Drawdown Case Study – Paul £200k

Case Studies – Paul the accountant, wants his tax free cash and nil income.

26th Oct 2010 – Pension value £206,542.34

Paul is 60 and hasn’t been paying into his pension for the last 5 yrs. He wanted the full 25% tax free cash to do renovations on his property, he doesn’t need the income as he is still working and feels he will still be working for the next 5 yrs.

We looked at various options such as an annuity, this was discounted due to poor rates and the fact that he didn’t need income and would only be paying tax on it. We looked at a temporary annuity again this didn’t fit as the returns where not that attractive and the flexibility was not there (although it has to be said that these products are more flexible now than they were 2 yrs ago).

It was then decided that the best option was to go for a drawdown plan, cost and performance were factors in determining which provider to use. On a cost level Scottish Life were head and shoulders above the rest offering 0.9% total costs including adviser charges on the fund. Many others are in the region of 1.3– 2.1%. Performance is key though and after much discussion the Scottish Life governed portfolio was chosen.

The full tax free cash was taken of 25% or £51635.6 this left a fund of £154906.76. As no income was needed instead of leaving the money in the pot I advised at looking at income recycling. So we set up an income payment of £897 per month or £658.24 after tax. This income was then re-invested back in to the pension. The reason for this was that as income is not needed for 5 yrs then this income recycling could set up a small pension pot on the side, basically meaning that you can benefit from another 25% tax free cash in 5yrs. In theory with nil growth the £897 per month over 5 yrs would mean £53,820 would be transferred into a new pot and 25% or £13,455 off this could be taken as tax free cash. With growth this might be nearer £65K, saving between £3000 to £4000 in tax just by arranging the pension in a slightly different way.

Oct 2011 Review. Value of £172,453 

It became clear at the review that Paul wanted to wind down his work even more therefore it was decided that income would now not be recycled back in to the pension pot and instead this income would be kept. We set up a tax free lump sum of £2,691 to be paid. We discussed annuities and at this point annuity rates were not better and in fact the best annuity rate that provided an income for his wife was £8,968.

Oct 2012 review. Value £164,345

Not a fantastic year for investments but the policy is now valued at £164,345. We discussed different investment options and potentially changing the fund but it was decided that its still a cautious investment and as income is now being taken this is the way we want to keep it. Income of £10,763 was taken.

Oct 2013 Review. Value £172,932

The market has seen some significant returns and the pension plan although not experiencing the full returns of the market due to the cautious nature of the investment its still seen a significant increase. Income of £10,763 was taken and the fund is now valued at £172,932. This has been a good year and we are happy with the investment and are looking to keep this investment for the future. We talked about purchasing of some commercial property thats been looked at, it was mentioned that if needed the p pension could be used to fund this purchase, essentially as a deposit. This is something you are thinking of but will decide on in the near future.

 

 

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