What comes first,
the pension or the plan?

Specific pension dilemmas often bring clients through wealth managers’ doors, but these invariably uncover other areas where their investments and financial planning could be working harder. Here, Gareth Munn, Private Client Manager at 7IM, illustrates with a recent case.

“We need advice on our pensions…”

This is one of the most common reasons people come to 7IM for help. However, in the example below, and with a lot of cases we work on, it turned out that there was much more to it than that.

1. Setting the scene

Mr and Mrs S, based in Southampton, came to us for advice “on their pension”, having recently retired from the family business.

The real question quickly became apparent: How would they fund their future lifestyle in retirement, for the rest of their lives whilst providing a legacy for their children? Prior to retirement, they were spending around £45,000 per year after tax, and although they had built up a variety of savings, ISAs and pensions, and considered their first year of retirement covered, the question still loomed: Could this level of spending be sustained or would they need to make changes?

The real question quickly became apparent: How would they fund their future lifestyle in retirement, for the rest of their lives whilst providing a legacy for their children?

2. What did they need and when?

Many people think their spending will go down in retirement, when in actual fact it often goes up initially (as you spend more time doing the things you enjoy), drops off as you get older (and less willing/able to do those same things), then goes back up again in later life as care costs start to rise – a phenomenon we call the “retirement smile”.

After reviewing their assets and expectations of spending in retirement, we created a bespoke “cash flow model” using 7IMagine, our award-winning app. This allows us to estimate how long a client could drawdown on their savings in retirement once their employment income stops.

In this case, their savings, investments and pensions, when combined with rental income from an existing buy-to-let property and state pensions, would last the rest of their lives quite comfortably with a few minor adjustments. It also gave us an idea of how much could be left to pass onto the next generation – the “legacy” they wanted.

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Top Tip

Planning for key life events like retirement is generally what drives people to seek professional wealth advice, but broader-based discussions invariably ensue that lead to clients’ wealth working harder across the board. The review needed to answer specific pension questions, like whether to transfer a final salary scheme, is the key to a better financial future, so why not arrange to meet an adviser to improve your overarching plan.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. What next?

Working with our in-house financial planning team, we looked at maximising pension contributions from excess cash in their business. This included using “carry forward” from previous years’ annual pension allowances – moving cash from a business straight into a pension is a very tax-efficient way of contributing, as all payments are made gross of income tax and National Insurance. Next, the required income for the next five years could be covered by cash savings and ISAs, and the following five years (when combined with state pensions) by using the 25% tax free pension “lump sum”, but drawn “flexibly” – not all drawn out in one year. The result? Nearly 10 years of income in retirement with minimal income tax to pay, while retaining the maximum amount in the pension, which, under current legislation, is outside of your estate for inheritance tax purposes.
The result? Nearly 10 years of income in retirement with minimal income tax to pay, while retaining the maximum amount in the pension, which, under current legislation, is outside of your estate for inheritance tax purposes
I’d like to highlight the importance here of seeking advice when it comes to pension rules and regulations – they’re an ever-changing beast, and can be extremely complicated.

4. A two-stage investment approach

All money we estimated the client would use during their lifetime was invested in a more cautious strategy with a target of providing the required level of annual income. Any money earmarked as a legacy for future generations was invested more adventurously, in line with the attitude to risk and the longer-term nature of this investment.

Any money earmarked as a legacy for future generations was invested more adventurously, in line with the attitude to risk and the longer-term nature of this investment

The most important thing to understand is that any plan is only good as its review – we will continue to work with the clients and adjust their plan as often as necessary.

Do you this case study resonate with you?

findaWEALTHMANAGER.com says:

Case studies can be an invaluable way to quickly see how a wealth manager has helped people similar to you. While details will of course remain anonymous, a prospective adviser should have abundant illustrations similar to this they can share.

If you have a specific pension planning question or feel the time is right for a thoroughgoing financial review, arrange to meet your best-matched advisers quickly and easily through our 3-minute search tool. Alternatively, please get in touch with our expert team to discuss your requirements further.

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