Client Stories

Pre-retirement Counselling

We work with other professional advisers, such as accountants and solicitors, to provide our clients with the best possible holistic planning. Our services can complement rather than compete with those of other professionals.

The Value of Holistic Financial Planning

Background

Creative Wealth Management advise individuals on many different aspects of financial planning. We can focus on particular areas of interest and we can also add value by looking at the bigger picture, providing holistic advice.

WHEN THE USUAL OPTIONS DON’T QUITE FIT…

Richard and Jacqueline Preston, who were initially referred to one of our advisers from a solicitor, started with the need for savings and investment advice, however it was clear that there were other areas to address as well. In addition to their own finances, Richard was a trustee for two separate portfolios where specific investment advice was needed on an ongoing basis. The responsibilities of being a trustee can be onerous, especially for lay trustees who may not fully appreciate the duties placed upon them.

For each trust, our adviser helped position the underlying investments in accordance with the best interests of the beneficiaries and continues to provide regular investment advice. In turn, this ensures that Richard adheres with his duties as per the Trustee Act 2000. In addition to providing investment advice, our adviser assists the Preston’s with ongoing inheritance tax advice. With the individual inheritance tax threshold at the time being £325,000, our adviser went through all of the main options considering the advantages and disadvantages of each one.

Some of the typical solutions to combat inheritance tax involve setting up a loan trust and/or discounted gift trust. However, neither of these options were appropriate as death in the very early years would not have resulted in much of a saving. Furthermore, the Preston’s were wary over the level of risk that the underlying portfolios would have been subject to, especially as they already have significant exposure to the stock market.

WHAT CREATIVE RECOMMENDED

Looking for a speedier solution, the obvious alternative would have been a portfolio of AIM listed shares, as these are exempt from inheritance tax within just two years (so long as they are held at time of death). However, this method would not have been any more appropriate as it would mean investing in shares of smaller companies where the level of risk remains high.

Consequently, our adviser recommended a specialist inheritance tax solution utilising business property relief so that the two year exemption still applies, yet with much less risk involved. The solution also provides a degree of inflation protection thereby helping the investment keep pace with the cost of living.

SEEING THE BIGGER PICTURE

The resulting effect is that the Preston’s have already reduced their exposure to inheritance tax and yet still have access to the underlying capital should they need it.

“The ongoing assistance that I receive from my Financial Planner is extremely valuable, especially as my financial planning needs continue to change. Through regular reviews, I feel confident that the underlying investments in all portfolios meet the specific needs of each beneficiary. In addition, the mitigation in inheritance tax is welcome and I’m thankful to my adviser for going through all of the options available to me.”

Richard and Jacqueline Preston, October 2014

Using Your Pension Fund to Purchase Property

Background

Mr Jones has seen a local commercial property for sale for £450,000 which is paying a good rental income of £45,000 per annum. He pays a reasonable amount into his current pension and so his disposable income would not support a mortgage to purchase the property. Sadly, Mr Jones does not have sufficient cash to purchase the property or even raise a deposit.

However, his pension fund is currently worth £350,000 and he has heard that it may be possible to use this to purchase the property using a SIPP (Self Invested Personal Pension).

THE PURCHASE

Mr Jones visits his financial adviser who tells him that he can use 50% of his pension fund (£175,000) to secure a commercial loan to buy the premises.

After taking advice from his financial adviser and commercial lenders, he decides to switch his pension to a SIPP and proceed with the purchase. The SIPP puts down a deposit of £275k and borrows a further £175k at 3.9% per year (3.4% over base rate).

Loan Details Deposit £275,000
Loan £175,000
Interest 3.9%
Term (Yrs) 15
Monthly cost £1,286
Repayment Details
(Annual)
Rental Income £45,000
Personal £18,000
Less loan costs £15,432
Total £47,568

ON-GOING PENSION FUNDING

The cost of the loan is £1,286 per month (interest and capital) over a fifteen year time period which is met from the rental income that is now paid into the SIPP, of £45,000 per year, as the property belongs to the pension fund.

In addition, Mr Jones carries on paying his regular pension contribution of £1,500 per month (£18,000 per year).

His pension fund therefore receives £63,000 per year and pays out £15,432 per year in mortgage costs.

Only £18,000 of the £63,000 is classed as a contribution (as the rest is rent) leaving Mr Jones the ability to make even higher contributions of up to the maximum of his annual allowance.

THE RESULT

At the end of the fifteen year term, the loan is repaid and Mr Jones’ SIPP owns a property. Even assuming no growth at all in the value of the property or any other investments he has in his pension, Mr Jones’ position is significantly better off by using his pension fund to purchase the commercial property, as the tables below demonstrate.

