I had a great meeting on Tuesday morning with a lovely retired couple.
They came to see me at the suggestion of their Accountant as they had some plans that they wished to discuss.
The wife had received a statement from her previous employer’s scheme (a defined benefits pension scheme) and had noted that the offered cash equivalent transfer value was a significant £30,000 greater than it had been a year ago. A sum of nearly £300,000.
She planned to transfer this to a personal pension plan and then take the whole value out.
The money, net of tax, would be used to convert their three bedroom home into a four bedroom property which would make life so much easier when they had children and grandchildren to visit, which happens on a regular basis. She was pretty convinced that this was what she wanted to do (transfer out).
I asked if there were any alternatives to this rather dramatic course of action.
Dramatic because it would involve giving up a guaranteed lifetime income starting now of £12,500 gross per year and dramatic because the tax charge on doing this would be frankly, huge ( a big chunk at 45% and then 40% and then 20% with only a modest amount fitting inside her remaining personal income tax allowance).
To be fair she was totally aware of the tax position on this course of action.
For example between them they have some quite substantial cash reserves earning relatively modest amounts of interest. Might they use those monies to fund the building project?
In addition they described a second property that they might sell and which after CGT was paid would provide sufficient cash to fund the project.
This property though was let to their daughter, son-in-law and grandchildren and they couldn’t just throw them out on the street! However the children had offered to buy the property from them (subject to being able to get a mortgage) so that might be a viable alternative to cashing in the pension benefits.
The husband has substantial guaranteed pension income from previous employer’s pension schemes in addition to a really good level of state pension benefits and a substantial self-invested pension plan from which he had taken tax free cash but no other taxable benefits.
They also have ISA investments managed by a discretionary fund manager.
It’s reasonable to say that they have some complex issues to consider. Importantly though there was more than one approach they could adopt to funding the property project.
Unsurprisingly, I took time to explain how having a Financial Plan was going to help them make really good decisions about the best way to proceed.
It’s always best to consider the alternatives.
