Every client will have their own needs and desires that are hugely significant to them and therefore to their adviser in helping them to achieve their goals. What matters is a consistent and proven process to identify the options available to them and which is likely to be the most suitable one for them. This is particularly true when it comes to taking benefits.
Angela has been watching Grand Designs. She and her husband Andrew have found a 1950s townhouse which she wants to buy and completely refurbish for their eventual retirement in 10 to 12 years’ time. As she has reached age 55 she would like to take advantage of the pension freedoms she has read about by withdrawing about £65,000 from her self-invested personal pension (SIPP) to fund a deposit and the bulk of the property renovations.
Available resources
| Angela (55) | Andrew (53) | |
| Current income | ||
| Earnings | £12,000 p.a. | £75,000 p.a. |
| Income from savings | £1,900 p.a. | £3,750 p.a. |
| Available capital | ||
| SIPP | £251,000 | |
| Savings | £64,000 | |
| Shares | £500 | £145,000 |
| Future income | ||
| State pension @ 67 | £8,300 p.a. | £8,300 p.a. |
| Projected annuity @ 75 | £8,900 p.a. | |
| Projected OPS income @65 | £60,000 p.a. |
During the conversation with her financial adviser, Angela explains that the house purchase and renovation is to be her own project and that she wishes to fund it from her own resources. Her husband’s financial assets will continue to be used to fund their lifestyle and also provide security for Angela if her project is unsuccessful.
Angela’s savings are currently spread across bank and building society accounts and primarily invested in deposit and higher interest investments. She will certainly have access to these funds should they be required but it would require some work to raise a single lump sum and she would incur some tax charges as a result. It is decided to leave these funds alone to provide security and to potentially fund any excess expenses relating to the property development.
The adviser informs Angela that she could withdraw up to £62,750 as a tax-free lump sum from her SIPP but that anything in excess of this would be taxed as income, as well as limiting her ability to make more contributions. They discuss the option of an annuity but this is discounted as she does not require the income at this time. She is also averse to the more limited benefits that would be available for her family in the event of her death.
Withdrawing an uncrystallised funds pension lump sum (UFPLS) would not meet her needs either as an element of the withdrawal would be taxed, therefore the option of taking the maximum PCLS from flexi-access drawdown is deemed to be most suitable, providing the remaining fund is capable of supporting her future income needs.
Cashflow analysis
Angela does not require any additional income at this time, however she estimates that she will need a total income of £14,000 when she finally retires, probably at age 67. Her cashflow analysis, including an allowance for long-term inflation, shows that her earnings and income from savings should be sufficient to provide this level of income until her state pension becomes payable, and that she should have the option of either withdrawing income or purchasing an annuity in excess of this level at that time.
Her adviser also carries out a stockmarket crash test and ascertains that should the pension plan suffer a 30% fall in equity markets during her early retirement years this would not have a significant impact on the outcome.
Investment strategy
Angela is a naturally cautious investor however, the analysis shows that she is not heavily dependent on her pension for future income. Given that she has over 10 years left before reaching her intended retirement date she agrees to take a medium risk approach towards the management of her fund. This is supported by the cashflow analysis which shows that a real return of 3.8% would be sufficient for her to achieve her objectives and provide an income surplus to her requirements at age 67.
Recommendation
Based on Angela’s requirement for an immediate lump sum, and the fact that she will be investing it in the development of a capital asset, the adviser recommends withdrawing £62,750 from her SIPP via flexi-access drawdown.
The remaining fund will be invested in line with a medium risk growth strategy in order to fund her likely income requirements in 12 years’ time.
Fiona Tait is technical director at Intelligent Pensions
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