Professional Capital have advised numerous clients on final salary pension transfers and the following are actual client case studies.
CASE STUDY 1: GJ – Transfer May 2014 – Client current age 65
GJ at age 58 was offered a transfer value of £286,054 from her previous employer Britvic, in return for giving up a projected pension at 65 of £15,686 per annum plus a tax free cash sum of £34,885. We had re-examined GJ's pension in 2010 and the advice at the time was to stay put because the transfer value was unattractive. GJ is a single mother with one son age over 18 and she could not bear the thought that in the event of a premature death her pension would stop. She had worked very hard to bring her son up and she would have liked him to benefit financially in the event of an early death. She also wanted to take control of her pension asset and to retire by taking a flexible retirement income via a pension drawdown arrangement.
WHY GJ TOOK THE TRANSFER VALUE
- GJ had a great chance to improve her tax free cash entitlement from £34,885 by the scheme to 25% of the total transfer value at age 65 or earlier.
- GJ was not relying solely on her Britvic pension to fund her retirement income. She had already qualified for her State Pension and she was expecting an inheritance from her auntie, which, it was received and invested in December 2016 (£150,000).
- GJ was planning to downsize later on in life, thus releasing extra capital in the future.
- GJ's income requirement at retirement was around £1,500 per month net. Her State Pension together with a monthly withdrawal from assets were sufficient to support her lifestyle.
- We estimated that she would need to withdraw around 2% per annum from assets to supplement her State Pension.
- Requiring a withdrawal rate of only 2% per annum from assets gave us the opportunity to create a very cautious portfolio with plenty of liquidity as an investment strategy going forward.
- Whilst she traded-off the security of a lifetime income for flexibility and control over her pension asset, the new rules that came in 2015 allow her now to take a flexible income out of her pension fund and any unused funds will be passed on to her son.
- Our strategic planning will allow her to pay no income tax for around the first 20 years of her retirement life.
CASE STUDY 2: DF – Transfer January 2017 – Client current age 65
When we advised DF (60 at the time) in 2015 to consolidate all his pension plans we strongly advised him to arrange a meeting with his wife HF (52 at the time) to provide her with advice on her deferred pension with Barclays. HF had undergone a successful cancer treatment years ago. HF was planning to utilise her pension at age 55.
The meeting was never arranged but in December 2017 the clients requested an urgent meeting. Unfortunately, HF was diagnosed with cancer again and she wanted to assess all options with her deferred pension. We advised HF to transfer out.
WHY HF TOOK THE TRANSFER VALUE
- The scheme was providing a tax free cash sum of £61,547 and an income of £10,443 per annum at her normal retirement date of 60. At age 55, her tax free cash prediction was £36,444 and a reduced income of £5,466 per annum.
- HF was concerned that if treatment was not successful then DF would only receive around £5,710 per annum worth of pension. She wanted DF and her two daughters to benefit from her pension asset. DF had his own pension arrangements and his own business.
- She was offered a transfer value of £391,379.
- Based on 4% investment growth the transfer value would have provided her with an income to match her final salary pension from age 55 to age 120+.
- Unfortunately, HF passed away in January 2018. Her husband took over the transfer plan and since death took place before age 75, he can make withdrawals tax free. Her two daughters have benefited as well having enough money to purchase their own home. DF was not in need of the scheme spouse’s pension but the transfer value has helped the family members enormously.
CASE STUDY 3: ER – Transfer March 2017 – Client current age 55
ER is a self employed solicitor who was looking to semi retire at age 55 with husband MR. They owned a property valued at £500,000 with a small mortgage outstanding. There were planning to downsize and use the proceeds to built two properties in Granada to rent out in order to generate investment income and buy a smaller property in the UK. During the vacant periods, they wanted to occupy one of the properties in Granada themselves. The cost of the built in Granada was anticipated at £300,000. Their income requirement after age 55 was predicted at £30,000 per annum. They had savings in excess of £50,000. ER had two final salary schemes with Phoenix and Lloyds Bank. ER was given a transfer value of £365,000 and £120,000 respectively.
