Recently, one of our clients was forced to retire early due to ill health. Being a couple of years away from State Pension age, he was understandably concerned about how he and his wife would cope financially and in particular, how the outstanding mortgage would be repaid. His wife was already in receipt of her State and personal pensions and didn’t want to return to work if it could be avoided.
In the first instance, having discussed their overall financial situation in depth with them, we agreed on the amount of income required to cover their daily living costs. We then reviewed their pension arrangements and investments to see how much income might comfortably be provided; we also considered whether there were any special features attached to those arrangements. Having considered their attitude to investment risk, we then provided a report outlining the various options open to them together with the risks and benefits of each approach. At a further meeting, having discussed these options in some detail, we agreed on a strategy.
Our client used part of his tax free cash entitlement to repay the mortgage. One of the older pension plans contained a valuable guaranteed annuity rate, much higher than current market rates, which we used to provide a guaranteed income. Due to his medical conditions, we were able to obtain an enhanced annuity rate for some additional pension funds and these guaranteed lifetime payments will cover the majority of their living costs. However, we didn’t want to commit all of these funds to annuities as we wanted to retain some flexibility for the future.
With the residual funds, we arranged a flexible Drawdown Plan from which a regular payment will be drawn each month, to make up the shortfall in income until his State Pension commences. At that point, those withdrawals can cease and on his death, the value of the Drawdown Plan will be available either for his wife or for the family – free of inheritance tax. This fund will also be available to them to top up their income in the future, as required.
We will also be meeting with them on a regular basis to review the progress of these arrangements and to consider any changes in their circumstances. In this way, we can ensure that things remain on track to meet their requirements in the future.