Drawdown post-April: Adviser case studies

Each client is very different, but FTAdviser asked some experts on how they might advise clients based purely on pot size, to get a general sense of where the dividing lines may be broadly drawn.

Reading between the lines on comments from many experts and even the regulator, some believe £50,000 could be a cut off. Sheriar Bradbury, managing director for Bradbury Hamilton, believes that there is potential for Fad to be valuable at this pot size.

This is because, he says, it offers the potential to take out a tax-free cash lump sum at any point after age 55 and continue potentially to obtain tax relief on topping up pension plans, “which is very useful for a higher rate taxpayer”.

David Trenner, technical director at Intelligent Pensions, says that generally speaking the average client will have £100,000 or more plus other assets to use drawdown and that this will not really change post-April.

For those with larger pension pots in excess of £100,000, Fad allows those heading towards retirement to work less and supplement earnings by taking an income from their pension once they are in a lower tax rate if they wish, Mr Bradbury says.

Pot size: £50,000

Rebecca Colley, operations director and chartered financial planner at Informed Financial Planning, gives the example below of a case study of someone who wishes to go into Fad with a £50,000 pot.

Clive, aged 63, is thinking about retiring. He is aware his state pension, which equates to £144 per week, is not payable until age 66. He also has some final salary benefits with an old employer payable from age 65 equal to £9,000pa and a stakeholder pension worth £50,000.

It is clear that from state pension age Clive will have sufficient income to provide for his ongoing expenditure (which is around £15,000pa), as both the state pension and final salary benefits are escalated annually in line with inflation.

Under Fad, Clive could choose to use the stakeholder pension to provide him with income from now until his state pension is payable. The fund would simply be moved to a drawdown provider and the required income of £15,000 could be taken as part tax-free cash and part income to maximise tax efficiency annually or monthly.

Utilising the rules to provide flexible income to allow early retirement is something we are already seeing as a benefit to the rules change. Under the old rules Clive would not have been able to access £15,000 from a £50,000 pot and therefore would have continued working until state pension age.

Pot size: £100,000+

Mr Trenner gives an example below of how various drawdown options can be used for a £150,000 pot.

John is a higher rate taxpayer who has £150,000 in his pension fund. He wishes to access £20,000 cash to buy a new car, but does not want any income as he is still working.

If he moves quickly he can take £20,000 tax-free cash and put £60,000 into capped drawdown, but take no income. If he does not get his request in by 2 April (3 April to 6 April is the Easter weekend), then he can go into Fad and take the same £20,000 and no income.

With the former option he can even access the £60,000 in the fund without triggering the £10,000 annual allowance. Until he takes income he can continue to contribute £40,000 either way.

Alternatively he can use UFPLS and take £28,572 from his fund. £7,143 will be tax free and £21,429 will be taxed at 40 per cent leaving £12,857.40 and a total of £20,000.40.

If John expects to be a higher rate taxpayer in retirement, then UFPLS allows him to retain some tax-free cash which will be useful as tax-free income in retirement. If however he expects to be a basic rate taxpayer in retirement, then taking tax-free cash under Fad and avoiding 40 per cent tax will be attractive to him.

So if John wants to pay annual contributions in future exceeding £10,000, Fad or capped drawdown will be particularly attractive.

This case study above would also work for a £100,000 fund, although after taking out £20,000 or £28,572 the remaining fund will be relatively expensive to manage.

Tax implications

There are many things to consider when looking at what to do with a pension pot and tax plays a big part of this.

Claire Trott, head of technical support at Talbot and Muir, warns that the level of tax payable by someone flexibly accessing their pot is “something that should be high on the list of things clients need to consider” prior to stripping their funds.

She adds that a common mistake is while a saver may have been a basic rate tax payer when contributing, they could easily be a higher rate tax payer, particularly with just a £50,000 pot, “if they fail to take their fund in a sensible and controlled way”.

Ms Trott adds that taking a £150,000 pot in one go could also create a number of issues.

“The loss of at least some of the personal allowance as the income would be in excess of £100,000 and all of it if the total income exceeds £120,000.”

She warns there is also scope to become an additional rate tax payer depending on the total income; paying tax at 45 per cent on the part over £150,000 with 40 per cent on the “vast majority” below that level.

“Again with a fund of this level, they could easily have been a basic rate tax payer all their lives.”

Mr Bradbury adds that the new rules on death benefits means savers are in a more advantageous position, as pension pots can be passed on if you die before the age of 75 to a nominated beneficiary tax-free, whether in drawdown or not.

Previously this would have resulted in a 55 per cent tax charge if you were in drawdown. If savers die post-75, the beneficiary can still receive the pot and tax will be paid when they draw money out at their marginal tax rate.

donia.o’loughlin@ft.com