Skip to main content

Example of how working with a financial adviser can help your finances

Example 2, tax efficient pension decisions;

Andy didn’t want to employ his own financial adviser when he joined his work pension in 2012. He had a good read through of the pension literature provided as well as googling pension information.

‘Lifestyling’ sounded like the best option (it was also the default fund option).

Lifestyling automatically reduces Andy's equity holding within his pension fund incrementally from 15 years until his Normal Retirement Date (which he nominated as 65) and selected 'Target Cash’ meaning by 65 his holdings would be completely in cash.

A financial adviser might take a look at this situation/fund selection choice and suggest Andy consider taking advantage of the new pension freedoms that came in during 2015.

By opting to leave the lifestyle fund Andy is currently in and reinvesting his money in high yielding funds (even after he retires so the funds continue to grow) and then working with a financial adviser to take his income tax efficiently he could end up with a much higher income. If Andy had remained in cash not only would he miss out on potential growth while working and in retirement but he would also suffer the negative effects of inflation, currently 2.5%

Andy earns £160,000 (including pension contributions) as a law firm partner. Currently, he has lost his £11,000 Personal Allowance because he has a greater income than £122,000. He has also lost £5,000 of his annual Pension Input Amount due to being £10,000 over £150,000 Net Adjusted Income.

A financial adviser might look at this situation, and by using Carry Forward Pension Input Amounts availability from the preceding 3 years, suggest making a £60,000 Pension Input Amount that takes Net Adjusted Income below £100,000, regaining Andy's £11,000 Personal Allowance.

This increased annual pension input amount also brings forward Andy's retirement date by several years, and frees up more tax free cash to pay a deposit on a flat for his daughter, which is one of his objectives. The adviser also sets up a Salary Sacrifice arrangement with the law firm that not only obtains 100p in the £1 regarding the pension contribution, but adds in the 13.8% National Insurance Contribution that the firm now doesn’t have to make.

On top of this, Andy started talking about inheritance, and how his wealthy father (with several properties) is going to suffer 40% inheritance tax on his estate for total assets over £325,000.

Cambridge Pensions LogoThe financial adviser tells Andy that if all of this money was invested in Enterprise Investment Scheme funds (the part subject to capital gains) and the rest put into Inheritance Tax funds, both types of investment would be inheritance tax exempt after 2 years (instead of 7 years which would happen if his father transferred the properties as a gift). Both types of investment currently project 6% returns which significantly outperforms cash, and the Inheritance Tax fund can be set up to pay out income on a quarterly basis. This will save Andy's father's estate over £1 million in inheritance tax, that money going to Andy to invest in ISAs and pensions, as well as a similar contribution for his wife, and his children (lower maximum input amount allowed), so as much of the money grows in a tax efficient wrapper as allowed).

Andy is very happy because he pays less tax that year, makes a big pension contribution, can retire earlier, can make a bigger deposit on his daughter’s flat, inherits far more money, and understands his finances so he has less to worry about!

Cambridge pensions is a pension expert but is also a financial advising company (Matrix Financial Ltd) offering every type of personal financial advice. Please get in touch to discuss all of your financial needs, not just pension needs!

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

Return to index