Take a SIPP

Pension investment has seen many changes in recent years. Currently, the maximum amount that qualifies for tax relief is £50,000 gross per annum (or earnings, if lower) falling to £40,000 per annum from April 2014. These figures include employer as well as employee contributions. Members of defined benefit schemes who are also contributing to a self-invested personal pension (SIPP) should be wary of these limits as tax relief is effectively clawed back on excess contributions.

A SIPP is like a bag holding a range of assets. You can manage the assets or seek the help of a discretionary fund manager (DFM) who can access a broad range of investments on your behalf. There is substantial flexibility as to which assets can be held in the 'bag' and there are no minimum or maximum limits on allocation to any asset class or any specific asset.

Alongside cash, bonds and equities, SIPPs can typically hold funds, exchange-traded funds, structured products and gold. An investment manager can access unit trusts at a lower underlying fee rate than that available to the retail market.

A DFM will discuss your objectives and risk tolerance, and any preferences you may have about the underlying assets. They will suggest an allocation, your time horizon, future plans and any income requirements. Your portfolio can be designed to complement any other existing arrangements.

Over time, these parameters invariably change and your SIPP portfolio will be adjusted accordingly.

Typically, someone who has 30 years until retirement has a higher risk tolerance than someone with fewer than five years. However, this may not be the case and the SIPP is flexible enough to enable individual preferences.

An individual can be involved as much, or as little, as they like but the DFM should constantly review the SIPP portfolio. Asset allocation will evolve over time as economic conditions change. Indeed, the last five years have shown us the benefit of active management in some difficult market conditions.

Stop press! The lifetime allowance on tax-­favoured pension saving falls to £1.25m from April 2014. Investors could find they are better off crystallising benefits now, or electing to adopt the current lifetime allowance of £1.5m. However, they must do this by 5 April 2014 otherwise they could face a tax charge of up to 55 per cent on pension benefits above £1.25m. If in any doubt about the value of your investments, get a pension valuation promptly to give time for appropriate planning; this process can take several months. Pension contributions can be carried back for up to three years if you have not used your total allocation. The annual allowance falls to £40,000 from April 2014.

Drawing an income

A SIPP also offers flexibility when drawing an income. At present, 25 per cent can be taken as tax-free cash (pension commencement lump sum) and the remaining fund can ?be used to purchase ?an income through ?a traditional annuity.

However, the popularity of annuities has declined as the interest rates available have fallen to very low levels. An alternative is to take an income by way of 'drawdown', which means maintaining the SIPP and drawing an income of between zero and the maximum set by the Government Actuary's Department. This can appeal to people who want to slowly reduce working hours, taking ?an income to suit their needs and tax rates, leaving funds in their SIPP to potentially grow in value.

If an individual has at least £20,000 of gross secured income, including the state pension, they can withdraw an income up to the value of the entire SIPP fund (depending on the SIPP provider), albeit subject to their marginal rate of tax.

Katy Barnard is investment management partner at Smith & Williamson; Dani Glover, financial services director, contributed to this article

Smith & Williamson writes a regular in-practice article on asset management for Private Client Adviser