Ted owns a self-invested personal pension (SIPP) and has always been fiercely independent about managing his investments.
He does admit to reading the financial press and scanning the circulars sent to him but it was only by good fortune that he became aware he had to take early action to protect the future of his pension planning.
Ted is 74 and, for the first time, has approached a financial adviser to ask what he should do about mitigating his inheritance tax (IHT) position and reviewing his will arrangements. The adviser, of course, questioned Ted about his pension arrangements
The facts
Ted took tax-free cash in 2011 at age 67. His fund was then worth £1.7m which provided a pension commencement lump sum (PCLS) of £425,000 leaving a fund of £1,275,00 for income drawdown. The LTA was £1.8m at that time.
He did not apply for any lifetime allowance (LTA) protection when he took his tax-free cash and along the way he had also taken income from his scheme, as and when he needed to improve his liquidity, particularly when his daughter suddenly announced she was getting married.
He did tell his pension administrator he was going to apply for LTA protection but Ted did not think it was a big issue and never got around to applying for it.
He still owns a successful business but he is more often than not travelling around the world. His children now run the business on a day-to-day basis but he still draws income so is not totally dependent on his pension.
He was aware of the changes in death benefits brought in and that made him stop taking income from his SIPP, as he really felt that if he was to die before age 75 it would be nice for his family to have the fund tax-free.
After talking to his financial adviser, he now realises that he could have an issue.
His property, which in 2011 was valued at £1.1m, is now currently worth £1.4m.
He has an unconnected tenant who has gone on to be very successful and promptly pays the rent every quarter. The lease was just renewed for another five years at a level, which Ted believes, is very good.
Together with his other investments his total fund is now worth £1.8m. Ted has been advised that he is facing an issue as he did not realise he has to be tested against the LTA at age 75. It is the growth on his fund that is tested, i.e. £525,000 (£1.8 – £1.275). Ted used 94.44% of his LTA at the time he retired and any excess growth will now be taxed at 55%, if taken as lump sum.
To the rescue
However, his adviser points out he can now apply for Fixed Protection 2016. Ted was excited at this prospect but his adviser points out to him that he can only have protection of up to £1.25m. Ted is still happy with this as he feels that is better than nothing. In order to help reduce his pension fund he could also start drawing income from his fund and turn off income from his business.
Ted applied for Fixed Protection 2016 and arranged with his pension administrator to take some income this tax year, starting at the end of March and will take a regular income over the next tax year 18/19. The most the tax charge will be is 55% of the £455,500 excess but if he takes income before November next year then he will reduce this.
Ted realises he was lucky to meet his adviser and gain some protection for his hard-earned pension savings but also that he is lucky to have had his investments grow as well as they have.
Elaine Turtle is director at DP Pensions
The post RP case studies: Taking two bites of the cherry appeared first on Retirement Planner.