Case Study - At Retirement Planning

A married couple had run a successful business for a number of years, but had ceased trading in 2006 so that they could retire. At that time their Executive Pension Plans were wound-up and the benefits transferred to Section 32 ‘Buyout Plans’.

Now aged in their mid-sixties, they had been living off the interest from their investments of approximately £750,000 (which were all in deposit accounts) since retiring, but were concerned that this was not a sensible long-term strategy i.e. tax inefficient, no inflation protection and income at the mercy of interest rates.

They had pension funds worth £1.2m in total and their objectives were to take their pension benefits to try and produce a total net income of around £50,000 pa, reduce their potential Inheritance Tax liability and implement an effective investment strategy for the rest of their lives.

They were initially interested in Unsecured Pension, or USP (similar to the old Income Drawdown) as the annuity quotes they had received from their existing Section 32 provider didn’t appear to offer good value. They had been to see another adviser who they felt had ‘steered’ them down the USP route, however, it was apparent during our initial meeting that they were very cautious clients who were not comfortable taking any unnecessary investment risk.

We explained all of the options available to them such as lifetime annuities, short-term or temporary annuities, Unsecured Pension (USP) and the new ‘3rd Way’ products and discussed fully the advantages and potential risks of each. They decided they wanted a guaranteed level of income to act as a ‘bedrock’ for the rest of their lives and that actually lifetime annuities best met their objectives after all. As they were both higher rate taxpayers they took the maximum tax-free cash entitlement of around £350,000 from their pensions before buying annuities.

We explained the possible advantages of utilising their Open Market Option and as one of them was not in the best of health we researched the terms offered by the enhanced/impaired lifetime annuity providers. The terms they had originally been offered by the existing Section 32 provider on their preferred annuity basis were for a combined income of £44,000 pa gross. However, by arranging an Open Market Annuity and an Enhanced/Impaired Annuity, we secured them a combined gross income of £58,000 pa – an increase of 31%!!

This, combined with their State Pensions and a small annuity that they were already receiving, met their objective of a total net income of £50,000 pa, meaning that they no longer need to use the interest from their deposit accounts as their income and we are now in the process of advising them on arranging lifetime trusts with approximately half of the monies they have on deposit. This will result in a considerable IHT saving if they survive for 7 years, of around £240,000 and they now know that they have sufficient capital available to them for the rest of their lives. They also require further advice regarding an appropriate investment strategy for the rest of their lives.



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