Case studies

Bob and Sally are 60 and 57 respectively. Bob is an engineer and Sally works part-time as a teaching assistant.

They own their main residence, worth £450,000, with no mortgage. They have around £140,000 of cash savings and Bob has accrued a pension within his employer’s Defined Benefit pension. The pension shut many years ago, so he also has around £720,000 in the Defined Contribution pension.

Bob wanted to retire, but Sally was happy to continue working for a few more years. They wanted to understand what their cost of living in retirement will be and how they will meet this with their pensions.

Bob had done some research and thought he should take his annual pension from the Defined Benefit pension, transfer his Defined Contribution pension to a SIPP and draw out the maximum 25% (around £162,500) tax-free lump sum to add to his savings and £10,000 additional income.

We completed a budget planner and cashflow model, establishing that Bob and Sally needed £41,000 per year to cover their desired lifestyle. We discussed their attitude to investment risk, their past experience of investing and their capacity for loss, in order to ensure any recommendations were suitable.

We concluded that they should take the following actions:

• Bob should take the maximum pension of £21,240 from his Defined Benefit pension. When added to Sally’s earnings of £7,250, this would leave a shortfall in income of £12,510.
• Transfer Bob’s Defined Contribution Pension to a Qualifying Registered Overseas Pension (QROP) rather than a SIPP, in order to protect him from potential Lifetime Allowance tax charges in the future.
• Crystallise £50,040 of the QROP to generate £12,510 tax-free cash. This can be used for one year’s income shortfall. They can repeat this each year until the QROP is fully crystallised.

We secured enough income for Bob and Sally to cover the cost of their desired lifestyle.

By not taking the entirety of his tax-free lump sum in one go, Bob’s estate remained at £585,000 instead of rising to £765,000. This stopped his potential inheritance tax liability rising from nothing to £46,000 (I).

By taking the £12,510 ‘income’ from his tax-free lump sum entitlement, we saved Bob £3,127.50 in income tax in year one. These savings could be made in subsequent years until all tax-free cash has been drawn.

Transferring Bob’s Defined Contribution pension to a QROP rather than a SIPP could potentially save Bob in excess of £100,000 in future lifetime allowance tax charges (II).

I Advice given in 2015 before the introduction of the Residence Nil Rate Band.

II Advice given in 2015. Based on client transferring £720,000 to a SIPP, taking 25% PCLS, £10,000 per annum income, fund growing at 5% per annum, Lifetime Allowance increasing by 2.5% per annum. BCE test on client’s 75th birthday.