Independent Financial Advisers

• HOME
• WHAT WE DO
• RESOURCES
• CONTACT US
• COMMUNITY

Financial aspects of retirement - Case Study

[ Print and download version in Adobe PDF format: Financial Aspects Of Retirement - Case Study ]

We recently advised a client who was about to reach his 60th birthday and required advice on his pension funds.

Mr Jones is married and his wife is age 59, they are partners in a business and each has earnings of £55,000 p.a. approximately. The clients wish to reduce their workloads gradually prior to stopping work completely at Mr Jones’ age 65 so some additional income is required so that they can maintain their standard of living.

Both Mr and Mrs Jones have substantial pension funds. His total pension funds are valued at around £300,000 and her funds are valued at around £220,000. She is a cautious investor and he has a realistic risk tolerance.

Mr Jones’ pension funds have been going for many years and he has a mixture of single and regular contribution plans. Some of the very old policies, dating back to pre July 1988 have a feature known as a guaranteed annuity option so that the policies provide for the income to be payable with a minimum underlying interest rate. In this case this is around 8.3% per annum or £8.30 p.a. of income for every £100 of pension fund at age 60. These guaranteed annuity options are flexible and allow for different income yields at different ages and also for different annuity structures. 

At the time of writing, market rates for a male aged 60 with £100,000 or more pension fund are around 6.2% p.a. for a level annuity including a five year minimum guaranteed payment period.

Both Mr & Mrs Jones are in good health and do not smoke.

Our initial enquiries revealed that the older policies had a total valuation of around £120,000 and were all single premium contracts so there were no penalties on transfer out or early retirement before age 65.

Tax-free cash was available from the policies at a multiple of three times the initial pension. Mr Jones was advised that it would be possible to improve the tax-free cash on these policies to 25% of the fund value but this would mean giving up the guaranteed annuity option.

As Mr Jones had no requirement for a tax-free cash lump sum payment, and in view of the attractive yield for the annuities it was decided that he would purchase annuities on his life only paid monthly in arrears and guaranteed for five years in any event. This equates to an investment yield of around 8.3% p.a. with no investment risk.

 

For the balance of his personal pension funds valued at some £180,000 we recommended a self invested personal pension (SIPP) from a major provider. Using a SIPP meant that we could create a coordinated investment strategy suited to Mr Jones risk tolerances and pension fund objectives. In the longer term it is expected that Mr Jones would use unsecured pension (income drawdown) from the fund as a means of accessing his retirement benefits.

The personal pension plans had been set up to age 60 retirement ages so there were no penalties on transfer to an alternative plan. We recommended a SIPP that was set up as a series of 1,000 smaller but identical segments to give flexibility over the timing and nature of any other retirement benefits that may be required.

The SIPP fund was invested in a diversified portfolio of investment funds.

 

 

Our analysis of Mrs Jones’ pension funds revealed that she was invested primarily in life office managed funds that were not suited to her risk tolerance. Further investigation revealed that there was a very limited range of alternative funds available to her through the insurer. It was agreed that a transfer to a SIPP would enable a diversified investment portfolio to be created suited to her investment risk profile and an investment term to annuity purchase of around 5 years.

Once her SIPP was established the funds were invested in a range of corporate bonds and commercial property funds with only a very limited exposure to UK company shares. It was agreed that we would have regular review meetings to assess the performance of both the portfolios against the client requirements.

Mrs Jones is not making any further pension contributions as she considers that she has sufficient retirement savings. Mr Jones would like to make additional single contributions from time to time as part of his tax planning.       

On our advice both client’s set up a special trust to ensure that any lump sum death benefits paid from their SIPPs would give the survivor full access to and control over the funds but would fall outside of the survivor’s estate for inheritance tax purposes. 
    
Summary

This document can only provide a brief summary of the process for taking retirement benefits and consolidating pension funds to a SIPP. It is not intended to be a recommendation for a specific course of action. For more information please contact us.

The content of this document is based on our understanding of current United Kingdom legislation, taxation and HM Revenue & Customs practice, which can change at any time. The precise amount of any tax relief would depend on the circumstances of the investor.

If you have any questions or comment in relation to this article, or if you require advice on taking your retirement benefits, consolidating your pension funds, and achieving a coordinated investment strategy suitable for your risk tolerances and pension fund objectives, or SIPP’s generally please contact Expert Financial Solutions.

Expert Financial Solutions Ltd

July 2006

Other Case Studies From Expert Financial Solutions:

Pension scheme property purchase

Self invested personal pensions

Shareholder protection case study