WHY ER TOOK THE TRANSFER VALUE
- Her Phoenix final salary pension scheme forecast was to provide her with a tax free cash sum of £49,968 plus a reduced income of £7,495 per annum at her normal retirement date of 62. However, she wanted to access her benefits at age 55 and the prediction was £41,208 tax free cash and an income of £6,181 per annum. The Lloyds final salary pension forecast was £17,948 tax free cash sum and an income of £2,692 per annum at age 55. Both transfer values amounted to £485,000 with a 25% tax free cash entitlement after age 55, a lot higher than the schemes would have offered. The enhanced tax free cash would have helped with the cost of the project in Granada. The remainder fund would have stayed invested in a pension drawdown arrangement for future use.
- Based on 4% gross return, ER would have been able to generate the same income to match the final salary promised pensions from age 55 and still the funds would have lasted to ages 109 and 101 respectively.
- The investment yield required by the personal pension funds to provide an equivalent pension on normal retirement date was 2.18% and 4.88% respectively.
- Our analysis showed that with part time employment, State Pensions, investment property and drawdown income ER & MR would have sufficient income to enjoy in retirement and the transfers made their dreams come true.
CASE STUDY 4: GH – Transfer April 2017 – Client current age 60
GH, a Marketing Executive working in London, left his job as he got tired travelling to London and decided to seek a part time job locally and semi retire. He was 57 at the time and he was looking to access his assets, as he had no income. He had a property valued at £1.2 million and planning to downsize at some point in the future, thus releasing extra capital. He had a final salary scheme with PA Consulting and money purchase schemes valued at around £410,000. He was given a transfer value for his final salary pension of £465,000. He also had savings/investments valued at £170,000. GH was also expecting an inheritance in the region of £500,000 from his parents. GH needed an income of around £4,000 per month net until a new part time employment was secured.
WHY GH TOOK THE TRANSFER VALUE
- The existing PA Consulting Scheme offered a tax free cash of £80,717 and a reduced income of £12,107 per annum.
- The transfer value of £465,000 offered £116,250 worth of tax free cash (25% of transfer value).
- Based on 4% investment growth, GH could have had a similar pension in the form of drawdown income and still his fund would have lasted to age 90.
- By taking the transfer, GH was able to flexibly access his retirement savings to generate tax efficient income now and then reduce or stop it when the new part time employment was found.
- The transfer provided him with enormous flexibility as to how and when to utilise his assets to suit his personal lifestyle.
CASE STUDY 5: KH – Transfer September 2019 – Client current age 69
KH took late retirement at age 68. His income requirement at retirement was £1,500 per month net. He had two final salary pension schemes with Eaton UK. He was given a transfer value of £132,000 and £115,000. KH had savings worth of £45,000. KH owned his own home and had no debts.
WHY KH TOOK THE TRANSFER VALUE
- We advised KH to draw his benefits directly from the main scheme and take the second transfer value.
- His State Pension together with his final salary pension provided him with the required income in retirement from safe sources.
- We invested cautiously the second transfer in a pension drawdown together with his tax free cash from the final salary pension and now KH enjoys ad hoc flexible income to fund various discretionary expenses.
- Based on 4% gross investment growth, the pension drawdown would have provided him with the same income as his second final salary pension scheme until age 88. However, as the primary objective was to use the fund flexibly and not try to match the scheme pension the fund has been invested very cautiously allowing plenty of liquidity.
- In the event of a premature death, his wife would get 50% of his final salary pension and the full value of his drawdown pension plan and other assets which would provide sufficient income for her. If the drawdown pension fund is not used up in their lifetime, it would pass on to their son.
CASE STUDY 6: KP – Transfer April 2020 – Client current age 65
KP is divorced with two sons. Although was planning to work for two more years he reached normal retirement age in February 2020. KP was concerned that in the event of death his sons would receive nothing from the pension scheme. KP had two deferred pensions with Eaton UK having been given a transfer value of £141,000 and £77,000.
WHY KP TOOK THE TRANSFER VALUE
- Both Schemes provided KP with a tax free cash of £63,830 and reduced pension of £7,035 per annum. The Scheme’s tax free cash would have been higher by around £9,330 compared to 25% from his transfer values. However, he was not concerned about tax free cash or losing the guaranteed income offered by the Scheme.
- His State Pension together with his two mortgage free investment properties provided with more than enough the required income in retirement.
- He had savings in excess of £100,000.
