Client Situation

£140,000
  • Age 62
  • Married, no dependents
  • Current Pension & Investment income £20,000
  • Outgoings £18,000
  • Buy to Let Property with £45,000 mortgage
  • Residential mortgage with £40,000 mortgage

Cashout Option

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I was approached by a client who had a Defined Benefit Scheme from employment many years ago. The scheme had written to him and disclosed a potential Cash Equivalent Transfer Value (CETV) of £140,000 or an annual income in 3 years of £5,800. Until this point, my client hadn’t realised there was a cash value to his benefits and was therefore surprised at its value. He wanted to understand if he could somehow use the pension, to help fund the building of an additional room on a buy to let property.

He wasn’t interested in the income as he already had enough pension income between himself and his wife to cover their outgoings. They were also due to start receiving a state pension in a few years, which would provide even more guaranteed income. His main objective was to access the pension to use for renovation and use any remaining fund to pay off his mortgages.

To analysis any case where someone wishes to give up safeguarded benefits, I need to consider a number of factors, some of which are:

  • What benefits are being given up and could the CETV being offered, be used to replicate those benefits in the future (potentially through buying an annuity)?
  • What are the client main priorities for considering a transfer?
  • What position would the client be left in financially if the CETV was taken and the markets had a downturn?
  • Can the clients’ objectives be met by some other method?

This particular client didn’t have any savings and didn’t wish to take on any more loans for the renovations. His only accessible asset was the DB scheme.

He didn’t need the income from the scheme and therefore it wouldn’t be detrimental if it wasn’t there. For all intense purposes, the pension income was surplus to his needs.

By renovating the buy to let property, it was estimated to increase the property value by around £50,000 and increase the rental income by around £5,000 per annum.

All factors considered, I gave the client a positive recommendation to move the scheme.

The usual vehicle for this type of transfer is a flexi-access drawdown product, which keeps the fund invested and allows unrestricted access. On this occasion though this didn’t suit the clients objectives or risk. He wanted to withdraw the fund, in the quickest time possible, without breaching the higher rate tax threshold.

As his current taxable income was around £20,000, he had a further £25,000 available per year, in the 20% tax band.

Additionally the client state he didn’t want any investment risk. Given the timeframe he was looking to withdraw the fund (5 years), even if he’d wanted some investment risk, I have advised against it. Investing is for the medium to long term, 5 years plus, any timeframe shorter than this doesn’t give the fund chance to recover any downturns.

After some further discussions we chose to use a Fixed Term Annuity – cash out plan.

£35,000 was paid as tax-free cash immediately and a fixed £22,000 income, paid annually as a lump sum, will be paid for 5 years. No investment risk, no volatility, no ongoing fund charges. A simple solution.

CategoryCase Study
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