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A head start

A couple discover they have the option to overdraw on their pension fund in early retirement

I have not given much thought to saving for retirement as bringing up four children and paying off the mortgage have absorbed my efforts. However, retirement is looming and I need to take some action now. What are my options?

Although a little late in the day, a client called Sebastian seeks advice. Having worked all his life, he plans to retire next year when he reaches the age of 65. Sebastian is in a fortunate situation as he is the beneficiary of a well-funded final-salary pension scheme. Projections show he can expect an income of about £30,000 a year.

His wife Gloria is retired on the state pension and a smaller civil service pension. She is not working but does some voluntary work in the local Oxfam bookshop.

Sebastian anticipates he will retire from his full-time work but it is possible he may take on some consultancy or project work. Having worked in the film industry, one of his ambitions is to help out at a film school in Bulgaria where he has family connections.

He and his wife anticipate spending six months of the first year of retirement in Bulgaria so he can use his expertise and some of his savings to help set up a scholarship for underprivileged students.

Their children have all left home and are self-sufficient but the family finances are not hugely robust and the amount of savings they have managed to put together amount to £50,000.

However, there is an additional personal pension fund for Sebastian that is worth £300,000. Sebastian seeks advice as to what to do with this pension, as the provider has written to him pointing out the options for his retirement next year.

Another factor is Sebastian’s elderly mother. He anticipates he will receive a legacy from her at some stage in the future of about £200,000. Sebastian is confident this sum is a reasonable expect-ation but there is some uncertainty as to when the inheritance will materialise – within the next five years is a reasonable estimate.

As he will have a confirmed income in excess of £20,000, he is able to use flexible drawdown for the £300,000 in his personal pension and this serves them quite well.

Sebastian and Gloria have considered selling their property at some stage as the family house is too big for two people in retirement but they want to take their time over this decision.

They have worked out that their income requirements are higher than the final-salary pension scheme that Sebastian will draw. They are also keen to spend the earlier years of their retirement in various activities, including travel and helping out in Bulgaria, which will mean they will spend more in the first 10 or 15 years of their retirement than they are likely to spend thereafter.

The ability to draw on their money-purchase pension as and when they like, to top it up in the shorter term, is attractive for both of them.
They were delighted to hear this could be undertaken via flexible drawdown and that they have the option of some tax-free cash as well as taxable income.

They will be able to control the amount of income drawn from the pension so that Sebastian does not tip into a higher tax rate. This is a particular consideration for any consultancy work that Sebastian may undertake.

It also means they can overdraw on the pension monies in anticipation of the inheritance from Sebastian’s mother.

All this means that they can delay any major decisions on the property for at least 10 years, if not longer.

It is interesting to note that without the money purchase pension and the inheritance from Sebastian’s mother, their lifestyle would be very different and their choices rather stark. They are fortunate that the legislation has changed in their favour and granted them the flexibility that suits them well.

Amanda Davidson is a director of Baigrie Davies


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