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We have provided the following case study to illustrate a typical client's situation. It should be used for guidance only as not everybody is suited to the advice given in this case study.

Mr Client was 49 years old and had a preserved pension from 15y service in the Royal Navy. Mr Client wanted control of his own pension and the flexibility to take benefits when and how he chose.

At this point the Royal Navy pension was £9,100 pa with a lump sum of £27,299; the projected pension benefit at age 60 was £11,884 pa. The pension would increase with inflation and provide 50% benefits for his wife on his death – as an alternative the scheme trustees offered a transfer value of £115,455.

His Risk Profile could be summarised as balanced to adventurous!

He agreed to transfer to a Personal Pension with the intention of drawing his tax free cash of 25% of the fund value at age 50. He felt the increases offered by the Royal Navy Scheme were mild compared to the potential growth offered by the investment markets over the medium-term.

By February 2008, when he reached 50, the transfer value had grown to £136,521. It was then moved to a Pension Drawdown plan and he took tax free cash of £34,130. The remaining fund, after taking into account the charges, was £99,456, and providing an income of £6,635 pa. On 13 July 2010 the plan value was £113,006.

After adding in all income taken to date, the equivalent value is £127,584. This is a return of 28.3% over a period that the ftse 100 has dropped 10.4% and the RPI index has increased 6.2%. The fund value ignoring the income is £113,103.

•  He has a flexible income of up to £6,635 pa.
• This income is reviewed every 3y to reflect changes in age, gilt yields and fund value.
•  His pension is not halved on his death, it can be passed to his wife in its entirety.
•  It will also not disappear on his wife's death, as any remaining fund could then be passed as a legacy, albeit less 55% recovery charge.

Due to our pro-active management we have made progress against a strong headwind, and expect to further improve returns if markets come off current lows, as we expect they will.

Mr B retired in 2008 with a personal pension valued at £600,000 after taking tax free cash. He had worked hard all his life to build up this retirement pot and he approached The Pension Drawdown Company to discuss his options and then used the money to go in to a pension drawdown fund.

Unfortunately not long after his retirement Mr B died. However, his widow was relieved to discover that the pension pot could be transferred in to her name and she could continue to benefit from the entire fund value.

Had Mr B opted for an annuity when he retired, he would have had to have sacrificed almost a quarter of his annual income to purchase 100 per cent death benefit for Mrs B. This is because of the cost of building in this benefit to the annuity itself.

She now lives comfortably with a pension income equal to the amount her late husband drew and she is very happy knowing that when she dies the pension pot will be left to her three children.

Mr D approached The Pension Drawdown Company in November 2002 when he was retiring aged 60. In February 2003 his pension fund was used to provide 25 per cent as tax-free cash (£11,305), with the remainder placed in an income drawdown plan with a fund value of £33,916.

Since then Mr D has enjoyed an income of £25,464 as well as the tax-free cash sum. A plan which was worth £45,221 to start has paid out a total of £36,759 so far and with proactive management is still worth £41,655.

The important thing to Mr D at the time was that his wife would receive the full value of the plan should anything happen to him. Now both are pleased that the fund has grown and there is also the hope they will be able to leave part of this in their wills to their children (subject to the 55 per cent government recovery tax charge of course). In their opinion, this is better than the fund dying with them. 

BACKGROUND

Richard Williams started taking Unsecured Pension (USP) shortly after his 60^th birthday in June 2006. After taking his Pension Commencement Lump Sum (PCLS) he had £320,000 available for drawdown which gave him a maximum income of £24,576 per annum¹.

Richard has been taking the maximum income permitted, and wishes to continue to do so. The level of benefits he can take will be reviewed on 30 June 2011 as this is 5 years after benefit crystallisation.

Richard's pension fund is now valued at £280,000.

SOLUTION

Another option would be to consider a scheme pension. Richard is in fair health as he has high blood pressure, but is otherwise healthy. The maximum income available under scheme pension is £22,388 per annum and a pre-determined term of 10 years is available at no extra cost.

His Financial Adviser explains that the level of income will be reviewed every three years under both options, with the option for the member to request an annual review with drawdown or reviews at any time with scheme pension. If Richard's health deteriorates then the level of scheme pension can be reviewed to reflect his shortened life expectancy; this is not an option under drawdown.

The annuity option is also considered; the maximum available based on single life, level income with no guarantee is £19,227 per annum⁴.

Richard opts for scheme pension as he wants to keep control of his fund and this offers him the highest level of income. He understands the level of income is not guaranteed for life but is happy as he wants to keep his funds invested and to maximise income.

¹ gilt yield was 4.5% in June 2006, 2006 GAD tables were used and 120% maximum income

²gilt yield for June 2011 is 3.75%, 2011 GAD tables used and 100% maximum income

³ pending Royal Assent of Finance (No.3) Bill 2011

⁴best annuity quote from retirement-partnership.co.uk on 16 May 2011 

BACKGROUND

Amy Hewitt (66) has retired from her civil service position for health reasons, and is concerned that she may not be able to sustain her current standard of living because her total income will no longer exceed her monthly outgoings.

She has reviewed her finances and believes that if she used part of her pension savings to pay off a lump sum from her mortgage, she will be in a manageable position. Amy researched the market and realised that she needed advice and immediately appointed a Financial Adviser.

Amy's current pension savings are:

• State pension £ 5,312.00 per annum gross

• Financial salary scheme £ 14,688.00 per annum gross

• Personal pension £ 80,000.00 uncrystallised

SOLUTION

Her Financial Adviser reviewed her situation and requirements, and recommended that she only crystallise the amount she actually needed, as this would reduce the 55% recovery charge on her death. He explained that because her health may still improve flexibility was a requirement, and she should not tie herself into a contract that could not be amended or exited.

As Amy had secured the Minimum Income Requirement (MIR) of £20,000 per annum she was eligible for Flexible Drawdown.

Keen to reduce her tax liabilities and maximise her income, her Financial Adviser recommended that Amy transferred part of her personal pension into a SIPP for Flexible Drawdown. In order to prevent Amy from paying higher rate tax her income for the 2012/13 tax year must not exceed £42,475. He advised Amy to transfer £29,960 of funds for flexible drawdown, of which 25% was payable as a Pension Commencement Lump Sum (PCLS) and paid tax free (£7,490). The remainder of the fund (£22,470) was paid as income through PAYE as a one-off income payment immediately.

Amy's total income for the 2012/13 tax year was £42,470 (£20,000 plus £22,470). Amy had no other taxable income and there was no higher rate tax to pay. The net income plus her PCLS payment was then used to pay a lump sum figure from her mortgage, which reduced her monthly outgoings.

Amy is unable to make contributions in the 2012/13 tax year as this would invalidate the declaration. Her Annual Allowance is set to zero for subsequent tax years.