Example case study: Using Flexible Drawdown to help your family

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.

Janet Fox is 65 and was a member of her employer’s Final Salary scheme for a number of years before she decided to leave and set up her own business.

The Final Salary pension is now worth £15,000 per year, before tax. Janet also qualifies for a State Pension of £6,000 per year, taking her total income to £21,000 before tax.

Janet has decided to start to wind down her involvement in the business and retire. Whilst she will continue to work for the business in a consultancy role, until the handover is complete in around a year’s time, her exact level of income will only become clear over time, depending on the amount of work involved.

Janet’s business was very successful and she has been able to build up a SIPP (Self Invested Personal Pension) fund in excess of £500,000 invested by her Independent Financial Adviser (IFA) in a wide range of different funds, which match Janet’s attitude to risk.

Although Janet’s children are grown up and will be taking over the business when she retires, her long term partner has little pension provision of his own and she is keen to provide for him should she die first.

Other than their main home, which has no mortgage outstanding, and around £45,000 in Cash ISAs Janet and her partner have no other assets.

Objectives

Janet visits her existing IFA to discuss her retirement objectives:

• As she is going to continue working for the business on a consultancy basis Janet is sure this income, plus her Final Salary pension and State Pension will be sufficient to meet her outgoings this year
• However, as the handover of the business nears completion next year, Janet intends to reduce her hours more significantly and ultimately finish work altogether. She therefore wants to be able to take additional income from the SIPP as and when it is required
• Once the handover is complete Janet and her partner would like to spend more time with their grandchildren. They would also like to take extended holidays, which were not possible whilst the children were growing up and Janet was building the business. They have no set travel plans and therefore need flexibility to draw fluctuating levels of income safe in the knowledge that their day to day outgoings are met by their guaranteed pensions
• Janet is also concerned that, although her partner could support himself on his State Pension and a small Annuity on her death, she wants as much of the SIPP as possible to be left to him to enjoy as he supported her whilst she was building the business

Options

Janet, her partner and their IFA meet to discuss the options available. Following a thorough fact find, their IFA presents his recommendations:

• As Janet wants to be able to have flexibility in her income levels, whilst being able to leave a lump sum to her partner, an Annuity was quickly discounted
• Traditional Income Drawdown, also known as Capped Drawdown, was also naturally considered. However, because in some years Janet will want to take more than the maximum income available under Income Drawdown she felt this option would be too inflexible
• As Janet’s guaranteed sources of income produce more than £20,000, the level of the Minimum Income Requirement, her IFA has therefore recommended Janet use Flexible Drawdown
• Janet cannot immediately enter Flexible Drawdown as she has made a pension contribution in the current tax year. Her IFA therefore recommends Janet starts to plan for entering Flexible Drawdown in the next tax year, when the handover of the business should be nearing completion and Janet can look forward to long overseas trips with her partner
• Her IFA correctly points out that Janet will only need to crystallise enough tax-free lump sum and income to pay for each trip, leaving the balance of the pension fund uncrystallised and therefore payable as a tax-free lump sum to her partner should she die before he does and before age 75; meeting another of Janet’s key objectives
• Unfortunately Janet’s current SIPP does not offer Flexible Drawdown. Her IFA therefore recommends a suitable alternative having researched the market. Janet is made aware of the charging structure of the new SIPP provider, which has roughly the same annual charges as her current provider. At the same time her IFA explains his fees for delivering this advice to Janet

What has been achieved?

Following the advice of her IFA Janet has achieved all her objectives:

• She has been able to find a way of accessing her pension which gives her ultimate income flexibility to meet her needs when the handover of the business is complete
• By only crystallising sections of the SIPP as and when funds are needed this will leave the maximum possible tax-free lump sum to her partner on Janet’s death before age 75

Next steps

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 info@investmentsense.co.uk.