Jane has asked for advice regarding her retirement. She has an old personal pension, a Group Pension Plan from an old employer and a workplace pension scheme with her current employer. She also has savings in a cash ISA and £15,000 in a deposit account. In addition, there is a Stocks and Shares ISA.
During our appointment with Jane we determined that Jane was 59 in six months time and that she wanted to stop working at age 60 or the year after at the very latest. She divorced 8 years ago and the divorce settlement allowed her to pay off most of her mortgage.
Her outgoings amounted to roughly £12,600 per annum and she would like to have two weeks holiday and a couple of long weekends away each year. Jane doesn’t smoke, but does like a glass of wine or two! She has a married daughter and a grandson.
We asked Jane to complete an ill health annuity quotation form to see if she would qualify for an enhanced Annuity, as this would give us a base line of what she could expect as an income from her pensions.
When consolidated, her combined pensions totalled in the region of £227,115, which could then be used to try and provide Jane’s required income of approximately £12,600 a year plus holidays, which were estimated to cost about £3,000.
From the responses of the providers to whom we submitted the ill health quotation form, we established that Jane did not qualify for an ill health Annuity. Therefore, using a Standard Level Annuity, her totalled pension fund could provide a gross annual income of £13,620 or a Tax-Free cash lump sum of £56,750 plus a reduced gross annual income of £10,200.
We also took into consideration that in 6 years 5 months she would be entitled to receive her state pension and this should give her an additional £7,500 per annum. Her mortgage, which is £300 per month, will be finished in approximately 3 years 6 months and her stocks and Shares ISA was, at her last valuation, £42,028.
After discussing her options, Jane decided that a flexible income which could be increased or decreased as her circumstances changed would be best for her. Then if there was anything left, she could leave it to her grandson.
It was suggested that Jane kept her Cash ISA as her emergency fund and use sufficient monies from her deposit account to make a final payment to (presumably ‘to pay off’ or ‘to clear’?) her mortgage as this would save her £3,600 a year, reducing her overall annual expenditure to £9,000 (£750 per month), plus holidays. The remaining monies in the deposit account should be transferred to the Cash ISA, as this would give her a higher interest rate and it would be free of tax.
Her personal pension and her old group pension funds should be switched in to an Income Drawdown plan. The benefits could produce up to 25% of the value of the fund as a tax-free cash lump sum and the remainder as a taxable income.
Then at age 60, Jane’s employment would cease and she would start the new tax year as a non-tax payer.
Options to produce £9,000 annual income plus £3,000 holiday fund:
By withdrawing:
After this time her state pension would become available. This would then leave a shortfall, which could be taken up by increasing the amount withdrawn from the Income Drawdown plan.
This would make Jane’s total taxable income £11,350. As this is less than Jane’s personal allowances for income tax, her whole income would be tax-free. Also, as the majority of Jane’s income has been from her Stocks & Shares ISA, most of her Income Drawdown plan is still available to be passed to her grandchild.
Alternatively, Jane could have taken her Tax-Free cash lump sum, which could be used for her holidays. The reduced pension fund could have bought a standard level Annuity. She could have taken a lower income from her Stocks & Shares ISA. And after 42 months her state pension would have become available. (The bulleted sentences did not follow on grammatically so I have turned this above wording into a paragraph – but best to check it still makes sense).
This option would mean that her stocks & Shares ISA would still have a value and her tax-free cash lump sum from her Income Drawdown fund, less withdrawals for holidays, would also be available to leave to her grandson (assuming £10,000 used for holidays).
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