- We invested his transfer values very cautiously as he did not need to chase higher returns.
- KP can access his benefits now as and when required in a tax efficient way.
- KP was considering very seriously buying a third investment property funded by his transfer values and savings.
- His transfer values can now pass on to his two sons in the event of death.
CASE STUDY 7: SB – Remain in Scheme - June 2020 – Client current age 65
SB employed as Principle Design Engineer by AWE at age 65 wanted to retire having an income requirement of £2,000 per month. SB was offered a transfer value of £500,000 from his employer in return for giving up a pension at 65 of £16,182 per annum plus a tax free cash sum of £107,886. SB is married and his wife will continue working for another 10 years. SB has personal pension funds of £110,000 and savings of around £80,000. His State Pension at age 66 is £8,767pa. He has a property valued at £450,000 with no debts. He is in good health.
WHY SB TOOK THE SCHEME PENSION
Although by taking the transfer, SB would have still achieved his required income in retirement & own the asset without having to take any investment risk because of the size of the transfer value and other assets, we recommended he took the pension income and tax free cash directly from the scheme.
- SB was not concerned about mortality loss or reverting to a 50% spouse’s pension only in the event of death.
- SB was not concerned about leaving his fund to his wife or daughter.
- SB felt more comfortable with a secure and increasing income.
- SB has other liquid assets to use flexibly.
- SB had no specific objectives where a transfer would have proved to be very useful.
- SB’s objectives met by taking the pension income and tax free cash directly from the scheme.
CASE STUDY 8: CH – Remain in Scheme - June 2020 – Client current age 65
CH employed as Computer Engineer at age 65 wanted to retire having an income requirement of £2,000 per month. CH was offered a transfer value of £256,000 from his employer in return for giving up a pension at 65 of £9,859 per annum plus a tax free cash sum of £65,730 or a pension of £13,209 per annum without tax free cash. CH is married and his wife, three years younger, will receive her maximum State Pension at age 66. She also has £100,000 in personal pensions. CH has personal pension funds of £260,000, savings of around £15,000 and expects an immediate inheritance of around £65,000. CH will receive the maximum State Pension at age 66. They have a property valued at £500,000 with no debt.
WHY CH TOOK THE SCHEME PENSION
Although by taking the transfer, CH would have still achieved his required income in retirement & own the asset without having to take any investment risk because of the size of the transfer value and other assets, we recommended he took the pension income and no tax free cash directly from the scheme.
- CH was not concerned about mortality loss or reverting to a 50% spouse’s pension only in the event of death.
- CH wanted the maximum income in retirement.
- CH was not concerned about leaving his fund to his wife or children as he has other assets.
- CH has other liquid assets to use on a flexible way or pass on.
- CH had no specific objectives where a transfer would have proved to be very useful.
- CH’s objectives met by taking the maximum pension income directly from the scheme as he was not in need for tax free cash.
CASE STUDY 9: KM – Transfer July 2021 – Client current age 62
KM employed aged 62 wanted to take early retirement requiring an income of £1,700 per month. KM was offered a transfer value of £306,000 from his employer in return for giving up a pension at 62 of £6,389 per annum increasing with RPI plus a tax-free cash sum of £42,599. KM is single & will receive his maximum State Pension at age 66. KM lived in rented accommodation and had no other assets. He had two heart attacks in the past with some other health issues.
WHY KM TOOK THE TRANSFER VALUE
KM was not able to achieve his objectives by drawing his benefits directly from the scheme. The scheme’s pension & State Pension at age 66 was not large enough to provide him with the required income in retirement. He was single, so the spouse’s pension was of no benefit and his health played an important role in making the decision to transfer.
We recommended to take the transfer value & buy an annuity on the Open Market because:
- KM received a tax-free cash of £76,500 compared to 42,599 from the scheme.
- KM received an annuity of £13,404 per annum for the rest of his life, which together with his State Pension at 66 was able to meet his expenses.
- KM was not concerned about leaving his fund to his children.
- KM had no other liquid assets to use so we felt a guaranteed income was a priority in order to fund his basic living expenses.
- KM would have achieved his objectives by investing the transfer value into a flexi-access drawdown plan, but that would have meant taking a medium risk with his sole asset.
- The annuity provided him with a guaranteed income not subject to the vagaries of the investment market.