A couple of SIPP questions

RomfordNavy

Forgive me if these are basic questions but I am only just learning about SIPPs, actually don't have one myself but asking on behalf of a friend.

• There seems to be a rule with the existing pension provider that taking out the over 55s 25% tax-free allowance can only be done if an Annuity is purchased at the same time.  If the existing pension is transfered to a SIPP can the 25% tax-free payment then be taken.  Is it a case of just withdrawing that amount or is there some more complicated procedure?
• There are two existing pensions, an older 25K one (now closed to new contributions) and a newer 60k one (still accepting new contributions).  The older one has an option of guaranteed (1980's level) annuity rates if held until age 65 (another ten years) so current thinkning it to leave this one alone until age 65 to take advantage of the guaranteed anuity rates.  However if moved into a SIPP the fact that this one had guaranteed annuity rates is irrelevant, isn't it? The difference between the guaranteed annuity rate and normal rates might be so small as to become unimportant and perhaps better-off moving both into a SIPP to simplfy matters.

Your thoughts please?

Linton

RomfordNavy said:

Forgive me if these are basic questions but I am only just learning about SIPPs, actually don't have one myself but asking on behalf of a friend.

• (1) There seems to be a rule with the existing pension provider that taking out the over 55s 25% tax-free allowance can only be done if an Annuity is purchased at the same time.  If the existing pension is transfered to a SIPP can the 25% tax-free payment then be taken.  Is it a case of just withdrawing that amount or is there some more complicated procedure?
• (2) There are two existing pensions, an older 25K one (now closed to new contributions) and a newer 60k one (still accepting new contributions).  The older one has an option of guaranteed (1980's level) annuity rates if held until age 65 (another ten years) so current thinkning it to leave this one alone until age 65 to take advantage of the guaranteed anuity rates.  However if moved into a SIPP the fact that this one had guaranteed annuity rates is irrelevant, isn't it? The difference between the guaranteed annuity rate and normal rates might be so small as to become unimportant and perhaps better-off moving both into a SIPP to simplfy matters.

Your thoughts please?

(1) Although the law now allows you to take 25% and then later move into drawdown there is no requirement for pension companies to rewrite all their old procedures and software to deal with the change.  It would have been impractical for them to do so, or very expensive at least.  So old pension schemes often dont support drawdown and insist on annuities since thay were the only option available when the scheme was set up.

If you want to go for 25% TFLS + drawdown you need to transfer the pension to a scheme which supports it.  People often use SIPPs for the purpose.  As long as the pension is not DB (eg "final salary" or CARE) or if DC does not have guarantees such as a fixed annuity rate then you transfer in the same was as you would transfer an ISA.  You sign up with a SIPP provider and ask them to transfer-in your old pension.

(2)  Normally transfer of a pension with a Guaranteed Annuity Rate would require that you take advice from a suitably qualified IFA but this does not apply to pensions worth less than £30K.  If you transferred a GAR pension you would lose all the benefits.  GARs on pensions dating back to the 1980s can be ruinously (for the pension company) generous.  One of mine guaranteed an annuity rate of 11.5% which it would have been rude to turn down. So you must check.

AlanP_2

Point 1 - More of a practical issue rather than a rule probably, although the outcome is the same. Many older pension schemes were setup (and the IT application that is used) were setup when annities were the deafult so were not designed to cater for any other options. Hence a transfer is needed to something that can offer the alternative your friend wants. Why, BTW, do they want to take the 25% tax free? If not needed to settle mortgage or similar leaving it invested and taking regular Taxable Income Amount + 25% tax free might be a better option. Many people take £12,500 taxable plus 25% tax free a year and hence get £16,667 cash without paying any income tax.

Point 2 - Look at current annuity rates and compare to the guarantee on offer. the 80's rate guarantees is likely to be very valuable.  

AnotherJoe

RomfordNavy said:

• There are two existing pensions, an older 25K one (now closed to new contributions) and a newer 60k one (still accepting new contributions).  The older one has an option of guaranteed (1980's level) annuity rates if held until age 65 (another ten years) so current thinkning it to leave this one alone until age 65 to take advantage of the guaranteed anuity rates.  However if moved into a SIPP the fact that this one had guaranteed annuity rates is irrelevant, isn't it? The difference between the guaranteed annuity rate and normal rates might be so small as to become unimportant and perhaps better-off moving both into a SIPP to simplfy matters.

Your thoughts please?

Im just going to focus on the secodn Q you posed.

Its not irrelevant the £25k one had GAR because  your friends almost certainly woudl be barking mad to give up 1980's rates. They could easily be 10% plus. I myself have one from the noughties which is 8%. No way I would I transfer that indeed i had the option along with an uplift and still turned it down.

Find out what the rate is.

RomfordNavy

AlanP_2 said:

...

Why, BTW, do they want to take the 25% tax free? If not needed to settle mortgage or similar leaving it invested and taking regular Taxable Income Amount + 25% tax free might be a better option.

25% tax free wanted to allow investment in business elsewhere which he hopes will return substantially better returns in ten years.

RomfordNavy

AnotherJoe said:

Find out what the rate is.

How do we do that, not stated anywhere in the documentation that I can see.  Do we just phone the pension Company and ask?

AnotherJoe

RomfordNavy said:

AnotherJoe said:

Find out what the rate is.

How do we do that, not stated anywhere in the documentation that I can see.  Do we just phone the pension Company and ask?

Yep, but it should be in documentation soemwhere, probably when they joined the scheme and lost maybe?