Pension and Investment Review

Background

Tim, is aged 57 and in good health, is one of three directors who owns a thriving pharmaceutical business.

Tim, is married to Karen, aged 50 who is a retired teacher and also in good health.

Neither Tim nor Karen have any children.

Currently Tim is earning a salary of £115,000 and receiving pension contributions of £15,000 per annum from the company. Karen wants to give something back to the community so she is volunteering to help the elderly two days a week and is now financially dependent on Tim to maintain their standard of living.

Tim is aiming to retire at age 60 and anticipates that between them they will require a joint net income of £52,000 per annum. This is similar to their current expenditure which they do not expect to drastically change in retirement.

Tim has three deferred pensions from previous employers, an old legacy pension product called a retirement annuity contract (section 226), a Self-Invested Personal Pension and is also a deferred member of a defined benefit scheme.

In addition to his pensions Tim, has accumulated a sizeable amount in deposit accounts, investment and cash ISAs.

Karen has a deferred Teachers’ pension which she cannot access until age 55 and has no other savings or pension provision.

Analysis

A full discussion of Tim and Karen’s objectives and goals was undertaken and analysed in line with their circumstances.  This was initiated via the completion of our robust fact finding and risk profiling processes.

Tim and Karen both signed information mandates in relation to their existing policies enabling Depledge to communicate with the scheme administrators and obtain full details on all of their arrangements.

Upon receipt of the requested information a thorough review and analysis was completed and used as the foundations for putting in place a suitable holistic financial planning strategy designed to achieve their objectives.

Outcomes

Two detailed reports and three meetings were completed with Tim and Karen over a number of weeks with a summary of the outcomes below:

• We established that the pharmaceutical business has nothing protecting the business should Tim or one of the other two shareholders die. To prevent conflicts of interest in the unfortunate event that one of them should die we put in place shareholder protection plans for Tim and the other two shareholders along with cross option agreements. This meant that should one of the shareholders die the surviving spouse would receive a lump sum payment whilst the other shareholders could continue to operate the business.
• State Pension Forecasts were obtained which highlighted Tim will be entitled to a full State Pension currently £7,865 per annum under the new regime at age 66 and Karen would be entitled to a State Pension of £5,500 per annum at age 67.
• As the amount Tim was holding in cash reserves was  with one bank and well in excess of the £85,000 (soon to be £75,000) deposit protection limits provided under the Financial Services Compensation Scheme  we helped him spread the monies across several banks to maximise the protection available.
• Tim’s defined benefit scheme was projecting an annual pension from age 60 of £27,000 per annum and a spouse’s pension of £18,000 per annum in the event of Tim’s death. Furthermore the annual pension provided from the scheme was indexed linked meaning it would keep pace with inflation during payment. Tim retained this pension in situ knowing this guaranteed income for life would provide a secure footing for their overall retirement strategy.
• Tim’s three paid up occupational money purchase pensions were consolidated into his existing SIPP resulting in a total investment amount of £300,000. The SIPP provided access to a much greater investment choice, cheaper overall policy charges and access to the new pension freedom options at retirement.
• We reduced the level of exposure to volatility of the retirement annuity contract’s investment strategy; locking in the gains as retirement approaches and retaining the pension in situ. The policy was offering a very favourable guaranteed annuity rate of 15% per annum from age 60. Based on the current value of £31,000 this equated to £4,650 per annum.
• Tim made a net personal pension contribution from his disposable earnings of £12,000 (£15,000 gross) into his SIPP. Not only did the contribution enable Tim to receive 40% tax relief on the contribution it also reinstated his personal allowance back to £10,600 from £3,100 as his net relevant earnings were now £100,000.
• The investment strategy of the SIPP was adjusted according to Tim’s moderate attitude to risk with the view to generating both income and capital returns. The SIPP provided access to 1000’s of funds from the leading investment managers enabling a well detailed and diversified portfolio to be held.
• Karen’s pension was projected to provide an annual pension of £13,700 per annum, indexed linked from age 55 and so this was retained in situ.
• Death benefit nomination forms were completed for all pensions ensuring that all of the death benefit options were available and that the correct beneficiary/ies were in line to receive the benefits as per Tim and Karen’s wishes.
• Tim’s existing general investment account and ISAs were transferred onto the same platform as per the SIPP lowering the overall charges across all funds invested. The ISAs retained their tax efficient status upon transfer and it was agreed to sell down funds each year from the general investment account within the annual capital gains tax allowance to utilise both Tim’s and Karen’s ISA allowance. The total value of Tim’s investments was £620,000.
• The investment strategy of the investments were altered as per the SIPP in line with Tim’s risk profile and target income yield of 2% per annum (the rest being capital growth) being agreed across the whole of the portfolio in order to provide the residual income requirements in retirement when Tim reaches age 60.
• As Karen becomes entitled to her Teacher’s pension and both of them start to receive their State Pensions the need for income from the portfolio’s will reduce with the investment strategies being more focused on long term capital growth.
• The income will be taken in such a manner that both Tim and Karen are basic rate tax payers during retirement.
• Tim and Karen were charged a competitive fixed initial fee and an agreed ongoing fee levied on the funds under servicing. The ongoing service was important to Tim and Karen as they wanted to appoint a trusted financial adviser they felt they could work with.