14 SEP 2023

Are you turning 55 in the next six months?

My social media feed seems to have been full of headlines like this in recent weeks, tagged as they are to articles by firms touting for business. Aside from reminding me that the clock ticks relentlessly onwards and giving me the feeling that “Big Brother is watching”, it is, in fairness, worth acknowledging that turning 55 is an important milestone for anyone.

By Steve Berridge, IFGL Pensions Technical Manager

The normal minimum retirement age is 55 (and will remain so until 2028 when it moves up to 57) and 55 is, for most people, the first opportunity to access their pension savings. 

Caution is therefore needed to ensure that dipping into your pension pot at the first available opportunity is right for you. It is definitely a good time to be making an appointment with your financial adviser! The good news is that these days you can take your 25% tax-free cash sum and not be tied into buying an annuity. 

Annuities, ironically, have seen a revival of late, following the succession of interest rate rises, but they are a final step with a pension and not for everyone.

Most commonly, people will look to take their 25% tax-free cash sum and then move into Flexi-Access Drawdown. This brings with it one huge potential advantage over, say, an annuity, in that you can take your lump sum of 25% and then put it into drawdown where you are free to take as much or little as you want and your pension can remain invested and continue to grow. 

With an annuity, you buy an income which is fixed for life and your pension fund no longer has the chance to continue to grow. But there are also potential pitfalls with Flexi-Access Drawdown that need to be carefully navigated.

Your adviser will be able to talk you through the pitfalls to be avoided and the first one is the Money Purchase Annual Allowance (MPAA). 

Thankfully, this was, at the last budget, increased to £10,000. As it includes employer as well as employee contributions, however, it needs to be looked at carefully, because a typical mid or high-level employee in receipt of generous employer contributions could easily exceed it. 

However, if you are not looking to take income, but simply take your 25% tax-free cash sum and designate the rest to drawdown, the MPAA is not triggered, which means you still have the use of the full £60,000 annual allowance.

The second potential pitfall is what is commonly known as “sequencing” or “reverse pound cost averaging”. 

Essentially this occurs when someone starts flexibly accessing their pension fund by way of tax-free cash and income payments during a period when investment values (and hence unit prices) are falling. 

Each withdrawal involves proportionately more units being cancelled during a downturn and the end result of this can be that the pension pot is exhausted more quickly.

We appreciate that these can be complicated areas and your financial adviser is always a good place to start for an explanation. For us at IFGL Pensions, however, the good news is this; if you do not need income desperately but just want to enjoy the benefits from your tax-free cash sum, you can continue to hold your pension monies within your SIPP and allocate the investments for the medium to longer term. 

SIPPs offer, over and above alternative investment vehicles, the ability for your investments to grow free from capital gains tax, income tax and usually, inheritance tax, which in the longer term will literally pay dividends!

So, if you are turning 55 within the next six months, talk to your adviser and, with them, explore the options your SIPP can offer you and look to enjoy the next phase in your life.