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Independent view

In the world of financial advice, what is set as policy has implications years down the line. It is even more difficult when we are not sure what future policy will be because it has not been clarified. Let me tell you a story which will demonstrate that there are present issues we need to discuss with clients.

The year is 2006 and you are seeing a client called David who is 54 and looking to retire at 60. He has a pension pot of £1.1m and is concerned that he is getting near the lifetime limit. It was not possible for him to top up before A-Day as he had put the maximum he could into pensions. He regrets he cannot carry back contributions.

As he is self-employed, it is difficult to know what his income is. Notwithstanding that he can use a basis year, when his income rises he is effectively losing out on tax relief that he could have had under the old regime. He had retirement annuities, so capping was not really a problem. He is more concerned about how he deals with his pension going forward.

David has always been diligent about his pension. Under the previous regime, he looked forward to putting substantial amounts into his pension but he now questions whether this is right. He was pleased that the National Audit Office agreed that the annuity rates taken in December 2002 were out of date and that the lifetime allowance is £1.7m as at 2005 but he is still concerned.

You carry out some calculations which show he could put £50,000 a year into his pension until 60 and that this, combined with his current pension value, should be OK, providing performance does not rocket.

He then says he would like to diversify his investment portfolio, which is in a combination of deposits, shares and corporate bonds, into a holiday home. You explain that if he is not going to use it for commercial proposes, it would be a benefit in kind and the tax implications are really quite high.

Fast-forward and David has reached 60 and is about to retire. He is not keen on an annuity as he has children whom he wants to benefit from the pension fund. Also, he will continue to do consultancy work and the flexibility of taking different amounts of income will be useful. He discusses the implications of entering the new drawdown arrangements available up to 75. You explain that the minimum income he can take is £1 and the maximum 120 per cent of the market-rate single-life annuity.

David is quite cool about this because of the consultancy work that he is likely to do. However, he opts to start with the maximum as he plans to take the next year off and travel around the world in a yacht.

A year passes and David returns with the news that his mother has died and left him a reasonable sum of money. We decide it would be appropriate to take the minimum £1 from his drawdown plan for the current year. David is able to manage as he does odd bits of consultancy in between his sailing.

We now move forward and David is 73. He comes with his wife for a review. David is very ill and has not been given long to live. He wishes to focus on the death benefits that may be available from the pension fund. His wife Kate has never worked to any great extent and, while she has a small amount of pension, she largely relies on David&#39s pension and other assets to continue her lifestyle.

You discuss the scenario that David&#39s death before 75 would enable Kate to take a lump sum out of the pension, subject to a 35 per cent charge, or to take a dependant&#39s income. She will not be subject to the age 75 limit to buy an annuity as this is no longer relevant.

David is also keen to explore what would happen if he died after 75. You explain that unfortunately there would be no lump-sum death benefits but simply an income stream.

David is unhappy with the restrictions placed on his pension fund at the arbitrary age of 75. He has also found that the FSA set the annuity rates for his drawdown plan rather strangely, working to a different set of figures to the Government Actuary&#39s Department or, indeed, to regulated firms. David is keen for Kate to have a secure future without the vagaries of the FSA or the Government. You tell him that simplification is going through further simplification and all this may change yet again.

Amanda Davidson is a partner at Charcol Holden Meehan


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