What would you do? A case study in pension planning

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What would you do? A case
study in pension planning
If a client came to you in this situation, how would you deal with them? David Trenner sets the case
study and provides a model answer
Vic has brought his two
ic is 63 and married to
V
About the
author
David Trenner
is technical director
at Intelligent
Pensions
Roberta, 58. Vic gave
up smoking three years
ago, having smoked heavily
before that. He is on tablets for
high blood pressure and also
statins for raised cholesterol.
Roberta is in good health.
Vic runs his own business
and recent earnings have been
£150,000 p.a. before tax. Roberta,
a retired nurse, works in a charity
shop, with no remuneration.
Vic has a retained pension
from a former employer’s
defined benefit pension scheme
which is expected to pay about
£12,000 p.a. from age 65. He
also has £800,000 in a SIPP,
although no contributions have
been paid in the past few years.
Roberta is in receipt of a
pension from the NHS of
£18,000 p.a. She also has about
£7,500 in a stakeholder PP
(SHPP). Both Vic and Roberta
expect to qualify for a full state
pension when they reach state
pension age. They have ISAs
and other savings worth about
£400,000.
sons into the business, and
he has decided to reduce his
involvement now, with a view to
retiring fully in five years.
He expects to earn £110,000
for each of the next three years,
and about £50,000 p.a. in the
two years after that. He believes
that he will need about
£60,000 p.a. net in today’s
terms to live on.
Key questions
Q1. Roberta’s SHPP – what
should she do with this?
Q2. Should Vic/his company
pay further contributions into
his SIPP before he starts to take
benefits?
Q3. Assuming that he initially
goes into phased drawdown,
when should Vic consider
annuitising, and what sort of
annuities should he consider?
Q4. What key actions should
Vic take to reduce possible
inheritance tax?
Case study: model answer
Q1. Roberta’s SHPP – what should she do with this?
• It falls within new definition of ‘small pots’ if nothing is added
• She could add £3,600 p.a. to it
• The company could pay more if she has been employed by
Vic’s business.
Q2. Should Vic/his company pay further contributions into his
SIPP before he starts to take benefits?
• He could pay £190,000 using carry forward of
unused allowance
• Employer contribution would be subject to ‘wholly and
exclusively’ test
• Lifetime allowance (LTA) issues: £240,000 from retained
benefit + £800,000 SIPP + at least three years growth: could
have LTA issue without paying any more.
Q3. Assuming that he initially goes into phased drawdown,
when should Vic consider annuitising, and what sort of
annuities should he consider?
• Decade of annuitisation generally 70-80
• Mortality cross-subsidy kicking in
• Heavy smoker within past 10 years; two medications,
so will qualify for enhanced annuity
• Roberta is in good health and five years younger, so
joint life rate will not be subject to significant enhancement
• Does not need income for at least three years, probably
not for five years; at 68, with enhancement could qualify
for reasonable rate, so could buy some annuity on single
life basis
• Roberta covered by tax-free return of fund on unvested
segments up to his 75
• Could consider investment-linked annuity to gain mortality
subsidy but also opportunity for growth.
Q4. What key actions should Vic take to reduce possible
inheritance tax?
• Spousal bypass trust
• Gifting – gifts out of normal expenditure; and potentially
exempt transfers
• Is he retaining company shares?
This case study has been prepared by Intelligent Pensions
for discussion by advisers. No part of the case study or the
‘model answer’ should be construed as advice.
Retirement Planner | September 2014
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