Right now the client is faced with a decision of where they get their retirement income from. Their portfolio has lost money in the last 6 months which is reflected in their pension fund.
5 years ago we produced a flexible retirement plan for ‘Dave’ on the basis that he would be stopping work between 2010 and 2013. The date was flexible due to his and his employers needs. Unfortunately, he had no secure final salary pensions and his retirement plan was based totally on how and where his investments were placed. He needed growth on his investment to achieve an adequate sustainable retirement income for him and his wife. To do this meant that his portfolio would need to be exposed to some element of risk to his capital value.
We now know his retirement day is due in February 2012. He has been through a series of reviews and amendments to his retirement plans over the years. His portfolio has been reviewed and changed as part of the Reeves Portfolio management service.
His position right now is that he has a portfolio of investments that is held within the Transact Platform / Wrap (See previous Blog for description). He also has a portfolio of ‘savings’ held outside Transact which is predominantly cash held within Cash ISA’s and other low risk products.
The Transact portfolio is valued in 6 figures and administered and managed within the tax wrappers of personal pensions, ISA’s and a life insurance Bond. Across all wrappers he holds a mixed portfolio of investments ranging from cash, government and corporate bonds, property and equities. The equity portfolio also covers a mix range of markets including European and financial stocks. These latter investments have clearly been hit hard in recent months.
The issue as stated before is how and where the client now gets his income from. He is reluctant to cash in his pension with the fund value being lower than in was 6 months ago.
The flexible retirement plan that we put into place is now coming to fruition. Despite having significant amounts of cash in equities across all tax advantaged wrappers he still has options and opportunities of where he can draw his income from. Since the client has no mortgage and owns his home the option of using equity release has always formed part of his retirement plan. At this time and as planned, the option is not one we wished to pursue. This may be accessed later in retirement.
Clearly spending a percentage of capital is an option to fund year ones income. Spending a percentage of the deposit money that currently attracts low rates of interest and is attracting no tax advantages would be a major option. This would avoid selling equity and other investments that were currently showing losses. Maintaining the pension funds in full would have added bonus of maintaining the maximum death benefits in his estate in case of the worse thing happening and avoid buying an annuity till he knows the best option to suit his family in the long term.
Upon closer inspection of the Transact Portfolio the benefit of a mixed investment portfolio was clear. Despite the whole portfolio going down in value over the past 6 months there are asset classes and funds that have showed gains. It will be possible to sell down these units which have gained ground to provide for the clients income. These were more cautious funds that were predominantly invested in corporate bonds and some of the portfolios also had cash elements too. These funds that showed gains / avoided losses were held within the pension and the bond accounts and provided an opportunity for providing tax free income as well as selling assets that had performed better than cash and an opportunity to sell at attractive rather than depressed prices.
The bond enables a client to draw a tax free income of up to 5% of the original investment each year. Hence the sale of the positively performing asset would be paid tax free. Since, this would not take up all the annual allowance for tax free income it would mean that there is provision for taking out tax free income in future years when the markets are generally in a better state.
Up to 25% of the pension fund is available as a tax free lump sum. With the balance the client can buy an annuity or take no income through the use of drawdown. To maximise the opportunity of selling the positive assets and avoid selling assets at a bad time the option would be to utilise a percentage of the tax free cash for an amount equal to the fund size of the positive assets. For example £5000 tax free cash would be taken and paid to the client; this would represent 25% of possible tax free cash available from a fund of £80k. £15000 would be switched to drawdown with no income being taken – leaving the badly performing assets untouched till there is change with the family health situation and or the assets start to show positive returns.
Having established how the client can achieve the required income for the next year we have minimised tax and retained flexibility for the future year’s income and eventual passing down the client’s wealth to his family. We have also maintained the portfolio in a position to continue to build value since the client may well have another 20 or 30 years to go.
The above may sound complicated to those that are not involved but the summary is that a well planned, flexible retirement plan can provide tax efficient, sustainable incomes that help keep wealth within ones family – even at times in depressed markets.
Due to the way Transact and the Reeves Independent portfolio management service work together the above can be done very easily, time efficiency and minimum costs to the client.
Please remember that all client circumstances are unique and advice should always be sought. Not all relevant information is shown and names and figures have been changed for illustrative purposes.
Key issues covered:
Broad Portfolio of assets
Working to a feasible plan
Transact Platform / Wrap
Mixed portfolio of pensions, isa,s , Bonds and Deposit accounts.
Phased use of pension Funds and tax free cash
Drawdown options
Annuity Purchase
Portfolio management
All of the above is what Reeves Independent use within their portfolio management service.
To find our more about Reeves Independent Portfolio Management Service contact us on 0871 271 1280 or e-mail info@reevesifa.com for a FREE no obligation appointment!
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*Please note this article is not provided for advice purposes but aimed at encouraging private investors to think and discuss their circumstances and how it is impacted by what’s happening in the world. Professional advice should always be sought before making any decisions.
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