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Pension decumulation

Pension decumulation. Claire Trott Pensions Technical Manager, Suffolk Life. Agenda. Background Capped Drawdown Flexible Drawdown Investing for Drawdown. HAPPY PENGUINS?. Why are we here?. Drawdown changes 2011-2012 Changes to age 75 rules Rise of flexible drawdown.

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Pension decumulation

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  1. Pension decumulation • Claire Trott Pensions Technical Manager, Suffolk Life

  2. Agenda • Background • Capped Drawdown • Flexible Drawdown • Investing for Drawdown HAPPY PENGUINS?

  3. Why are we here? • Drawdown changes 2011-2012 • Changes to age 75 rules • Rise of flexible drawdown

  4. What do we want to achieve? • Reaffirm knowledge of implications of capped drawdown changes – Tax issues • Be confident in complexities of flexible drawdown • Review issues of investment for drawdown in these difficult times

  5. Capped Drawdown

  6. Scenario • Female, aged 62 • FV = £500,000 • Wants max Pension Commencement Lump Sum

  7. Questions • What is her Max GAD today • What would it be if the gilt yields remained the same but she chose to wait until Jan to crystallise? • List the circumstances that would cause the Max GAD to be recalculated/reduced • List some reason why Capped DD is still suitable even at reduced GAD rates

  8. Model answers 1 • Max gad is £17,250 • Fund value used = £375,000 • Gad Rate, based on age, gender and FV = £46 per £1000

  9. Model answers 2 • The interim gender neutral tables shouldbe used • This means males table • Max gad is £18,375 • Fund value used = £375,000 • Gad Rate, based on age, gender and FV = £46 per £1000

  10. Model Answers 3 • Buy a lifetime annuity with part of the fund • Buy a scheme pension with part of the fund • Pension sharing order placed on the drawdown • Crystallise further funds into the same drawdown arrangement

  11. Model answers 3 - bonus points • Transfer from one RPS to another if you are crystallised before April 2011 • Will also mean a move to 100% GAD from 120% and move to triennial reviews • At their request, although this will only be at the anniversary of the pension year.

  12. Model answer 4 • Retained control • Investment control • Future retirement options • Not locked into current rates • Ability to take advantages of future improvements • Improved death benefit options • Lumps sums • Flexibility for spouse

  13. Flexible drawdown

  14. Scenario - Martin • Male aged 70 • Partially crystallised in Drawdown in February 2005 • Review of limits in June 2011 • Max GAD now £20,000 • He has: • state pension benefits of £7,000 • Final salary pension currently £15,000pa increasing annually by 5%, in payment since age 60 • £500,000 uncrystallised funds

  15. Questions • Give an overview of the basic conditions for Martin to enter flexible drawdown • List reasons for entering Flexible other than to strip the fund • Martin meets the conditions and enters flexible taking an income of £100,000 from his fund, when he crystallises his remaining fund in October 2012, how much lifetime allowance is remaining following this crystallisation

  16. Model answer

  17. Model answer 1 • No contributions (personal or third party) or accrual in a DB scheme have occurred in the tax year in which declaration is made • One payment of each income used for MIR has been received • The whole MIR (£20,000) will be received in the tax year of the declaration

  18. Model answer 2 • Protection of death benefits • Crystallise less to receive same income • Leaves more uncrystallised for death lump sum pre 75 • Reduction in fees for triennial reviews • Maximising income in tax rate band • Possible gifts from income - IHT

  19. Model answer 3 • First crystallisation since A-day, need to test preA-day benefits • 25 x £20,000 = £500,000 • 25 x £15,000 = £375,000 • Lifetime allowance reduced by £875,000 = 58.33% • BCE 1 = £375,000 = 25.00% • BCE 6 = £125,000 = 8.33% • Remaining LTA = 100 - (25+8.33+58.33) = 8.34 • Monitor increases in pre A-day benefits!

  20. Investment in drawdown

  21. Scenario • Male, Age 62, • Not looking to annuitise for at least 10 years • Fund value = £500,000 • Going to take maximum PCLS • Max Gad of £18,750 but only looking to take income of £10,000pa. • He is a medium risk profile.

  22. Model answer Thanks to Brooks Macdonald Asset Management

  23. GAD rates . . . built on Gilt Yields Source: Bloomberg, September 2012 24

  24. Income segregation Source: Brooks Macdonald, 2012 25

  25. Fixed Interest Alliance Trust Monthly Income Bond Fund AXA Framlington US Short Duration HY Bond Fund UK Equity Lindsell Train UK Equity Fund Montanaro UK Smaller Companies Trust North America Threadneedle American Fund Europe Henderson European Special Sits Fund Japan, Far East & Emerging Markets Newton Asian Income Fund International & Thematic John Laing Infrastructure Fund M&G Global Dividend Fund Property Braemar Ground Rents Fund Structured Return IFSL Brooks Macdonald Defensive Growth Fund Asset allocation Source: Brooks Macdonald Asset Management

  26. Dividends matter – Global returns from January 1970 to December 2011 Source: MCSI, 2012 27

  27. Risk warning • Investors should be aware that the price of investments and the income from them cango down as well as up and that neither is guaranteed. Past performance is not a guideto the future. Investors may not get back the amount invested. Changes in rates ofexchange may have an adverse affect on the value, price or income of an investment. • Investors should be aware of the additional risks associated with funds investing inemerging or developing markets. • The information in this document does not constitute advice or a recommendation andinvestment decisions should not be made on the basis of it. This document is for theinformation of the recipient only and should not be reproduced, copied or madeavailable to others.

  28. Brooks Macdonald disclaimer • Brooks Macdonald Group, its subsidiaries and/or their officers, directors and employeesmay also own and trade in the underlying assets. Tax treatment depends on individualcircumstances and may be subject to change in the future. • This documentation may contain confidential or legally privileged information that isintended for the addressee only. Any views or opinions presented are solely those ofthe author and do not necessarily represent those of Brooks Macdonald AssetManagement. If you are not the intended recipient you are hereby notified that anydisclosure, copying, distribution or reliance upon the contents of this documentation isstrictly prohibited. If you have received this documentation in error, please notify thesender immediately, so that arrangements may be made for its proper delivery.

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