Tuesday, 10 July 2012 16:54
Real life case study: Mark Brownridge of Mazars
Mark Brownridge CFPCM of Mazars Financial Planning helps two affluent teachers avoid some retirement pitfalls and plan ahead for later life, while making the most of their investment and tax planning opportunities.
Alan and his wife Ceri were both 59. They have one son and two grandchildren and are generally financially independent. They were both teachers and had been considering their options as their normal retirement age of 60 was approaching. They both joined the Teachers Pension Scheme when they started teaching many years ago, so were unaffected by the Government's proposed changes to the scheme.
They have a small investment portfolio valued at £110,000 and various Isa and cash account holdings which we review annually to discuss performance and consider rebalancing in light of market movements and their attitude to risk. As part of that review meeting, both Alan and Ceri confirmed their desire to retire next year and wished to discuss their options in more detail.
We obtained their Teachers Pension statement, which showed that Alan and Ceri were entitled to a lump sum respectively of £101,000 and £61,285 with a residual pension of £15,200 and £9,120 per annum. Both Alan and Ceri had worked in industry before teaching and Alan had a Self Invested Personal Pension fund valued at £125,000 and Ceri had a personal pension valued at £75,000.
Their aim was to ensure that, after having enjoyed a successful working life, they would have a comfortable retirement without having to give serious thought or have any worries about their financial position, while also keeping an eye on providing something for the next generation and paying as little tax as possible.
This is a real life case study. Names and some other details have been changed to protect confidentiality.
It's our belief that the decisions taken at retirement are some of the most important decisions that clients can take. They may only have one chance to choose the most suitable options so a detailed discussion to ascertain objectives and educate clients as to what is possible is vital.
To give Alan and Ceri plenty of time to think about their retirement, we sat down with them 12 months before their respective retirement dates, reviewed their circumstances and had a detailed discussion about their retirement plans and objectives. Although they were long standing clients, we also completed a specific At Retirement factfind which we have developed to help us pick up all the important information relevant to planning at this stage in a client's life.
The factfind also acts as a retirement checklist and prompted Alan and Ceri to consider some aspects of their retirement that they had not previously given thought to. Specifically, their current and ongoing health. Ceri had a cancer scare a couple of years ago and while past the worst, was still receiving mild treatment.
In terms of budgeting issues, Ceri and Alan had given little thought to the question, "how much is enough?" Although they knew roughly how much income they needed to cover their basic expenditure, they were in the dark as to the income required to meet the standard of living they were envisaging or as to how long this level of income would be sustainable given their finances. They were therefore careful to complete as fully as possible the income and expenditure sections of the factfind.
We then discussed their views on life expectancy, inflation and annuity rates. When we explained to Alan and Ceri the effect these key risks could have on their income in retirement, we found out they had some strong, and opposing, views. Alan, for example, didn't like the inflexibility of annuities and given the current low rates for annuity purchase, said a lifetime annuity was not for him. Ceri, on the other hand, liked the certainty an annuity offered and because of her previous medical condition, had concerns about her life expectancy.
As well as identifying these areas to take forward, we were also keen for Alan and Ceri to understand the advantages and disadvantages of all the options available for taking income from their pensions. We also looked at their wider assets and chatted about for what use these assets were earmarked and whether they could be restructured for income either now or in the future. Alan confirmed they had no definite plans for their existing investments but would like them to be held tax efficiently and be available to provide income if necessary. However, he did intend to use the £162,285 tax free cash that they would receive from their Teachers Pension to reduce their mortgage.
During the meeting, Alan and Ceri both commented that they had not realised that there were so many different income options available, and that had they not received any advice, they would probably have just taken the annuity offered by their pension provider, along with their Teachers Pension.
We talked about investment risk specifically in regard to retirement, as we had already asked them to update their risk profile at the last investment review. Alan had a "highest medium" risk profile and Ceri a "low" risk profile and both believed their attitude to risk would not change in retirement.
From this meeting, we now had a good idea of what Alan and Ceri were hoping to achieve in their retirement years. Although they did not have any major or life changing plans, they had worked hard all their life and were primarily concerned with ensuring their financial wellbeing now and for many years to come, as Ceri said "It's taken us 40 years to earn it, we don't want to lose it all in a week!"
