View more on these topics

Widow of opportunity

Mrs Williamson is 58. She was widowed 18 months ago and is continuing to receive an income from her late husband&#39s 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&#39s 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&#39s 30th birthday, her daughter&#39s wedding and her mother&#39s 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.


The Mortgage Operation adds three new lenders

Mortgage network and packager The Mortgage Operation has added three new lenders, Intelligent Finance, Norwich & Peterborough and Cheltenham & Gloucester to its panel. This brings the total number of lenders offering products to TMO member brokers through the panel to 16.

DBS members face PI threat &#39to the grave&#39

DBS members are enraged after the network withdrew professional indemnity run-off cover for ex-members, saying the advice they give now will “follow them to the grave”.Although DBS&#39 new PI policy started on August 1, members of the Misys network were not told that run-off cover had been withdrawn until five weeks later in a group […]

Baillie Gifford sees opportunities for value on both sides of Atlantic

Recent weaknesses in the US stockmarket have created increasingly attractive investment opportunities in selected sectors and stocks, according to fund manager Baillie Gifford.It points to the performance of the S&P 500 companies, which showed increased profits this quarter year on year for the first time in six quarters, although it says that some companies are […]

GAM blends arbitrage strategies

GAM has established the GAM multi-arbitrage fund, a multi-manager fund of hedge funds that aims to provide capital growth.The GAM multi-arbitrage fund invests in a portfolio of 12 to 15 hedge funds that use a variety of arbitrage strategies. Arbitrage strategies were chosen because GAM believes the outlook is good, in the short term and […]

Finding value in UK equities

By Mark Martin, Investment Director & Head of UK Equities Register for a live update on 9 July at 14.30 with Mark Martin, who will be discussing Chancellor George Osborne’s ‘emergency’ summer budget, the UK equity landscape post May’s General Election and his outlook for the second half of 2015. Mark will also highlight the […]


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