▶ Retirement & IHT Planning Case Study of Mr. Alpha
Retirement & IHT Planning Case Study of Mr. Alpha
Written By: FS Wales
Published on: February 5, 2021

This is a real case that was completed in 2021 by Mr Ryan Caisley DipFA, the name of the client has been changed for confidentiality. This outlines the value that professional financial advice can add to your life and how an adviser can utilise your current portfolio to meet your objectives in an efficient manner but also identify issues you weren’t aware of. This advice piece involves portfolio restructuring and a drawdown strategy which utilises tax allowances whilst demonstrating how the income will be met for the remainder of the client’s life and potentially mitigate a current Inheritance Tax liability.

Mr. Alpha approached Ryan as he was preparing for retirement and wanted to identify the most tax-efficient way to draw an income from his available pension. Mr. Alpha’s initial idea was to take a tax-free lump sum from his pension and then use a Flexi-access drawdown arrangement to take an income from his pension up to his Personal Tax Allowance of £12,500. However, Mr. Alpha was in receipt of an income from his rental property which was using some of his Personal allowance. Mr. Alpha wanted professional advice and was prepared to take guidance if his initial plan was not the most efficient strategy.

Ryan followed the standard client fact-finding process, finding a range of soft and hard facts and spending time with Mr. Alpha so he could fully understand both the current circumstances and the objectives as well as, what values the client had, the lifestyle the client wanted to lead in retirement and if there were any other concerns he had going forward.

Ryan identified that:

  • Mr Alpha only required an income just above the Personal Allowance to meet his basic expenditure needs throughout retirement, but he enjoys going on holiday and would require the opportunity to access ad-hoc cash lump sums every other year to cover this expense.  
  • Mr Alpha required an immediate capital lump sum for home improvements,
  • Mr Alpha was single with no children but was close to his sister, nieces, and nephews who were the main beneficiaries of his Will. This is an important fact as this means Mr Alpha does not qualify for the Residence Nil-rate Band due to the main residence not passing to a direct descendant.  Have a read of our IHT – The Death Tax article to learn more
  • There was a large amount of capital in ISA savings,
  • There were a couple of pensions across different providers which offered different retirement options and investment choices,
  • Mr Alpha has concerns about his longevity due to his current health and family history,
  • The main concern was having his income need met throughout retirement and that there was the option to access ad-hoc cash lump sums.

Ryan identified that if Mr Alpha was to die tomorrow, he would have an IHT liability of circa £45,000 and Mr Alpha was not aware of this and wanted to know if there were anyways to mitigate this tax liability. Therefore, Ryan proceeded to research an efficient strategy that could both meet Mr Alpha’s income needs for the remainder of his life, but all mitigate his IHT liability. Ryan used Cashflow Planning software as well as other research tools when making his recommendation.

Ryan’s advice was to consolidate Mr Alpha’s pensions into a single low-cost pension plan that gave access to pension income flexibility for both the client and, upon death, his intended beneficiaries. The underlying investment strategy was of a cautious nature in line with Mr Alpha’s appetite for risk but still provided opportunity for some capital growth in attempt to keep his assets in pace with inflation.

Ryan also recommended that Mr Alpha did not draw his pensions first and that he lived off his savings whilst also maximising pension contributions using his savings. The benefit of this is that:

  • Mr Alpha would receive tax relief from the Government in the form of ‘grossed up pension contributions’ meaning for every £100 paid into the pension by Mr Alpha, the Government would contribute £25.
  • In Mr Alpha’s case he could contribute £18,000 towards his pension this year, which only cost £14,400 resulting in £3,600 tax relief and every subsequent year we will contribute £3,600 gross (£2,880 net which is £720 tax relief each year).
  • This option also retains Mr Alpha’s 25% tax free cash entitlement, which should aid towards some of Mr Alpha’s ad-hoc lumpsums in the future.
  • Also, as Pension’s are not ‘inside your estate’ for IHT purposes and ISA savings are, by utilising ISA assets to contribute towards your pension and fund your lifestyle you are depleting the capital value and moving more money outside of your estate and with 5-6 years of normal expenditure and pension contributions, we will have mitigated the full IHT liability and at this point we can begin drawing pension income to fund the lifestyle.

In summary, Ryan was able to utilise Mr Alpha’s assets in such way that his income need will be met comfortably throughout his lifetime, and if he survives 5 years with normal expenditure the £45,000 IHT liability will have been mitigated meaning his beneficiaries will not have to be concerned about having to sell assets in order to pay this liability and his pension would have received further contributions.

If you have any potential IHT liabilities or would like to explore ways of how professional financial advice can add value to your life, provide you a structured plan which will give you peace of mind, please contact Ryan using the following details: Ryan@fswales.co.uk, 01554 770022 or complete the contact form below to arrange a non-obligatory meeting.