We explained to Alan and Ceri that the next stage of the process would be for us to consider their circumstances and objectives and undertake a cashflow analysis. This would identify what was achievable given their finances and also help shape our recommendations as to the most suitable strategy.
From the cashflow planning exercise, it became clear that their initial expenditure requirements were quite high at £36,888 per annum. However, this figure would reduce over time before potentially rising again at a later age when care home costs might be incurred.
We therefore held a further meeting with Alan and Ceri to discuss our findings and set out various scenarios. We talked in more depth about the income options available and it was clear that the most suitable option for Ceri was a lifetime annuity. She wanted to take zero risks with her pension fund and liked the fact that the income was guaranteed for life. As we had already asked her to complete a common quotation form, we had ascertained that she would qualify for an enhanced annuity based on her medical and lifestyle details. This provided her with an uplift in income of £4,068 per annum, 35 per cent above that available from her current pension provider and 13 per cent above the highest open market annuity available.
Including the Teachers Pension, this would provide Ceri with a total income of £13,188 per annum.
Alan, however, wanted to take a slightly more adventurous approach and was keen to keep his pension fund invested. His Teachers Pension entitlement was £15,200 per annum, so together with Ceri's income of £28,388, there was a shortfall of £8,500 per annum.
We talked to Alan about options that meant his funds remained invested and he liked the idea of investment-linked annuities as they were able to provide a higher income than a lifetime annuity but with a guaranteed level of minimum income, therefore capping the downsize but not the upside. Alan also felt this was preferable to income drawdown as the GAD rate was currently at a historic low.
We also discussed inheritance tax planning and passing on wealth to their son and grandchildren. We agreed that the best way to do this would be to transfer his investment portfolio in specie, so as to save on the costs involved in selling and repurchasing funds, into a Discounted Gift Trust (DGT). A DGT would allow Alan to retain his investment portfolio on the existing portfolio but also give him an immediate reduction in his estate for IHT purposes and further decrease his IHT bill, if he subsequently survives for seven years. Importantly, Alan was also able to choose to take a tax deferred income from the DGT and choose his son as the beneficiary of the fund left upon his death. Alan chose to receive an income of 5 per cent of the investment, that is £5,500 per annum.
As a result, we told Alan that he did not need to crystallise all of his Sipp and would only need to access enough to fund the remaining shortfall of £3,000. By not having to crystallise all of his Sipp, Alan improved the position for his family upon his death as the uncrystallised fund is available as a lump sum, tax free instead of being taxed at 55 per cent.
Having discussed the options with Alan and Ceri, we presented our recommendations to them in a written report. In the report, we recommended the following:
An enhanced annuity for Ceri from her personal pension giving her an income of £4,068 per annum;
Both Alan and Ceri to take tax free cash in total of £162,825 from the Teachers Pension Scheme and income of £24,320 per annum;
Transfer the investment portfolio in specie to a DGT and receive £5,500 per annum income and immediate removal from his taxable estate of £30,000;
Crystallise £45,000 of his Sipp to purchase an investment-linked annuity and receive an income of £3,000 per annum.
Alan and Ceri were satisfied that their objective of enjoying a comfortable retirement without worrying about money was met by identifying the income and expenditure needs from the cashflow planning exercise and the income set up with the annuities and Teachers' Pensions. Their total income of £36,888 per annum meets the expenditure needs with the option to increase or decrease this amount as circumstances dictate.
In a few years time, when their expenditure has decreased, as identified by the cashflow plan, Alan can decrease his investment-linked annuity down to the minimum income level. Should either he or Ceri require additional income for care home costs or other expenditure, Alan can increase the income from the investment-linked annuity and the remainder of the uncrystallised Sipp, providing him with great flexibility.
The DGT gives them additional income and the comfort that their son will benefit on their death and the amount of tax they pay is minimised through the tax deferred DGT income payments and the improved death benefit position. Overall, they will achieve an IHT saving of £44,000 if Alan survives seven years.
We visited Alan and Ceri last month and they seemed to be enjoying retired life.
They still have no particular goals other than to enjoy retirement, and given Ceri's ongoing health concerns do not intend to jet around the world. Alan has started to collect silver objects and hopes this will occupy his time and keep him out of Ceri's hair.
We will revisit them every year to review their DGT, Sipp and investment- linked annuity investments and ongoing income needs.
Alan and his wife Ceri were both 59. They have one son and two grandchildren and are generally financially independent. They were both teachers and had been considering their options as their normal retirement age of 60 was approaching. They both joined the Teachers Pension Scheme when they started teaching many years ago, so were unaffected by the Government's proposed changes to the scheme.
They have a small investment portfolio valued at £110,000 and various Isa and cash account holdings which we review annually to discuss performance and consider rebalancing in light of market movements and their attitude to risk. As part of that review meeting, both Alan and Ceri confirmed their desire to retire next year and wished to discuss their options in more detail.
We obtained their Teachers Pension statement, which showed that Alan and Ceri were entitled to a lump sum respectively of £101,000 and £61,285 with a residual pension of £15,200 and £9,120 per annum. Both Alan and Ceri had worked in industry before teaching and Alan had a Self Invested Personal Pension fund valued at £125,000 and Ceri had a personal pension valued at £75,000.
Their aim was to ensure that, after having enjoyed a successful working life, they would have a comfortable retirement without having to give serious thought or have any worries about their financial position, while also keeping an eye on providing something for the next generation and paying as little tax as possible.
This is a real life case study. Names and some other details have been changed to protect confidentiality.
To give Alan and Ceri plenty of time to think about their retirement, we sat down with them 12 months before their respective retirement dates, reviewed their circumstances and had a detailed discussion about their retirement plans and objectives. Although they were long standing clients, we also completed a specific At Retirement factfind which we have developed to help us pick up all the important information relevant to planning at this stage in a client's life.
The factfind also acts as a retirement checklist and prompted Alan and Ceri to consider some aspects of their retirement that they had not previously given thought to. Specifically, their current and ongoing health. Ceri had a cancer scare a couple of years ago and while past the worst, was still receiving mild treatment.
In terms of budgeting issues, Ceri and Alan had given little thought to the question, "how much is enough?" Although they knew roughly how much income they needed to cover their basic expenditure, they were in the dark as to the income required to meet the standard of living they were envisaging or as to how long this level of income would be sustainable given their finances. They were therefore careful to complete as fully as possible the income and expenditure sections of the factfind.
We then discussed their views on life expectancy, inflation and annuity rates. When we explained to Alan and Ceri the effect these key risks could have on their income in retirement, we found out they had some strong, and opposing, views. Alan, for example, didn't like the inflexibility of annuities and given the current low rates for annuity purchase, said a lifetime annuity was not for him. Ceri, on the other hand, liked the certainty an annuity offered and because of her previous medical condition, had concerns about her life expectancy.
As well as identifying these areas to take forward, we were also keen for Alan and Ceri to understand the advantages and disadvantages of all the options available for taking income from their pensions. We also looked at their wider assets and chatted about for what use these assets were earmarked and whether they could be restructured for income either now or in the future. Alan confirmed they had no definite plans for their existing investments but would like them to be held tax efficiently and be available to provide income if necessary. However, he did intend to use the £162,285 tax free cash that they would receive from their Teachers Pension to reduce their mortgage.
During the meeting, Alan and Ceri both commented that they had not realised that there were so many different income options available, and that had they not received any advice, they would probably have just taken the annuity offered by their pension provider, along with their Teachers Pension.
We talked about investment risk specifically in regard to retirement, as we had already asked them to update their risk profile at the last investment review. Alan had a "highest medium" risk profile and Ceri a "low" risk profile and both believed their attitude to risk would not change in retirement.
From this meeting, we now had a good idea of what Alan and Ceri were hoping to achieve in their retirement years. Although they did not have any major or life changing plans, they had worked hard all their life and were primarily concerned with ensuring their financial wellbeing now and for many years to come, as Ceri said "It's taken us 40 years to earn it, we don't want to lose it all in a week!"
We explained to Alan and Ceri that the next stage of the process would be for us to consider their circumstances and objectives and undertake a cashflow analysis. This would identify what was achievable given their finances and also help shape our recommendations as to the most suitable strategy.
