View more on these topics

Strategic withdrawal

Is it good tactics for a client to make an early exit from a pension fund?

Iam 55 and have accrued pension funds worth around £800,000. I have been told by an IFA friend that I should consider taking the benefits of my pension now, including maximum tax-free cash and maximum income, in order to reduce my fund to a minimum by the time I am 75, because any remaining funds on my death after 75 will be lost. Is this a sensible thing to do?

This is a very topical issue since a U-turn in the rules has prevented any remaining funds on death after 75 to be passed on to dependants’ pensions, as was originally expected to be allowed.

The things to consider when deciding what to do with your pension fund are the same as they have always been. Have you been saving all your working life to provide yourself with a good, stable income in retirement? If so, then you should think very carefully before you risk depleting your fund to the extent that it will not provide you with an adequate income in your later years.

I am assuming for the moment that you do not need any tax-free cash or income from this pension at present. I am also assuming that your adviser friend is suggesting you reinvest the cash and income in alternative investments that can be passed on to your dependants at the time of your death, albeit after an income tax charge of up to 40 per cent on the income withdrawn and a 40 per cent inheritance tax charge. Can you be assured that these options will provide you with an adequate, guaranteed level of income for the rest of your life if you live to 100?

Annuity purchase can actually be fairly good value at 75 and there are guarantees that can be purchased to ensure that your entire remaining funds are not lost at the time of your death. Do you have a spouse to consider? Will he or she be in a good financial situation at the time of your death after 75 if your pension at that time has been depleted?

You should also look at the charges and tax rules surrounding these alternative products. I would expect there to be some initial charges and that the tax rules will not be as favourable as investments within pensions. Over a period of 20 years, this can make quite a difference to the size of your investments.

When you go into full drawdown and take your maximum tax-free cash, you have immediately changed the tax situation for the worse in the event of your death in the near future. You go from being able to pass on your full pension fund free of all taxes to having the tax-free cash in your estate, so subject to IHT, and the remainder of your fund subject to a 35 per cent tax charge, assuming it is taken as a lump sum.

With all the changes that have affected pensions over the last few years, are there more changes to come? As it is 20 years until you reach 75, it is possible that by that time there may be an option that would suit your wish to pass on some or all of your remaining fund to your beneficiaries upon death. My point here is that no one knows what the rules will be in the future and if they change to your benefit, you may regret depleting your fund in favour of less tax-advantageous investments that are held within your estate.

I would suggest that a balance needs to be found in this scenario and that phasing benefits, so that you only take part of your fund into drawdown at a time, may be an option worth considering at some point.

Phasing benefits will keep the majority (the unvested part) of your fund outside your estate for IHT purposes, yet will enable you to reduce the size of your fund slowly over the coming years if you feel you have more than you want or need to use for purely pension income in future.

There are certainly people who should be doing as your adviser friend suggests, especially if they are not married and/or have a pension fund and other wealth exceeding their needs. However, this is not blanket advice and personal circumstances should dictate whether this is something you would be well advised to do.

Emma Duncan is a director of Thameside


Ford quits Royal Liver for Zurich

Royal Liver chief actuary David Ford is leaving to become senior life actuary at Zurich. Ford, who has been at Royal Liver for 12 years, will continue in his current role until the end of the year.

Pension peril

Nicola York reports on fears about the RDR’s effect on pensions

Former Northern Rock FD joins JO Hambro

Former Northern Rock finance director Bob Bennett has joined JO Hambro Capital Management Group as its first independent non-executive director.Bennett retired from Northern Rock in January this year after more than 13 years with the company.In his non-executive directorship at JOHCM he will be responsible for helping the company develop and grow.JOHCM chairman Jamie Hambro […]

Atkins to leave Premier Mortgage

Premier Mortgage service head Steve Atkins has resigned. He joined PMS a year ago as part of a succession plan for managing director John Malone and says he plans to take some time out to rethink his career.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm