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Following the death of her partner, Elizabeth is unsure about how much money she will have to live on in retirement and whether she has enough to see her through – especially given the rising cost of living.
Her adviser carries out a full review and finds that consolidating her pensions and investing in the right combination of an annuity and an investment-backed pension solution, is better suited to her than her defined benefit (DB) arrangement and other small pensions - especially as she no longer needs the defined benefit spousal income guarantee.
The Retirement Account enables Elizabeth to consolidate her pensions - including her defined benefit arrangement. She can then annuitise some of her pension pot and invest the rest for further income and capital growth - all in one place.
The security of a guaranteed income
Elizabeth’s adviser recommends she purchases an annuity to match the income stream she would have received from her DB pension scheme. This gives Elizabeth the comfort of knowing her basic living expenses are covered. (N.B., the annuity doesn’t include escalation as the DB scheme does, and is on a single life basis as her husband has pre-deceased her).
She buys an annuity with a 20-year guarantee because her adviser has calculated that Elizabeth or her family will receive at least the purchase price back over the 20 years, if she passes away suddenly.
As Elizabeth is a widow, she completes an expression of wish and identifies her son as one of the potential beneficiaries. Had she remained in her DB scheme, this option wouldn’t have been open to her.
Remaining invested to combat the effect of rising inflation
Elizabeth invests the rest of her pension savings in a diversified monthly income fund, which aims to provide a regular income with the prospect for longer-term growth. The fund invests globally in equities, bonds, cash, near cash and money market instruments, property, infrastructure and commodities. This diversification offers growth over the longer term, which reduces the impact of rising inflation and meets future increases in income or capital.
If Elizabeth decides that any additional income from the fund isn’t required, this can be recycled back via the cash account to increase the drawdown pot, so it remains outside of her estate for inheritance tax purposes.
After seven years, Elizabeth’s health starts to deteriorate so she decides to annuitise the remaining drawdown pot, receiving a rate based on her age and health.
Because the annuity is written within The Retirement Account:
Three years later, she sadly passes away and her son receives a nominee drawdown account.
Following Elizabeth’s death, her son and his adviser review the income stream. For the first annuity, her son can either continue to receive the income from the annuity for another 10 years or, convert the income stream for a capital value. With the second annuity he can decide to continue to receive the income from the annuity for another 17 years, or convert the income stream for a capital value.
For both annuities, he decides to commute the annuity for a lump sum and retain this amount within the nominee drawdown account. By leaving the funds within The Retirement Account, the fund sits outside his estate for inheritance tax, and he can choose when and how much income or capital he wishes to draw at a future date.
Any income withdrawn will be at his marginal rate of income tax as Elizabeth died after age 75, so he can control the amount of income tax deducted on each withdrawal.
He can complete an expression of wish and leave any remaining pension funds to future generations, which will pass down wealth in the most tax efficient way.
The inherited pension fund will not be tested against her son’s Lifetime Allowance as it was previously tested against Elizabeth’s. This is also the case for any future generations that may inherit any part of Elizabeth’s original pension.
The funds can be invested in any manner that her son chooses and, if it’s appropriate, could also purchase annuities in the future to provide a guaranteed income stream, drawdown, or a combination of both.
As you can see from the above scenario, our flexible Retirement Account is more than a one-size fits all approach to retirement. With our retirement solution you can prepare your clients for a number of eventualities and help them to achieve their retirement goals and aspirations.
*Professional Adviser use only. Persons portrayed in the case studies are not based on real people and are for illustrative purposes only and may not cover all considerations relating to your clients. This should not be treated as advice and independent taxation and or legal advice should be sought