Making good decisions
I have been working today with our Senior Paraplanner, Amelia.
Working together we have been preparing for a client strategy meeting later this week.
The client has some great questions that she needs answering.
These questions are wide ranging and really demonstrate the importance of not making decisions in isolation from other aspects of a person’s financial well-being.
A key question from the client is whether or not to defer taking pension benefits due to become payable at the end of this month?
The client intends to continue working for possibly the next two years. What her Financial Plan demonstrates is that cash flow into the future will be positive whether she takes the pension now or defers it for two years.
However, what we found ourselves debating were the advantages and disadvantages of such a deferment.
We know what the pension value is today. We don’t know for certain what it will be worth in two years’ time but we know the way the scheme treats increases to deferred pensions.
So using some realistic assumptions we can calculate what we believe it might be worth in two years’ time.
When we look at these numbers in the round we calculated that ignoring future increases when she does start to take the pension benefits she would have to wait in excess of 30 years before the deferred pension paid out as much as she would have given up over the next two years!
I don’t know about you but I think there is a disincentive to defer taking the benefits. After all no one knows how long they are going to live and 30 years will take her into her 90’s
A connected question is based around her reluctance to pay 40% income tax something that many people have an aversion to if they can avoid it.
The income and income tax calculations carried out within her Financial Plan suggest that even if this pension is added to her salary only a modest part of it will fall into the 40% income tax band.
I do sometimes feel that people think the 40% income tax applies to all of a person’s income once they have breached the threshold.
It is probably best in her case to take the pension income now and enjoy the net proceeds (spend it, save it, give it away) even if she does help HM Treasury out a little by paying some tax at 40%!!