Case Study 200pxPlease note this case study is not based on real life events and is intended to demonstrate how a SIPP can be used in a specific scenario.

Before such a transaction is entered into we would recommend that advice is taken from a suitably qualified Independent Financial Adviser.

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Problem: Now

Tom Hardy is 60, divorced, and taking semi retirement. He will continue to work for two days a week on a consultancy basis but wants to take some pension benefits to top up his regular income. He also wants to clear the remainder of his mortgage and purchase a new car as he will be returning his company car when he leaves employment; he needs £50,000 to cover both of these payments.

Tom is a keen investor, having traded both shares and investment funds successfully for many years. He likes to make his own investment decisions although he works closely with his Independent Financial Adviser on certain aspects of his financial planning.

Tom has a Self Invested Personal Pension (SIPP) currently valued at £500,000 invested in a range of funds, shares and some deposit accounts opened over the past couple of years in anticipation of partial retirement.

Being recently divorced Tom’s main assets, apart from a small, but adequate emergency fund, are his house and his SIPP; his other investments were passed to his ex wife at the time of their divorce.

Although he likes to manage his own investments he also likes to consult his IFA and now that he is nearing partial retirement he arranged to meet his adviser to discuss the best way of meeting his income and capital requirements; he is also concerned about preserving the death benefits of his pension for his adult children.

Possible solution

Having discussed with Tom his objectives and obtained an up to date record of his financial affairs Tom’s IFA recommends that he takes partial Capped Drawdown as follows:

  • £200,000 of the fund is crystallised
  • Tom takes £50,000 tax free lump sum (his IFA explains that this is now known as Pension Commencement Lump Sum)
  • Tom takes the maximum income of £8,400 per year, when added to his consultancy income this gives Tom enough money to meet his annual expenditure. His IFA explains that the maximum income is based on a current gilt yield of 3.50% and using current GAD tables

This solution gives Tom the lump sum and income that he requires and in the event of his death before the age of 75 the uncrystallised fund, valued currently at £300,000, is still available to be passed on tax free to his children. The crystallised fund would also be available as a lump sum for his death, although this would attract a tax charge of 55%.

Tom’s IFA also considers whether the move to Capped Drawdown should be made with the existing SIPP provider or by using an alternative company. Tom is happy with the trading options offered by his existing SIPP provider and the additional charges payable for moving into Capped Drawdown are competitive, Tom and his IFA therefore agree that the SIPP should remain with the existing provider.

Problem: Five years later

Having acted as a consultant for five years, and now aged 65, Tom decides to fully retire. Again he consults his IFA, this time about taking more income and the need to take an additional lump sum of £50,000 to fund a luxury round the world holiday with his new partner to celebrate retirement.
Unfortunately Tom’s consultancy has not been as successful as he expected, he therefore has not been able to rebuild his savings, which if he had, could have been used to pay for the holiday he wishes to take.

Following some successful investment decisions Tom’s pension is now valued £575,000 of which £420,000 is uncrystallised with the crystallised section worth £155,000 as the growth has been more than the income taken by Tom.

Possible solution

Tom’s IFA is impressed by the performance of the investments held in the SIPP, he points out that it is not always the case that a fund grows in value when income is being taken.

Having reassessed Tom’s circumstances and objectives his IFA recommends the following:

  • A further £200,000 of the fund is crystallised  allowing Tom to take £50,000, as a Pension Commencement Lump Sum, to fund his round the world trip
  • Tom then takes the maximum income under Capped Drawdown of £19,215 (based on a £305,000 Capped Drawdown fund, £155,000 already crystallised plus the additional £150,000 crystallised at age 65)

This gives Tom the lump sum he requires and also an income, which when added to his state pension, is sufficient for his needs.

Tom would still like to leave as much money to his children as possible and in the event of his death before age the uncrystallised fund is still available to be passed on tax free. As they will be passed on to his children as lump sums the crystallised pensions will be taxed at 55% on his death.

Summary

Tom is a keen investor and by using a SIPP has been able to access a range of different investments to suit his needs.

Furthermore by using Capped Drawdown and only crystallising enough in each event, at ages 60 and 65, to produce the income and capital needed Tom has also been able to maximise the amount which would be paid to his children should he die before the age of 75.

The flexibility offered by Capped Drawdown could also have been useful if Tom wanted to reduce his level of income in the event that he took on additional consultancy work or his new partner had a source of income.

Next Steps

If you would like to learn more about Capped Drawdown and SIPPs then speak to our team of highly qualified and experienced Independent Financial Advisers on 0115 933 8433 or email info@investmentsense.co.uk