Which Retirement Road to Take?
Given recent Government rulings about pensions, retiring in your mid-fifties might seem like a far-fetched dream. But is it possible to have a pension scheme flexible enough to allow you to retire at the age of 55?
One of our readers asked us recently about what kind of pension scheme could give him the ability to do just that. (1)
Our reader wondered if a UK Self Invested Personal Pension (UK SIPP) would be the best way to achieve that, but he was concerned that it might mean his money would be ‘locked’ into his UK SIPP fund.
If you do choose to take the UK SIPP road to retirement, what can you expect?
What we’re aiming to give you here is a brief overview of a UK SIPP. The idea of a UK SIPP is that they are personal pensions, not ‘one-size-fits-all’ pensions. For a more detailed consultation about whether they would suit you and your investment aims and objectives, we’d recommend you talk things through with your independent financial adviser.
If you want tax efficiency, taking the UK SIPP route is probably going to suit you very well. Depending on your earnings and your previous pension planning you should be able to put funds into a UK SIPP and receive tax relief on the premiums. Your adviser will be able to assist you with this and ensure you’re not losing out on any tax relief available to you.
Another potential advantage of a UK SIPP is that allow you a wide range of investment options, depending on your attitude to investment risk. The following are just a few examples of what can be invested within a UK SIPP:
• Cash deposits
• Equities
• Gilts and Bonds
• Investment Trusts, Unit Trusts & Exchange Traded Funds.
Again, your adviser will be able to help you decide which of these investments might be most suitable for you, as well as helping you decide how ‘active’ you want to be with managing your investments.
Both a potential advantage as well as a disadvantage is that (as our reader wondered about) funds within a UK SIPP are ‘locked in’. This means you won’t be able to access them until you reach 55. There is a further restriction that, while you will be able to draw 25% as a tax free lump sum when you are eligible to at 55, the rest of your fund will have to be used to provide you with income benefits.
Bear in mind, too, that if you retire at 55, annuity rates are likely to be very unattractive, because it’s expected that you will have a considerable number of years of retirement ahead of you (all being well of course). Recent pension rulings also mean that the amount of income you can take under the rules of pension drawdown has been reduced. So if you want to draw a significant income at 55, you are going to need a sizeable amount in your fund.
At current rates, at age 55 a single life annuity would provide around £49 per £1,000 of capital (with a level annuity that stays the same) or £24 per £1,000 (with a Retail Prices Index linked annuity that rises by a percentage each year).
For an alternative approach to saving for your retirement, instead of a UK SIPP you could consider using a tax-efficient ‘wrapper’ for your investments, such as investing in an Individual Savings Account (ISA). By doing this, you will reduce the amount of tax paid on your investments and you can draw on the capital and / or the income when you choose to retire.
You can use your ISA allowances each year (currently £10,680 for the 2011/2012 tax year which ends on the 5th April) or you might want to consider onshore or offshore bonds if they are appropriate for you.
Overall, your best route will depend on the flexibility you might need, what level of income you would require at 55 and what your attitude to investment risk is.
For a free and confidential discussion about a UK SIPP and all your pension options, call Matt Higham on 0845 230 9876 or e-mail info@wwfp.net.
Sources:
1. This is Money