1) Meeting objectives – Ensure she can generate a sustainable income throughout retirement Flashcards
Explain in detail to Andrea how benefits would be paid from her workplace pension plan on death and why it is important that she updates her death benefit nomination as soon as possible. (8 points)
- If Carl is named as the beneficiary on the nomination form, death benefits could be paid out to him even after divorce, ultimately at the discretion of the Scheme Administrator.
- Updating it following divorce ensures it will be passed to her intended beneficiaries (her two sons).
- This simplifies the process on death/minimises delays in payment.
- It ensures her sons receive the benefits and have option to use flexi access drawdown (FAD).
- They will also have the option of taking a lump sum or buying an annuity.
- Improves tax-efficiency for children/tax free growth/protects tax free pension wrapper.
- Retains IHT-free wrapper/can pass IHT free to future generations.
- Income (or lump sum) is tax free if Andrea dies before age 75/taxed at their marginal rate if Andrea dies after 75.
Recommend and justify the actions that Andrea can take to improve her retirement provision. (31 points)
Rec:
Make additional pension contributions
Just:
* Andrea has up to £56,000 tax relievable pension contributions/can use other assets if no surplus income.
* Tax relief on contributions – higher rate (40%).
* Can become a BRT, preserves £1,000 PSA.
* Tax free fund/IHT efficient/25% PCLS entitlement on vesting.
* Current pension provision is moderate.
Rec:
* Diversify pension funds
* Increase exposure to gilts/commercial property
* Consider lifestyle funds/target date funds (if Andrea has enough time to retirement)
Just:
* Matches ATR and timescales to retirement.
* Lowers volatility.
* Gilts protect against reducing annuity rates for annuity purchase.
* Safer funds provide more protection in market downturn for annuity rates and and/or maximum PCLS.
* Lifestyle and target funds provide automatic switch from equities into safer funds as retirement date approaches.
Rec:
* Reduce cash holdings
* Ensure holding in each bank is limited to £85,000
* Move most of cash holdings to fixed rate accounts
Just:
* Too much (£180,000) held in cash/subject to inflation risk and limited potential for real growth.
* Only require approx. 6 to 9 months emergency fund.
* Ensure funds are protected by FSCS.
* Andrea is HRT, savings income over PSA of £500 taxed at 40%.
* Interest rates likely to reduce as inflation subsides.
* Fixed term accounts could offer better rates over longer term.
Rec:
* Use maximum ISA allowances
* Use S&S ISA
Just:
* Tax free income and capital growth within the ISA wrapper.
* This will increase growth and ultimately their fund values.
* All other assets are less tax efficient (40% on savings income, 33.75% on dividends over DA and potential for CGT on OEICs and shares).
* Use S&S ISA for equity/property/global exposure.
* Can match cautious ATR.
* Good potential for long term growth/growth in real terms.
Explain in detail why Andrea should consider increasing her pension contributions into her employer’s workplace pension scheme. (13 points)
- Increased pension pot/meets objective of sustainable income in retirement.
- 40% tax relief on contribution.
- Employer may match higher contribution.
- Potential for tax-free growth.
- Her other assets are not as tax efficient (40% tax on savings income, 33.75% on dividends over DA and potential for CGT on OEICs and shares).
- Flexible options on retirement/FAD/UFPLS/annuity.
- IHT free fund/flexible death benefit options/IHT planning.
- No administration/deducted from gross salary/admin done by employer.
- Low-cost scheme/subsidised by employer.
- Limited timeframe to contribute.
- Wide range of funds/can add further diversification/can match ATR.
- Simple admin/deducted via salary/low cost.
- Salary sacrifice may be available/reduced employee NICs/employer may share NI savings.
Explain to Andrea why she should consider deferring her State Pension. Also set out the drawbacks of this approach. (6 points)
- Will save higher-rate Income Tax if she continues working.
- Increases pension by 1% for each 9 weeks deferred.
- In good health so more likely to live long enough to benefit from deferral.
Drawbacks
* No lump sum available.
* Loss of immediate income/could die younger and lose out.
* Children cannot inherit deferred State Pension.
Recommend and justify the changes Andrea could make to her existing ISA holdings to enable her to meet her longer-term retirement needs. (20 points)
Rec:
* Fund switches to add diversification and lower risk
Just:
* Matches ATR.
* Lowers volatility.
Rec:
* Reduce overall equity exposure.
* Increase global equity exposure/reduce UK exposure.
* Introduce actively managed income funds.
Just:
* 100% equities too high for cautious ATR.
* Increases global diversification/too much reliance on UK markets.
* Reduces overall risk.
* Chance to outperform/alpha.
* Income equity funds more suited to cautious investors/dividends can be reinvested tax free.
Rec:
* Increase holdings in gilts and global government bonds.
* Introduce index linked gilts
Just:
* Increases asset diversification.
* Suits cautious ATR.
* Guaranteed by government.
* Helps mitigate impact of inflation.
Rec:
* Increase commercial property funds
Just:
* Adds asset diversification.
* Reduces overall volatility/income can be reinvested tax free.
Explain why a lifetime annuity purchase is likely to be the most suitable use of Andrea’s pension funds when she retires. (10 points)
- Matches ATR/cautious investor/no investment risk.
- Provides guaranteed income for her lifetime.
- She is in good health so value for money/long payment period.
- No costs/need for ongoing advice/simple admin.
- She has no other guaranteed private pension provision.
- Can buy capital protection/guarantee period.
- Single life offers a higher annuity rate as no spouse’s pension required.
- Can build in escalation to protect from inflation.
