The client is in his early sixties and has decided to retire from his current job. This has triggered a poorly drafted pension-sharing order dating from 1999 which means he no longer has to pay his ex-wife an income of £350 a month but instead must share the maximum tax-free cash and subsequent income from four of his pensions with her.
The fund values amount to about £170,000 combined.
The choice of which vehicle to use for income is left with my client and we had originally thought that drawdown was most appropriate as he has been fully invested in equities, plans to continue to be so and likes to take reasonable risks.
However, when finalising the recommendations, particular attention needs to be paid to his relationship with his former spouse which is difficult and she does not trust him at all.
We had a number of solutions at our disposal, many of which we are all familiar with, including annuities (level life, flexible, increasing and fixed term) or taking drawdown and leaving the funds invested either through a retirement contract or a Sipp. The client preferred the Sipp option as this gives the him flexibility and the ability to take decisions quickly and total choice should he wish to adjust his investment or income strategy.
One of the pensions relating to the sharing order was a final- salary arrangement, which offered a choice between a reduced pension or a transfer value. The transfer value offered a higher tax-free cash entitlement but the lifetime annuity income would be much less. But the lure of increased tax-free cash for the client and his former spouse was beginning to look attractive against the loss of guarantees.
The final decision came when we discussed the difficult relationship with the former spouse.
Despite the client demonstrating a higher than average risk profile, I recommended the client should consider protecting the investment from stockmarket volatility in order to prevent a downward trend in income in future years and to ensure the solution continued to meet the former spouse’s expectations.
The client, on reflection, agreed and so we began investigating a solution which would allow flexibility, provide the level of exposure commensurate with his risk profile, yet would underpin his income expectations and therefore keep the former spouse happy.
The final recommendation maintained the idea of using a Sipp but elected to invest through a trustee investment plan using the Metlife Income for Life option.
I do not like plugging pension companies but this product fits really well with the client’s needs.
In short, it protects the existing assets and guarantees the value will never fall for the purpose of providing an income, yet remaining invested in the stockmarket, meaning it can still benefit from that big uptick…..when it comes.
Although there are some drawbacks to this type of contract, most notably the higher charges, it is still a credible and the most appropriate solution for my client to ensure compliance with the letter and spirit of the sharing order.
What’s more, the flexibility is still there should a more appropriate vehicle become available, that is, impaired life annuity as a result of a change in his health.
Ian Hudson is principal of Hudson Green & Associates