Please note this case study is not based on real life events and is intended to show how Flexible Drawdown 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.
John Lewin is 65 in a month’s time and is considering how best to use his existing pensions when he retires shortly.
He has a number of different pensions, including:
- A deferred Final Salary pension, which will provide him with an index linked pension of £8,500 per year
- A State Pension, which will give him an annual income of £9,500 per year
- A SIPP (Self-Invested Personal Pension), which he has built up over the years and now has a fund value of £260,000
In addition to his pensions John also owns a house, on which there is no mortgage outstanding and he has around £100,000 in Individual Savings Accounts (ISAs); split equally between Cash and Stocks & Shares. John has always taken a rather adventurous approach to his investments, preferring to invest his SIPP in equities.
John is divorced and has two children, Peter who is on a gap year and will start university in around a year’s time and Jane who left university last year and is now on a graduate training course.
John is healthy and expects to have a long retirement.
John meets with his Independent Financial Adviser (IFA); they discuss John’s upcoming retirement and identify a series of objectives:
- John has produced a list of his annual expenditure and it is clear the income from the Final Salary pension and State Pension is about £3,000, before tax, short of meeting his needs
- John wants to help his children financially. He would like to ensure Peter leaves university with no debt and he would also like to give both of his children a deposit to help them buy their first house
- John estimates that to meet these goals he will need to find an additional £10,000 per year, for three years, to help Peter and then two lump sums of around £30,000 as house deposits
John and his IFA spend some time discussing the various options available.
John does not want to use his existing ISAs to help his children financially as he sees these as being his emergency fund, which will also be there for him in later life should unforeseen capital expenditure rise. Furthermore the ISAs are of course a tax-efficient way of saving, which John is not keen to give up.
John is also initially not keen to use an Annuity to create an income from his pension fund. However, his IFA points out that John is actually very close to satisfying the Minimum Income Requirement (MIR) of £20,000 per year gross and that if he were to annuitise part of his pension fund, enough to give an additional £3,000 per year he would achieve a number of things:
- He would have sufficient guaranteed income to meet his annual outgoings
- He would have an annual income, from guaranteed sources, of £21,000, which is more than the MIR
- He would then be able to access Flexible Drawdown, giving him more flexibility to help his children out financially as per his objectives
- John would also like his children to benefit from his pension should he die suddenly
John’s IFA calculates that to generate the additional £3,000 per year, assuming annual rises linked to inflation are included, would cost John £85,000, meaning before tax free cash approximately £115,000 needs to be crystallised from his pension fund.
John is happy with this as the tax free cash of approximately £30,000 can be gifted to his daughter who is currently looking for a house to buy having left university last year.
The following is therefore agreed:
- John will crystallise £115,000 of his pension fund, use £85,000 to buy an index linked Lifetime Annuity of £3,000 per year and gift the tax-free cash to his daughter
- John will leave the balance of his pension invested with his current SIPP provider until his son requires financial assistance in around a year’s time
- John will then utilise Flexible Drawdown, which he qualifies for having partially vested his SIPP via an Annuity, to draw down a combination of income and tax-free cash to help meet his son’s expenditure
- John’s existing SIPP provider also offers Flexible Drawdown and after a thorough comparison with other providers John’s IFA recommends that no change in provider is made
- The fee payable to John’s IFA for the advice is taken from the SIPP
What has been achieved?
John has achieved a number of objectives using a combination of Annuity purchase and Flexible Drawdown:
- John’s outgoings are covered by guaranteed index linked income
- He has been able to use his tax-free lump sum to help his daughter get onto the property ladder
- By creating additional income from an Annuity, Flexible Drawdown has become an option for John allowing him to vary the income he takes each year in line with the needs of his son
- If John dies unexpectedly early and before age 75 the unvested pension funds will be available to his children as a tax-free lump sum, or as a lump sum less 55% tax on death on or after age 75)
- John’s ISAs have been left in situ to act as an emergency fund and cover unforeseen future expenditure
If you would like to learn more about how Flexible Drawdown can work for you, or SIPPs in general, then contact one of our team of highly qualified and knowledgeable advisers on 0115 933 8433, or by emailing firstname.lastname@example.org.