In this case study Martin who has a Final Salary Pension, wanted to take his pension benefits more flexibly, so he benefited from taking part of his benefits as a guaranteed income, with a more flexible approach for the rest of his benefits.
Releasing money from a Defined Benefit Pension
Martin is aged 54, and is married to Katie who is aged 51, they have two children. They live in Sussex where they have been based for a number of years. Martin has worked for most of his career in an office based administration position, and came in, to see our Occupational Pensions specialist Angus to discuss retiring at 60 and how best he should take his benefits.
They have a house worth around £250,000 and cash on deposit of £40,000. They were in the fortunate position to have paid off all of their mortgage and they have no other outstanding debts. Martin has a Final Salary Pension scheme which had a transfer value of £675,000. Katie went part time when the kids were born and so although she has a small pension pot, they will be relying mainly on Martin’s provision in retirement.
After looking at their outgoings they felt they need an income of around £1,300 per month to cover their bills if Martin were to retire at 60 which is what he would ideally want. Katie will carry on working part time for another few years. We assessed Martin and Katie’s attitude to investment risk and on a scale of 1 to 10 with 1 being the lowest risk and 10 being the highest, they both felt they were a 6 out of 10 or Medium High level of risk.
Martin checked with his Pension Scheme Trustees and if he were to take his benefits at 60, his pension if taken in full would provide an income of £25,000 per annum. However, Martin was worried that in the event that he passes away, Katie would then only receive a widows pension of half of this (£12,500) which is quite usual for these types of schemes.
- Martin’s objectives were to take a more flexible approach to how he draws his pension benefits. Where as previously Martin would have had very little choice regarding how he does this, he is aware that due to changes in legislation, a more flexible approach is now possible.
- He wanted to maximise death benefits so that on his death as much as possible could be passed to his wife and or children. He was concerned that if he left the money in his defined benefit scheme, upon his death a pension of 50% would be payable to his wife and that would be it.
- His current scheme offered him a pension of £25,000 per annum but he has very little other liquid assets.
Angus contacted the scheme trustees who confirmed Martin could partially transfer part of his pension out leaving the majority in the scheme. The scheme will provide a guaranteed income at age 60 of £18,000 per annum which will cover Martin and Katie’s fixed outgoings and bills. Martin did not want to transfer all of his Final salary pension out as he liked the idea of having a fixed income each month to pay for his fixed outgoings. By taking a smaller income, Martin was able to transfer £340,000 from his defined benefits pension into a Self-Invested Personal Pension (SIPP) which he can use as he wishes.
This money has been invested in line with his attitude to investment risk and will fluctuate down as well as up in value. However Martin is an experienced investor and felt as his fixed outgoings would be covered by his original pension, that he could take more of a risk with the funds he has transferred out into the SIPP. He can draw an additional income from the money in the SIPP as and when it is needed. At the age of 67 both Martin and Katie will begin to start receiving their State Pension and he can stop withdrawals on the SIPP so it accumulates for the benefit of his wife and children. Both children are still dependent teenagers and Martin and Katie were keen to ensure that if anything were to happen to both of them that there was some money to pass on to the children.
Both clients were very pleased with the outcome, they were pleased that they could effectively have their cake and eat it – in that they can obtain a guaranteed income from Martin’s final salary pension and also have a lump sum invested in the SIPP to draw on when required. Angus has arranged to meet Martin and Katie on a six monthly basis to review the pension to ensure it is still in line with their current situation and attitude to investment risk.
Please note the above case study is based on real clients seen by our advisers, however all names have been changed for confidentiality. This case study forms a summary of advice and before taking out such products we recommend taking independent financial advice as everyone’s situations are different and therefore the above products will not be suitable for everyone.