Ensure adequate Retirement Flashcards
To ensure that Alan and Lydia are able to generate an adequate and tax-efficient income in retirement
Describe in detail the process an adviser would follow to ensure that Alan and Lydia’s existing pensions and investments are on target to provide their desired level of income at their intended retirement age of 60
- Establish the level of income they require at their intended retirement age
- And any requirements for capital lump sums
- Obtain State Pension forecasts / BR19 for both
- Agree inflation assumptions to be used
- And likely tax status in retirement
- Obtain fund projections to intended retirement age of pensions
- And all other assets to be used to provide an income in retirement
- Factoring in the value of any potential sale of their company, if appropriate
- Include any assumptions for increases in contributions going forward
- Based on the term the income is likely to be payable over / likely longevity
- Establish a withdrawal rate / annuity rate
- Determine the fund required to provide this level of income
- And then determine the shortfall
- Calculate the level of contributions required to meet the shortfall
- Carry out regular reviews to adjust funding as necessary
Describe the key benefits if Alan and Lydia commence pension contributions via AQ Pack Ltd
• Tax-free extraction of profits from the company
• As it is an allowable deduction against Corporation Tax / not a benefit in kind
• So no income tax payable by Alan or Lydia
• And avoids NICs for them personally and the company
• Higher amounts of carry forward can be used
• As tax relief on employer contributions is not limited by relevant earnings / salary
• Will provide a higher income in retirement
• And higher PCLS
• Contributions can be flexible / based on company performance
• Greater pension fund / pension funds currently inadequate
• Maintains the couple’s disposable income
• Tax free growth
• Of an asset that is outside the estate for IHT
• And that will pay tax-free death benefits if they die before age 75 / flexible death benefits
• In trust so protected in the event the company becomes insolvent / they are declared
bankrupt
Outline the factors that should be taken into consideration before advising Alan and Lydia whether or not they should consolidate their existing group personal pension arrangements into a new plan
• A comparison of the charges on their existing schemes and the proposed scheme
• Any transfer penalties
• Any guarantees
• Or life cover within the current schemes that would be lost on transfer
• Comparison of fund choices between the existing schemes and the proposed plans
• Ease of administration between the current and proposed scheme / any online access
availability
• Availability of flexible retirement options under their group schemes
• Cost of the advice
• Out of market during transfer
Identify the reasons why re-starting contributions into Alan and Lydia’s existing group personal pension plans may be more beneficial at this stage than considering a SIPP as a suitable plan for their retirement provision
• Cost to transfer / cost of advice / exit fees
• Usually higher ongoing charges within a SIPP compared to a PPP
• There is no guarantee a SIPP will perform at a higher level than their existing plans, and
higher charges may provide a drag on investment returns
• The existing plans should provide sufficient investment fund choice for the current value of
the funds / is appears unlikely that they will benefit from the full investment range within a
SIPP, unless they decide to purchase commercial property within their pension wrappers
• They have a long-time horizon before funds can be accessed (at least 24/25 years) so flexible
access options not yet required / no need to transfer to access these options yet
• PPPs are usually less complex / less admin / less time consuming
• Market timing / they could lose out during the transfer process / markets can be very
volatile
Explain to Alan and Lydia how ‘pound cost averaging’ from investing regular contributions could be used to assist them in their objectives of retiring at age 60
• Savings discipline / process
• Benefit from volatility / more units purchased in falling market
• Avoids market timing risk / investing lump sum just before crash / market downturn
• Suitable for long-term investments / 24 years plus to anticipated retirement age
• Contributions can increase / decrease / flexibility
• Reduces risk of investing in higher risk funds / enables higher risk funds to be purchased
• Evens out / averages cost of unit purchases
• Unlikely to invest lump sums at present / lack of affordability / other objectives higher
priority / business newly established
Alan and Lydia are considering setting up a Lifetime ISA (LISA) to save for retirement.
(i) Explain in detail to Alan and Lydia how the LISA will operate
- Maximum contribution is £4,000 per tax year
- Part of normal ISA allowance / not in addition
- Can transfer from existing ISAs
- Tax free growth and income
- 25% Government bonus (based on contribution) / £1,000 max per tax year
- Bonus added monthly / when contributions made
- Penalty free access from age 60
- Otherwise penalty of 25% on amount withdrawn
- Earlier access without penalty on terminal illness / Additional Permitted Subscription available
- Eligible as both under 40
- After age 50 no further contributions permitted / no further bonus after age 50
- Choices of stocks and shares or cash
lan and Lydia are considering setting up a Lifetime ISA (LISA) to save for retirement.
(ii) Recommend and justify why commencing contributions into a personal pension plan may be a more suitable option for Alan and Lydia in their objective of generating a sufficient income in retirement
• Higher contributions allowed / up to annual allowance / 100% of salary
• Employer can fund
• Can use carry forward
• Income tax relief on contributions / Corporation tax relief of contributions paid by their
company
• No tax relief on LISA contributions / 25% bonus
• Wider choice of funds / providers / limited LISA providers
• Longer-term contributions permitted / can contribute beyond age 50
• Does not form part of estate / Inheritance Tax purposes
• Improved death benefits
• Access from age 55 / LISA from age 60
• Pension protected from creditors / LISA is not protected
Outline the key factors that Alan and Lydia should consider when building a diversified investment portfolio within their pension funds
- Use of different asset classes
- Uncorrelated / non correlated / negative correlation
- Attitude to risk / capacity for loss / timescale
- Assess current market conditions
- Geographical spread
- Cost / fund charges
- Liquidity of assets
- Currency risk / hedging
- Passive versus active / ethical investing
- Personal control / time / administration / monitoring
Comment on the suitability of Alan & Lydia’s existing pension plans and the steps they could take to seek an improvement in fund performance
• Alan & Lydia have an adventurous attitude to investment risk
• Alan’s UK Cautious managed fund and Sterling bond fund will be lower risk
• Lydia’s Global fixed interest and UK gilt fund will be low / medium risk
• Both their funds are therefore not aligned to ATR
• And may be a decisive factor in why they feel they have underperformed
• None of the funds are likely to match their ethical standpoint
• And options to switch to such funds / appropriate funds may be limited
• Further contributions to the funds will be allowed / GPPP can accept ongoing contributions
• Alan & Lydia could seek to switch the funds to ones that match their ATR / other
requirements
• Or switch the funds to another provider
• A switch may provide opportunities to use pension funds to acquire the commercial
property
• Allowing use of their pension funds to directly benefit their new company / provide added
tax efficiency
