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A Flexible Pension

Colin Parsons, aged 61, has no plans to retire just at the moment. He loves his work in property development and although he could afford to, he does not want to draw his pension just yet. With a portfolio of properties and a desire to keep feeling the buzz from new ones, Colin is very active and has plans for this to continue. But, property development requires capital outlay, which is not easy to come by in today’s economy….

In June 2010 at Colin’s regular review meeting with his Charles Derby Financial Planning Consultant, a new possibility was discussed – using his pension fund to help fund his next development.

Pensions today can offer a great deal of flexibility when it comes to drawing your money out. The ever widening choice of retirement products is welcome, but the confusion it can cause is not! Expertise is required to ensure that all available options are considered and all the pros and cons of the different solutions are assessed. For Colin, who has a speculative approach to investments and is prepared to take some risk in order to participate in the best growth prospects, it was necessary for his Charles Derby Adviser to look beyond the normal solution – a conventional annuity.

Research was quickly conducted and a report prepared to clearly set out all Colin’s options. This report was presented and explained in person which helped to cement a full understanding of the recommended solution – A Pension Drawdown Plan. Also known as a Pension Fund Withdrawal Plan, these products allow maximum flexibility.

Firstly, with the Drawdown plan, Colin was immediately able to take out a tax-free lump sum from his accrued pension fund. (Generally speaking, you must be aged 55 and above to do this). This tax-free cash payment was 25% of Colin’s total pension fund which was enough to fund his new development.

With conventional pension products, taking the tax-free cash sum would mean also having to cash-in all the pension fund and start taking an income. But, with Drawdown plans, there is no requirement to cash in the rest of the pension fund. This is ideally suited to Colin, who wanted to invest his remaining pension fund.

Step 2 was therefore to set up the investment of the remaining fund. In practice, this is done simultaneously to the release of the tax-free cash. With his adventurous approach to investment, Colin’s Charles Derby Adviser selected a suitable mix of Equity based funds, i.e. collective funds buying shares in companies. These funds have high volatility but also offer the best growth potential. As Colin has no plans to draw his pension in the short, or even the medium term, the short term volatility is not a problem.

One of the key advantages of Drawdown pension plans is that choice is retained. The whole remaining fund, after any tax-free cash has been paid, can be encashed at any time. And, within generous limits, an income can be paid regularly or on an ad hoc basis. They are not for everyone though as future income is not guaranteed.

This extra flexibility was another big plus for Colin who also wants to ensure that his pension fund will provide for his partner, Carrol, who is quite a bit younger than him. If he was to buy an annuity, it would force him to decide at the point of buying, what level of income should be payable to Carrol on his death. As Carrol is much younger than Colin (and a woman – we’re not being sexist, but annuity income rates usually are gender specific, paying less to women due to their generally longer lifespans) any continuing income would be expensive to provide, so depriving them both of income while Colin is still alive. With the Drawdown pension, Colin is in control. He can continue to draw no income, start a small income level or fully cash in at any time. And, if Colin were to die with some remaining fund, Carrol can use the whole fund to provide an income, or, cash in the fund less a tax charge of 35%.

The conclusion was a happy Colin. Not only was his property development funded, his pension was invested for growth and in a plan that is flexible and easy to manage with the help of his Charles Derby Financial Planning Consultant.