How will the most recent pension changes affect me and how can I best shape up my pension to protect my children?
At his recent review, a client asked how the recent pension changes would affect him, bearing in mind the various pensions he has. Samuel has two adult children who are likely to remain financially dependent on him for some time. His son is an eternal student while his daughter lives quite an alternative lifestyle and is unlikely to ever accumulate much capital.
Sadly, the daughter’s health is not great and she suffers from restriction in the movement of some of her joints. This means that her employment prospects are somewhat limited.
The other factor of relevance is that his wife died two years ago. He has not remarried and he does not anticipate that he will, so he is keen that his pensions should provide some benefits for his children after his death.
Samuel’s pensions will be quite adequate and sufficient to provide him with the life-style that he wants in retirement. He enjoys some final-salary pension benefits as well as what was an eclectic mix of pensions until I consolidated them into a Sipp for him.
For Samuel, it was partic-ularly galling that the previous post-75 death benefits for children meant that his Sipp fund would suffer tax at 82 per cent and is heartened that this tax has now decreased to 55 per cent.
His Sipp was originally to provide for himself and his spouse and then the children thereafter. Over the last year, we have restructured the investments to reflect longterm trends so they are more geared towards the children.
There are other issues that are pertinent for Samuel. He used to work for a firm that offered a final-salary pension scheme. This scheme is adequately funded and is due to provide him with an income of £30,000 gross a year. Samuel thinks that this will provide him with most of his retire-ment needs.
We also discussed the issues of long-term care and how it might need to be funded in the future. Samuel has no wish to be a burden on his children and wants to ensure that he had adequate provision for this should it happen.
The first piece of good news I had for Samuel was to let him know that his final-salary pension scheme is now even more attractive. As the income level from his final-salary pension was over £20,000 a year, it meant that he now faces no restrictions on the amount he can draw from his Sipp. As there are tax implic-ations, it would be unwise to cash the entire amount all in one go. But he would be able to draw on his Sipp fund up to, say, the higher-rate tax level on a yearly basis.
This would have a positive impact as it would enable him to take withdrawals from his pension fund, should he wish, in order to provide his son with a deposit on a property and even enable him to assist with the mortgage repayments on a yearly basis.
The other issue is in terms of his daughter’s health. Should it deteriorate further, Samuel is keen to provide some form of medical care and the ability to draw more flexibly on his pension fund is an attraction.
This year, Samuel is earning well with bonuses and basic income and his pensions are not up to the lifetime limit. As a result, he is keen to fund significantly in this tax year, mopping up unused allowances from the previous three years. He is going to be paying tax at 50 per cent, so it makes complete sense to reduce this with a pension contribution.
Because of the total that Samuel’s pensions will then be worth, it is highly likely that we will be applying for fixed protection, so that his pension will be assessed against the £1.8m rather than the £1.5m lifetime limit.
The timing of Samuel’s proposed retirement, which is a little earlier than he had anticipated a few years ago, is perfect in terms of the changes in pension legislation, which fortunately for this client have proved so beneficial.
Amanda Davidson is a director of Baigrie Davies