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RETIREMENT REVOLUTION March 2015 SLOWING DOWN! USING THE NEW PENSION FLEXIBILITY TO FUND A MORE BALANCED LIFESTYLE. Many people have both defined benefit (DB) and defined contribution (DC) pension pots. Whilst the new rules on pension flexibility will not apply to defined benefits schemes, combining the more fixed (defined) benefits with the more flexible DC benefits can help clients wishing to ‘slow down’ rather than retire and give up working altogether. THE SITUATION Pat Brown’s younger brother, Robert White, is 57 and has worked for the same company for 30 years. Throughout that time he has been a member of the company final salary pension scheme with a 1/60th accrual rate and a normal retirement date of 65. His current salary is £50,000, together with a generous benefits package. For the last 15 years he has received annual bonuses, most of which he has used to make pension contributions into a personal pension plan. The fund is now worth around £80,000. THE EXPECTATION Robert feels 30 years in the office is enough, however, he believes it is too soon to retire but would like to work less hours doing something he enjoys. He plans to leave his current job in May 2015. He’s a serious cyclist with coaching qualifications and has been using his contacts to find opportunities linked to his extensive experience of his sport. He has been offered a job working 25 hours a week at the new local velodrome that opens in July 2015, which pays £15,000 a year. This won’t be enough for him to live on comfortably, but he hopes his pensions can be used to top this up. TAKE COMPANY PENSION SCHEME EARLY? He could take his pension from his final salary scheme early, however, this would mean a substantial reduction in his benefits as his scheme has a 5% a year early retirement deduction. That means that if he took his benefits at 57 he would suffer round about a 40% reduction in benefits ((65-57) x 5%). He has heard about the new pension flexibility and we show him how the new rules may be useful to him. He can use his £80,000 fund to top up his lower earnings until he can start to receive his final salary benefits penalty free, and his state pension. As he was born in 1958, he’ll be entitled to his state pension at age 66. (State Pension Calculator). We give Robert 3 options on how the new rules will help him achieve his goals. OPTION 1 Take 25% of the fund value as a tax free lump sum now and move the remainder of the funds into drawdown. Robert can then take as much or as little income from the plan each year as he requires. This will be taxed as income at his marginal rate. With careful planning, this is likely to be 20%. The advantage of this option is that it will give him all his tax free cash up-front and he will have full control of the income. OPTION 2 As option 1 but take the benefits on a phased drawdown basis. He can take the tax free cash in smaller chunks and add more to the drawdown fund each time he does. So he could take the funds in, for example 8 chunks of £10,000 (ignoring any growth). Each would give him tax free cash of £2,500. The remaining £7,500 could be used to provide any amount of income. The advantage of this method is if he doesn’t need the tax free cash for any capital expenditure, he can use it to help fund his income requirements. This would reduce his annual income tax bill. The disadvantage is that Robert doesn’t receive all his tax free cash as a one off lump sum. OPTION 3 Draw money from his pension fund on an ad-hoc basis. With this option funds are drawn directly from Robert’s pension funds. 25% of any amounts withdrawn would be tax free with the remainder taxable as income. So, for example, if Robert took £10,000 a year out of the plan, £2,500 would be tax free & the other £7,500 would be added to his other income and taxed at his marginal rate. As with option 2, the advantage of this option is if the tax free cash isn’t all required up front, he can use it to help fund his income requirements. This will reduce his annual income tax bill. The disadvantage is the tax free cash is always directly linked to the income so it is not as flexible as option 2 above where he can take the tax free cash but doesn’t have to take the income. NOTE - With all 3 options, once Robert starts to take any income, the reduced money purchase annual allowance of £10,000 a year will apply to any further personal contributions. However, Bob has no plans to make any further substantial pension contributions so this shouldn’t be an issue. WHAT ABOUT BUYING AN ANNUITY? We consider the option of a lifetime annuity but do not think it is suitable as the £80,000 pension fund only needs to provide funds for the next 8 to 9 years. His Company Scheme and state pension will provide sufficient pension thereafter. Bob is in good health and with this size of fund an annuity is unlikely to provide sufficient income. THE CONCLUSION After further discussions we all agree that option 1 is the most attractive. This is because when Robert leaves his current job he will need to give back his company car. The £20,000 immediate tax free lump sum will ensure that he can purchase a suitable replacement. He would also like to take his wife on a luxury cycling trip along the Californian coast before starting his new job. The remainder of the funds will top up his reduced earnings. He thinks he needs around £8,000 a year and with reasonable growth the remaining funds should be able to provide that for the required time frame.
NOTES: We do our best to keep things as straight forward & simple as we can, but please bear in mind that pensions can be a technical & complicated subject. We would suggest therefore that there may be items in this article that may need more explanation. If that is the case, please do not hesitate to contact us Any reference to people , both living or dead, are purely coincidental Click here to download a pdf version of this case study that you can print out.