Mr Pink is 55 years old and has decided to take benefits from his SIPP. He has no dependants and, although he has other sources of income outside of his pension plan, he has no cash and he wants to withdraw a lump sum from his pension to repay his mortgage.
The assets within his SIPP are as follows;
- Property £250,000
- Investment Portfolio £150,000
- Cash £100,000
- Total £500,000
The property currently has a tenant who pays £20,000 rent per annum into the SIPP.
He has asked Boolers to confirm the benefits which his SIPP can provide to him.
Boolers reply to him with an illustration of benefits, which shows that the following can be taken;
- Pension Commencement Lump Sum (25%) £125,000
PLUS - Flexi Access Drawdown Any amount
OR - Lifetime Annuity Purchase £15,000 p.a.
Lifetime Annuity assumes good health, non smoker, single life, level, no guarantee.
Mr Pink is delighted with the flexibility that taking benefits via Flexi Access Drawdown will afford him as he is not sure what level of income he requires. He understands that ongoing money purchase pension contributions will be limited to £10,000 per annum once he starts taking pension income via Flexi Access Drawdown.
Mr Pink holds £100,000 in cash, but could take up to £125,000 as a pension commencement (tax free) lump sum. Rather than sell investments to provide the SIPP with the additional cash to allow Mr Pink to take the full tax free cash entitlement immediately, he decides that he will phase his retirement benefits, but still wants to take £100,000 as a cash sum.
He does not need any pension income initially, so is advised to take benefits via income drawdown as this allows the flexibility to take tax free cash but no pension income. He provides Boolers with a valuation confirming that the property is currently worth £250,000.
In order to take £100,000 as a tax free lump sum, Boolers confirm to Mr Pink that he will need to crystallise 80% of his SIPP, which gives a fund value for providing benefits of £400,000 (80% of £500,000).
This fund can provide the following;
- Pension Commencement Lump Sum (25%) £100,000
- Residual Fund £300,000
Which can provide Flexi Access Drawdown at any level.
The fund is tested against the prevailing Lifetime Allowance of £1,000,000, and uses up 40% of the Lifetime Allowance.
Mr Pink decides after six months that he does want some pension from
his SIPP, and elects to take £10,000 p.a. He had utilised all of the cash within his SIPP when taking the tax free lump sum of £100,000, but rent of £20,000 is received into the SIPP each year and this provides the funds to pay his pension income.
Mr Pink will not pay any national insurance on the pension income, but the income will be subject to PAYE tax.
Regular Reviews
Mr Pink will meet with his Boolers’ advisor on an annual basis, at least, to discuss any change in his personal circumstance, review the performance of the SIPPs, the level of income being taken, consider whether the pension income being paid is still appropriate for Mr Pink and to ensure the sustainability of the pension fund. They will also discuss any changes in pension legislation or other issues that might affect Mr Pink and the advice being provided.
Mr Pink can decide at any time to alter the level of pension that he wants to receive, or can elect to purchase an annuity using the SIPP fund, but would need to sell the investment portfolio and the property to do this.
After crystallising his benefits, Mr Pink still has a SIPP fund of £100,000 that has not yet been crystallised, and which can provide him with additional benefits at a future time.
If you require further information, please contact us: –
Email: enquiries@boolers.co.uk
Telephone: 0116 2407070
Website: www.boolers.co.uk
This case study is for illustrative purposes only and should not be construed as advice or guidance. It is based on our understanding of current taxation, law and practice (August 2016), which is subject to change. Before accessing any pension benefits you should take advice to ensure that the proposed action is suitable.
