Example Case Study: Using Flexi-Access Drawdown to pay for your children’s university education

Please note this case study is not based on real life events and is intended to show how Flexi-Access 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 Financial Planner or 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.

Objectives

John meets with his Financial Planner; 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

Options

John and his Financial Planner 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’s Financial Planner suggests that Flexi-Access Drawdown could help him meet these objectives:

• He would be able to access the pension funds by drawing just sufficient for his needs, whether lump sum or regular income
• John would also like his children to benefit from his pension should he die suddenly

John’s adviser confirms that if he was to crystallise £132,000 of his pension fund, this would provide him with a tax free lump sum of £30,000, which  can be gifted to his daughter who is currently looking for a house to buy having left university last year.  The remaining £3,000 tax free cash would then give him the additional income he needs.

The following is therefore agreed:

• John will crystallise £132,000 of his pension fund and gift £30,000 of the lump sum  to his daughter and retain the £3,000 to cover the shortfall in his income requirement. He will not draw any taxable income from the crystallised fund.
• John will leave the balance of his pension invested with his current SIPP provider until the following year when he needs a further amount of income and will crystallise a further £12,000 and take the tax free lump sum of £3,000 but no income. If his son also requires financial assistance at that time, he will crystallise a further amount as needed.
• John will repeat this until all his tax free cash entitlement has been used up to meet his income needs.
• In future years when there is no further tax free cash available, John will be able to continue to draw an income, however this will become taxable at his highest marginal rate for income tax.
• John’s existing SIPP provider offers Flexi-Access Drawdown and after a thorough comparison with other providers John’s Financial Planner recommends that no change in provider is made
• The fee payable to John’s Financial Planner for the advice is taken from the SIPP

What has been achieved?

John has achieved a number of objectives using Flexi-Access Drawdown:

• John’s outgoings are covered by his guaranteed pension and tax free regular income for a number of years.
• He has been able to use his tax-free lump sum to help his daughter get onto the property ladder
• By using Flexi-Access 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 whole of the pension funds will be available to his children as a tax-free lump sum.
• 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 Flexi-Access Drawdown can work for you, or SIPPs in general, then contact one of our team of highly qualified and knowledgeable Financial Planners on 0115 933 8433, or by emailing info@investmentsense.co.uk.