Case Study: Defined Benefit Pension review
Mr White (60 yrs.) approached Fiducia to conduct a review on his pension arrangements since he was not in the best of health and was considering taking early retirement. He had one small personal pension and one final salary pension. Mr White had very little knowledge on his retirement options and wanted some help to understand how his retirement was going to look. He was not married and had no financial dependents.
Mr White’s final salary pension provider had written to him and outlined some options, on the basis he would take immediate (early) retirement. If he wished to start taking benefits, the scheme only offered him two options: the first was a higher annual income figure with a smaller lump sum and the second was a higher lump sum with a smaller annual income. Mr White knew that he wanted at least £15,000 of index-linked (inflation protected) annual income but was unsure which option was best for him.
In addition to this, Mr White was not sure how this income could be used in conjunction with his personal pension and state pension and was therefore considering downsizing to ensure he had cash reserves to fall back on during retirement. Ultimately, he wanted to ensure he was using his wealth in the most efficient way possible.
When Fiducia began to analyse Mr White’s pension arrangements, we discovered that the scheme trustees for his final salary pension scheme were offering a very high transfer value relative to the guaranteed income offered. Our default position with final salary pensions is that these should be retained, except in exceptional circumstances, since they offer valuable guaranteed and index-linked income throughout retirement.
However, in Mr White’s case the transfer value was so high that he could buy an open market annuity (with the same inflation-proofing offered by the scheme), which would provide him with higher annual income. Once his health conditions were factored in, the annuity income was even higher.
Following the analysis, we were able to illustrate to Mr White how he could meet his income target of £15,000pa. This was possible through him using a proportion of the transferred funds to purchase an index-linked annuity, still leaving him with £220,000 of the transferred funds plus his personal pension which could be accessed flexibly in future.
The result of the review changed Mr White’s life. Downsizing was no longer a necessity and he could still draw additional income from his pension funds if necessary. The security of the guaranteed income has still been achieved, but in a far more productive and lucrative manner.
Case study learning points
- The client could have taken benefits on his final salary pension without receiving advice. A lot of people do so, but in this case the difference between taking advice and not taking advice has literally been lifechanging.
- It is important to consider exactly how to use ALL of your assets at retirement. The solution can sometimes take some work to arrive at but offers substantial gains.
- Past performance is no guarantee of future returns and the rates of growth used in illustrations are not guaranteed.
- The future income from your accounts continue to be subject to investment risk.
- Your capital is invested with risk and you may not get back as much of your money as you originally invested.
- If withdrawals exceed growth and income, capital will reduce.
- Final salary pensions offer valuable guarantees and careful consideration must be given before giving these up.
- The benefits from money purchase pensions are not guaranteed and will depend upon investment performance, charges and the manner in which they are drawn.
If you’d like to discuss your retirement or arrange a pension review, please contact us today and one of our team will be in touch.
If you would like to know more about how we as Financial Advisers can help you with your Pensions and overall Retirement Planning then visit the Retirement Planning section of our website: Retirement Planning or send us email at: firstname.lastname@example.org
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