie reaches state retirement age and receives her state pension, the amount
of income paid from her annuity will reduce by the amount of her state pension.
This means Julie’s overall income will remain the same.
Julie is aware that her pension provider does not offer annuities and shops around
to get the best annuity rates available at the time.
This information in these case studies are based on our current understanding of
the pension rules from 6th April 2015. This example is provided for information
only and is no intended as advice.
Please note that AJ Bell Management Limited and SIPPdeal Trustees Limited are not
able to offer advice. TD Direct Investing is not able to offer advice on your pension.
If you are unsure which option is suitable for your circumstances, you should seek
advice for a suitably qualified financial adviser.
Taking income direct from your SIPP instead of buying an annuity from an insurance
company can be complex. You need to consider the investment returns that you may
be able to achieve and the level of income that you wish to take.