Chapter 4: Phasing Pension Benefits

Question 1

£1,000,000 SIPP contain 1,000 segments each valued at £1,000. Nigel is a higher rate taxpayer, and requires £20,000 of annual net income. Annuity rate is 5%

How many segments will Nigel need to encash to achieve net income target?

Answer 1

Start: how much income will each £1,000 segment provide

1. £1,000 x 25% PCLS = £250
2. £750 taxable at 40%
3. £750 x 5% = £37.50
4. £37.50 x 60% = £22.50 net per segment
5. total net income = £250 + £22.50 = 272.50
6. £20,000 / £272.50 = 73.39 rounded up to 74 segments

Question 2

How would you work out the previous questions where there are no segments but only a single SIPP fund.

Answer 2

Calculate per £100 of fund as you do for income.

Question 3

Nigel has £1,000,000 SIPP and is a higher rate taxpayer. He has decided to use FAD. How much fund will nee to be crystallised to provide £20,000 of net income

Answer 3

Start: how much income will each £100 of fund provide

1. £25 PCLS
2. £75 taxable at 40% = £45
3. £25 + £45 = £70 or 0.70
4. £20,000 / 0.7 = £28,571.42

Question 4

If someone wanted to use phased PCLS how much do they need to crystalise to provide £34,000 of net income? What is the advantage of phased PCLS over phased drawdown

Answer 4

25% TFC net income of £34,000 = £34,000 / .25 = £136,000

Does not trigger MPAA

Question 5

What are the four phasing options available to clients?

Answer 5

Phased annuity purchase

Phased FAD

Phased UFPLS

Phased PCLS