Dennis was referred to Andy Gait by an existing client. He was aged 59 in excellent health and keen to discuss his pension arrangements as he was retiring as a partner of an accountancy practice and moving into consultancy in five months.
His wife, Jennifer, some two years younger, had worked as an NHS nurse for all of her working life. They have three sons, all married and financially independent.
Dennis is an experienced investor who managed his own pensions and investments but wanted the benefit of a second pair of expert eyes to help him make the right decisions. His initial thoughts were that he would ‘drawdown’ on one of his pensions to meet the difference between his current income and his impending reduced income.
Dennis’ self-employed income at the time was approximately £50,000 per annum which he expected to reduce to £25,000. After tax his income would reduce from £42,500 per annum to approximately £22,000. Jennifer’s current income after tax was approximately £25,000 per annum and on her planned retirement at age 60 she would have a state and NHS pension providing her with a pension income, after tax, of approximately £20,000.
Their joint annual income after tax would, therefore, reduce from around £67,500 to approximately £42,000 when Jennifer retired.
On Dennis’ full retirement at 65 the couple wanted to have access to an income of about £45,000 per annum, but saw this reducing in their mid-70s to approximately £36,000 a year. In the event of first death they stipulated it was important that the surviving spouse had access to an annual income in the region of £25,000.
On analysing Dennis’ pension it was apparent to Andy that his Aviva pension had a guaranteed income (annuity) built into the policy that was available from age 60. Although current performance was poor the rate of income at 10% was twice as much as was available on the open market, and too good a rate to refuse – even though if he predeceased Jennifer there would be nothing available to her.
A strategy was agreed and Dennis followed Andy’s recommendations that included:
(i) Purchasing the guaranteed annuity
(ii) Making a contribution to his Legal & General pension of £8,000 to mitigate his liability to higher rate income tax in the current tax year.
(iii) An investment strategy that focused on the likelihood of Dennis fully retiring at age 65 taking his tax free lump sum but continuing with his pension while drawing down income from it.
At the review in November 2011 advice was provided to Jennifer to purchase an annuity with her small non NHS pension fund that would pay an annual income that would die with her, as it appeared that Dennis would have adequate income to meet his needs from his pensions and share of the NHS pension if she predeceased him.
At the review in November 2013 Dennis advised that he intended to retire immediately following a recent heart attack, although the prognosis was good he was keen to reduce his workload and stress levels.
In order to protect as much of the fund for his family in the event of an early death Dennis took benefits from only a small part of his pension – enough to generate the income required. This meant in the event of his death the part which had not provided benefits would be left to his family via a trust without the deduction of any tax.
Following the budget in March 2014 the flexibility Dennis enjoys with his pension has increased. There were no longer any restrictions on the level of income he can draw from his pension as he meets the government’s Minimum Income Requirement of £12,000 per annum from guaranteed pensions.
At the review meeting in February 2015 Andy checked Dennis’ expenditure to see if retirement had been a little more expensive than projected. It had not. A conversation was initiated by Andy to discuss the changes in the Pensions Act 2015. Dennis was pleased to know that the amount of tax that would be taken from his pension fund on death had significantly reduced. However, he did not wish to amend his retirement strategy as ‘Government’s have been known to change pension legislation’.
Dennis and Jennifer were confident that their present strategy would meet their needs, and felt comfortable gifting £50,000 to each of their sons to help repay some mortgage debt. Andy had shown them this capital was surplus to their requirements, and by gifting there was a potential inheritance tax saving of £40,000.