Mrs Williamson is 58. She was widowed 18 months ago and is continuing to receive an income from her late husband's Equitable Life drawdown personal pension. She needs some, but not all, of the income and is extremely concerned about the future of Equitable Life. What should she do with her pension?
Mr Williamson sold his business and retired when he was 54. Having settled the family's mortgage and other liabilities, he and his wife lived comfortably off the sale proceeds for five years. He then took his pension benefits in the form of the maximum permitted tax-free cash sum, which he invested, and a deferred-annuity drawdown personal pension with Equitable Life, which was wholly invested in its with-profits fund. Two years later, aged 61, he was killed in a car accident.
When Mrs Williamson was referred to us, her Equitable Life pension fund had a notional value of £340,620, of which £306,558 would be available to transfer to an alternative provider. She was drawing £1,670 gross a month from the arrangement.
Having examined her household expenses, she believed that her net income needs were in the region of £14,000 a year, in the form of regular bills and other social expenses.
However, in the next 12 to 18 months, she had three major expenses to meet – her son's 30th birthday, her daughter's wedding and her mother's 80th birthday.
First, I explained the alternatives open to her using the personal pension fund. She could continue to draw an income from the pension fund until her husband would have been 75 (a little over 12 years). If she left the fund with Equitable Life, her future pension income would be tied to the fortunes of the society. Alternatively, she could transfer the fund to another pension provider or self-invested personal pension, maintaining the income but widening the range of possible investments. She could encash the fund, in which case she would suffer both the Equitable Life MVA penalty and the Inland Revenue 35 per cent tax charge, resulting in a net payment of £199,262. Finally, she could purchase an annuity, losing the capital but ensuring a guaranteed level of income for the remainder of her life.
Mrs Williamson said she was happy to accept that her income might fluctuate if it was linked to investments but remained worried about the future of Equitable Life. Equally, while she had no immediate need of the capital, she would like to retain control over at least some of the pension fund as a potential asset to pass on to her children.
We then discussed the possibility of using part of the pension fund to purchase an annuity sufficient to pay for her regular household bills, while leaving the remainder invested in a personal pension drawdown policy to provide additional income but using alternative investment managers. Mrs Williamson found this strategy attractive, and we agreed to put forward recommendations.
First, we established that the costs of the birthdays and wedding should more properly be met from the investments she had been left by her husband, rather than trying to meet them from her income. This relieved some of the pressure on her pension.
Mrs Williamson said that her fixed household expenses were in the order of £8,500, so we arranged the purchase of an annuity from Norwich Union using £169,129 of her pension fund.
Surprisingly, the fund to purchase the annuity was received without application of the MVA.
Although inflation-related risks were discussed, it was agreed that the annuity should be level, with the remaining drawdown fund being used to supplement her income as required. The resulting annuity was £11,150 gross a year or £8,697 net of basic-rate tax, which was sufficient to meet her regular expenses.
The remaining £169,821 pension was transferred to an alternative drawdown pension, less an MVA penalty, leaving a net sum of £152,839. This allowed Mrs Williamson to draw a sum between £3,530 and £10,087 annually. AIG was recommended as the provider because it offered a cost-effective, high-allocation-rate product, mitigating the Equitable Life MVA penalty, as well as a comprehensive range of investment alternatives.
The policy also permits investors to select one externally-managed fund beyond the linked funds, allowing us to access the excellent Eagle Star property fund, providing low volatility and good historical returns, and giving effective diversification from cash and equities.
Mrs Williamson achieved a stable, guaranteed income to meet her regular bills, a flexible additional level of income to meet her social and exceptional expenses and has preserved almost half of her drawdown pension fund so that, should she die before she is 75 or she purchases an annuity, the net fund can be passed to her children.