From the cashflow planning exercise, it became clear that their initial expenditure requirements were quite high at £36,888 per annum. However, this figure would reduce over time before potentially rising again at a later age when care home costs might be incurred.
We therefore held a further meeting with Alan and Ceri to discuss our findings and set out various scenarios. We talked in more depth about the income options available and it was clear that the most suitable option for Ceri was a lifetime annuity. She wanted to take zero risks with her pension fund and liked the fact that the income was guaranteed for life. As we had already asked her to complete a common quotation form, we had ascertained that she would qualify for an enhanced annuity based on her medical and lifestyle details. This provided her with an uplift in income of £4,068 per annum, 35 per cent above that available from her current pension provider and 13 per cent above the highest open market annuity available.
Including the Teachers Pension, this would provide Ceri with a total income of £13,188 per annum.
Alan, however, wanted to take a slightly more adventurous approach and was keen to keep his pension fund invested. His Teachers Pension entitlement was £15,200 per annum, so together with Ceri's income of £28,388, there was a shortfall of £8,500 per annum.
We talked to Alan about options that meant his funds remained invested and he liked the idea of investment-linked annuities as they were able to provide a higher income than a lifetime annuity but with a guaranteed level of minimum income, therefore capping the downsize but not the upside. Alan also felt this was preferable to income drawdown as the GAD rate was currently at a historic low.
We also discussed inheritance tax planning and passing on wealth to their son and grandchildren. We agreed that the best way to do this would be to transfer his investment portfolio in specie, so as to save on the costs involved in selling and repurchasing funds, into a Discounted Gift Trust (DGT). A DGT would allow Alan to retain his investment portfolio on the existing portfolio but also give him an immediate reduction in his estate for IHT purposes and further decrease his IHT bill, if he subsequently survives for seven years. Importantly, Alan was also able to choose to take a tax deferred income from the DGT and choose his son as the beneficiary of the fund left upon his death. Alan chose to receive an income of 5 per cent of the investment, that is £5,500 per annum.
As a result, we told Alan that he did not need to crystallise all of his Sipp and would only need to access enough to fund the remaining shortfall of £3,000. By not having to crystallise all of his Sipp, Alan improved the position for his family upon his death as the uncrystallised fund is available as a lump sum, tax free instead of being taxed at 55 per cent.
Having discussed the options with Alan and Ceri, we presented our recommendations to them in a written report. In the report, we recommended the following:
An enhanced annuity for Ceri from her personal pension giving her an income of £4,068 per annum;
Both Alan and Ceri to take tax free cash in total of £162,825 from the Teachers Pension Scheme and income of £24,320 per annum;
Transfer the investment portfolio in specie to a DGT and receive £5,500 per annum income and immediate removal from his taxable estate of £30,000;
Crystallise £45,000 of his Sipp to purchase an investment-linked annuity and receive an income of £3,000 per annum.
Alan and Ceri were satisfied that their objective of enjoying a comfortable retirement without worrying about money was met by identifying the income and expenditure needs from the cashflow planning exercise and the income set up with the annuities and Teachers' Pensions. Their total income of £36,888 per annum meets the expenditure needs with the option to increase or decrease this amount as circumstances dictate.
In a few years time, when their expenditure has decreased, as identified by the cashflow plan, Alan can decrease his investment-linked annuity down to the minimum income level. Should either he or Ceri require additional income for care home costs or other expenditure, Alan can increase the income from the investment-linked annuity and the remainder of the uncrystallised Sipp, providing him with great flexibility.
The DGT gives them additional income and the comfort that their son will benefit on their death and the amount of tax they pay is minimised through the tax deferred DGT income payments and the improved death benefit position. Overall, they will achieve an IHT saving of £44,000 if Alan survives seven years.
We visited Alan and Ceri last month and they seemed to be enjoying retired life.
They still have no particular goals other than to enjoy retirement, and given Ceri's ongoing health concerns do not intend to jet around the world. Alan has started to collect silver objects and hopes this will occupy his time and keep him out of Ceri's hair.
We will revisit them every year to review their DGT, Sipp and investment- linked annuity investments and ongoing income needs.
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