Pension Case Studies

Problem

Peter was 60 in January 2006, married with one grown up child, he was currently running the family business and was in poor health. He had several small personal pensions as well as one large one which was a transfer from a previous Occupational Pension Scheme and which had a certified Tax Free Cash figure. He wanted to raise money to purchase an additional home abroad for his retirement and then partially retire over the next 5 years, taking reduced income from the business. His wife was a teacher and would benefit from a full pension at age 60 in May 2006. He had been discussing his estate planning with his lawyer and asked him for advice on the possibility of taking Tax Free Cash from his pension policies along with a pension. His lawyer referred him to us to establish the most appropriate solution.

Solution

We advised Peter to delay taking his benefits until after the legislative changes on 6th April 2006 had taken effect. By doing this he would be able to take advantage of the provision that allows up to 25% of a pension fund to be taken as a Pension Commencement Lump Sum - the new term for Tax Free Cash. In his case this was considerably larger than the previous certified amount permissible and he chose to proceed with this. Although he wanted to free up his tax free cash immediately Peter also wanted to start taking all hisl pension benefits at that point and did not want any risk attaching to this in the future. We initially transferred his pension funds into an Income Drawdown Policy with the same company which held the benefits to facilitate payment of the tax free cash immediately. There were no changes to the way the monies were held as a result of this, no additional penalties or costs and subsequent transfer values were calculated on the same basis as if the monies had been held in the original pension contract.

By doing this Peter was then able to take advantage of the new GAD guidelines, also introduced in April 2006, which allowed him to take the maximum income available to him in year one as a taxable single payment before purchasing an annuity. This allowed him to boost his income for the first year as he was also able to receive his pension payments in that year. Peter was advised that this move would reduce the amount available for purchasing an annuity, but he was comfortable with this as we had secured an enhanced annuity rate for him as a result of his ill health which had taken the pension he received closer to the level he would have had had he not taken the cash initially, and taking the cash in advance substantially increased the amount of money he had available to purchase his retirement home.

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