Clients approached Depledge SWM requesting an overall review of their finances a few years prior to their retirement.
The clients were in their mid to late fifties with an objective to retire by age 62 and generate an income of at least £58,000 p.a. based on their current spending patterns and expectation to travel more in their retirements. They had read about the new ‘pension freedoms’ and wanted to understand how these relate to them.
Client A had four deferred pensions from previous employers and a current Group Personal Pension Plan where large regular contributions were being made to boost the retirement fund and reduce the overall income tax bill.
Client B had one deferred pension, an old pension called a section 32 plan and an occupational investment based scheme where a good level of contribution was being made.
The clients have a variety of investments in deposit saving accounts, cash ISAs, Investment ISAs and an Investment Bond with the major life office.
A full discussion of the clients objectives, family circumstances and aspirations were completed and recorded in a fact-find document that was later sent to the clients to ensure that everything was accurate.
Following the meeting mandates were sent to the scheme administrators and full details of all the pensions and investments were received to complete the file for the purpose of being able to advise on a detailed strategy to meet their objectives.
Two detailed reports and four meetings were completed with the clients over a number of weeks with a summary of the outcomes below:
- Client A was projected to exceed the pension lifetime cap (this is the maximum amount that you can have in pension schemes and plans and is known as the Lifetime Allowance (LTA)). If you exceed the cap when you retire then you can incur a large taxation bill of 55% of the amount that exceeds the cap. It was calculated that this would be in the region of £79,000.
- Client A had a number of deferred pensions guaranteed to keep pace with inflation and it was recommended that these were retained and in some cases put into payment (where no early penalty existed) to be tested against the lifetime allowance. The income generated would form a cornerstone of their retirement income.
- A detailed strategy was put in place to reduce the potential effect of the Lifetime Allowance cap and allow the client to continue to maximise pension contributions up to their retirement. This was achieved to testing the benefits at the current higher level of the LTA. It was estimated that around £79,000 was saved on Lifetime Allowance charges due to the action taken.
- Client B also had a number of deferred pensions guaranteed to keep pace with inflation and the s.32 also had a very valuable guaranteed annuity rate. These pensions were retained as the bedrock of their future income generation going forward.
- Detailed investment strategies were put in place across a range of plans to ensure that less risk was taken overall through diversifying holdings and removing some very poor performing funds. With the clients expecting to use drawdown facilities in the early years of retirement, it was important that some of the existing strategies designed for annuity purchase were changed.
- The use of drawdown strategies would allow the clients to make up for the shortfall in tax efficient income in the early years of retirement as some pensions were not available until age 65 and even age 66 in the case of the state pension entitlements.
- The nomination of benefits were updated in line with the new rules and investigations were underway to potentially change part of the employer Death in Service benefits to ensure that this would be tax efficient if death occurred before retirement.
- The existing investment portfolio was reviewed in detail and an ongoing programme was put in place to update the current portfolio and investments to lower the ongoing costs significantly and manage risk more effectively, utilising ISA and CGT allowances. The portfolio was then subject to regular asset allocation reviews and at least one annual face to face meeting to ensure that the plan remains on track.
- Importantly they have a retainer to have access to their assigned chartered financial planner throughout the year.
- A full cash flow lifetime forecast was produced to take both clients income streams (that come into payment at different times) and the capital currently held and expected to be received ongoing. This was detailed to age 100 in graphical form and assumed conservative estimates. It demonstrated that the clients should remain financially sound throughout what is expected to be a long retired period.
- The clients were charged a competitive fixed initial fee and an agreed ongoing fee levied on the funds under servicing. At this point the real work starts as they lead up to their retirements and into the future with the ongoing challenges to be faced.
- The clients have been financially prudent and at the point of their retirement will have reached an optimum point in terms of their wealth creation to date. The aims from that point will be to:
- Be tax efficient across the portfolio in terms of income taxation and longer term capital taxes.
- Maintain their income and capital in line with inflation
- Generate competitive returns in line with attitude to risk and agreed appropriate benchmark
- Retain their wealth to ensure their long term security with the challenges that come their way
- Have the flexibility within the plan to pass capital to other family members if and when appropriate within structures unique to their families.
- Make provision for an eventual inheritance tax bill or formulate a strategy to minimise the effect over the period of retirement.
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