Personal pension plans (PPP) have now been around since mid-1988. They were introduced by the UK government to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement. PPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s PPP which can move with individuals when they change jobs.

Self-Invested Personal Pensions (SIPPs)

Self-Invested Personal Pensions (SIPPs) are subject to the normal rules and regulations for registered pension schemes, but offer the freedom of choice over investment management, whilst keeping the administration in one place.  This means that you are able to change the investment manager when you wish, without incurring the expense of changing the provider of the administration.  Additionally, you can achieve greater flexibility in the benefits you can take during retirement without necessarily having to transfer your funds again.  You can elect to purchase an annuity or follow the route of phased retirement and/or drawdown pension.  There is now no upper age limit at which benefits must be taken.  SIPPs are money purchase schemes with contributions receiving tax relief.  An employer may contribute to an individual’s SIPP which can move with individuals when they change jobs.

Flexi-access Drawdown

Holders of money purchase pension plans can defer taking their pension in the form of an annuity and instead make withdrawals directly from the pension fund.  This will first require the funds to be moved into a flexi-access drawdown plan or converted to flexi-access drawdown.

The main purposes of drawdown pension can be summarised as follows:

  • Deferral of annuity purchase, thus avoiding being locked into low annuity rates which may apply at the time of retirement.
  • The drawdown pension option enables the policy holder to buy an annuity at a time that is best suited to them and hopefully when annuity rates are more favourable or provides an opportunity to avoid purchasing an annuity altogether where appropriate.
  • The option enables investors to retain control over their pension investments and allows them to continue to be invested in the markets.
  • It postpones the decision of deciding which type of annuity to lock into e.g. providing a contingent pension for a wife or husband and selecting a level or increasing pension.
  • With flexi-access drawdown the amount of income that can be taken from the fund is not subject to any specific limits therefore this method offers great flexibility. This can be useful for tax planning or where other sources of income are available.

Source: Threesixty LLP Online 2019