The Situation
Quinn is approaching her 65th birthday and plans to retire shortly afterwards. She currently has several different pensions which she’s built up throughout her working life.
Quinn wants her pensions to be able to meet three main requirements:
- Her essential day-to-day income needs, which will be higher in the first year or so before she reaches state pension age.
- Income for discretionary spending such as holidays and wedding gifts.
- Provision of a fund to be left to her children and grandchildren on her death.
Quinn is considering consolidating some of her pensions to make them easier to deal with when she retires. She envisages ending up with three pensions, so that she has one for each of her three goals and can manage the funds accordingly.
Quinn wants the money earmarked for her day-to-day income needs to be readily accessible to make sure that there are no interruptions to her regular payments. She would also like to minimise the risk of those funds fluctuating too much in value. Quinn is less concerned about this for the funds set aside for her discretionary spending as this will be much more flexible, so she should be able to make changes if needed. With the funds she wants to leave aside to pass on to her beneficiaries if everything goes to plan, Quinn wants to make sure that they are kept relatively safe: she doesn’t want her beneficiaries to lose out and doesn’t want to leave herself without a safety net. However, she’s not too concerned about keeping the funds easily accessible.
Quinn decides to speak to a financial adviser, Byron, about her plans for her pensions.
Byron appreciates Quinn’s three requirements and her desire to employ different investment strategies for each. However, he doesn’t believe she will need separate pensions for the different investments and asks if Quinn has ever considered holding a self-invested personal pension (SIPP). He explains that SIPPs are among the most flexible of pension products, and fully bespoke SIPPs will allow clients to hold a wide range of different investments and accounts within the same product. This way Quinn could meet all of her objectives in one place.
Byron suggests that first of all, Quinn’s SIPP could hold a bespoke structured portfolio to help meet her day-to-day income requirements. This kind of portfolio would help her to avoid sequencing risk on the funds she will be withdrawing regularly in the short term. She could also consider putting some of these funds into fixed term bank account. For the discretionary spending and the money Quinn wants to leave aside for her beneficiaries, a SIPP will allow her to access a range of other investment accounts and direct holdings. Another benefit of holding all of her funds in a SIPP is that Quinn will be able to easily change her investments and strategy when needed. It will also be easier to rebalance the value of funds assigned to each type of investment if required.
Quinn asks about her options for accessing her benefits from a SIPP. Byron confirms that SIPPs are normally very flexible in terms of income payments: Quinn will be able to establish regular income payments which she will be able to amend as needed, and will also have the option to take ad-hoc single payments when needed to meet her discretionary spending.
Byron goes on to confirm that SIPPs are normally also very well placed to offer flexibility for death benefits payments as well. The rules for defined contribution schemes allow death benefits to be paid to any beneficiaries (not just, for example, the individual’s dependants); additionally, any beneficiary may have the option of putting their inherited funds in drawdown, allowing them to continue benefiting from pension tax advantages until they withdraw the funds.
However, while the general legislation allows these options, the rules of individual pension schemes can sometimes offer greater restrictions. SIPPs, however, are most likely to offer as much flexibility as the legislation allows.
Therefore, a SIPP is not only suited to Quinn’s requirements, but is likely to be advantageous for her beneficiaries as well.
The Results
With Byron’s help, Quinn consolidates her pension funds into a SIPP which offers the investment flexibility she requires. She establishes a structured portfolio for her immediate income needs and selects a range of other investments for the remaining funds.
They set up regular monthly income payments and arrange for these to decrease in value at the time when Quinn’s state pension will begin. Quinn also makes sure that she knows who to contact if or when she requires an additional ad-hoc payment.
Finally, she puts an expression of wishes in place in favour of her children and grandchildren to make sure they will have the option of beneficiaries’ drawdown when the time comes.
Jess List is technical specialist at Curtis Banks