Pension Funds after 15 years
Personal Pension Method
Opening value £350,000
Pension contributions £270,000
Commercial property £0
Total value £620,000

 

Pension Funds after 15 years
SIPP Method
Opening value £175,000
Pension contributions £270,000
Rental Income £675,000
Commercial property £450,000
Less Loan repayments £231,480
Total value £1,388,520

 

Please note that while it has its advantages, using your pension to buy a commercial property isn’t without risks and advice should be taken when setting these arrangements up.

Note also that costs associated with property purchase will be increased by the pension fund.

Qualifying Recognised Overseas Pension Schemes

Background

As part of the ongoing service to Inchcape Shipping Services, Creative Wealth Management advise the Senior Management Team on their individual personal financial planning. It is part of our role to be aware of the circumstances of each individual and advise them if anything is pertinent to them when legislation changes or is updated.

A SPECIFIC EXAMPLE

One such case in point was for the Chief Executive Officer, Claus Hyldager, who in early 2014 had already accumulated substantial pension funds in a Self Invested Personal Pension (SIPP) and was drawing near to the Lifetime Allowance (LTA) of £1.25m.

If he continued to fund at the new maximum rate of Annual Allowance (AA) of £40,000, then, with investment growth, he would quickly have breached the limit. This would have limited his growth prospects and triggered a tax charge of 55% on any funds above the LTA.

One option was for him to apply for Fixed Protection 2014 which would have locked in the previous LTA of £1.5m, but he would then have had to cease all future contributions and with 10 years or longer to go before he was likely to take any benefits, he was very likely to breach even the higher figure anyway.

Claus is a Danish national with family connections in Denmark and although he had lived in the UK for quite some years, he had mentioned that there was a very high likelihood that he would retire outside of the UK.

WHAT CREATIVE DID

Our adviser therefore recommended he transfer his benefits from the SIPP to a QROPS as he would eventually do this on retirement anyway. The advantage of moving before the LTA changed was that a move to a QROPS is a Benefit Crystallisation Event (BCE) and as such, is tested against the LTA pertaining at the time (£1.5m). Therefore, the percentage of LTA used was lower than had the transfer taken place under the new reduced LTA regime.

Once the monies are moved to the QROPS, any growth is outside the LTA regime and is therefore unlimited going forward. Furthermore, ongoing contributions could be made to the onshore SIPP and these could continue for perhaps a further seven years or so, dependent on growth achieved, and these monies could then be moved out to the QROPS when required.

WHAT DIFFERENCE DID IT MAKE FOR THE CLIENT?

Whilst the cost of operating a QROPS is more than the SIPP, the saving in tax for breaching the LTA at 55% make the exercise extremely cost effective – pension contributions could continue and the retirement funds would be located where they are needed in the run up to retirement.

“I was delighted with the advice I received. Like all industries, it pays to get expertise, and without Creative’s knowledge of my circumstances and the pension tax rules, I would have lost out on future pension accrual and faced a very substantial tax charge.”

Claus Hyldager, CEO, Inchcape Shipping Services.

Pre-retirement counselling

Background

All too often individuals accept the annuity rate offered by the company looking after their pension fund without investigating what other rates are available in the market. This is usually due to the fact that scheme members are unaware that they can “shop around”.

This is why, approximately six months prior to normal retirement age, all members of pension schemes looked after by Creative Benefits (Creative) are contacted by them to offer advice regarding the pension options available.

This advice, more often than not, raises opportunities of which the retiring individual is unaware.

A CASE IN POINT

One such case for an employee at CTVC, an award winning radio and television broadcasting company, illustrates this point.

One of Creative’s Financial Planners contacted a female employee for a pre-retirement consultation and as a result of the detailed fact find conversation, ascertained that she had been diagnosed with breast cancer three years previously and as a result had had a mastectomy. The operation had been successful although she was still undergoing a drug programme to aid full recovery.

Enhanced annuity rates are often available for people with a health issue and her circumstances highlighted the need to investigate this further.

WHAT CREATIVE DID

Creative’s consultant suggested the member should complete an underwriting questionnaire which was forwarded to a number of providers of enhanced annuity rates in order to obtain quotes.

Once the quotes were received, their terms, conditions and rates were compared. After careful consideration, Creative recommended to the member that she buy her annuity from MGM Advantage, specialists in retirement income, and one of the longest registered companies in the UK.

WHAT IT MEANT FOR THE CLIENT

As a result, this retiree now enjoys an annual annuity that is over 50% higher than it would have been if she had taken the annuity offered by the company with whom she had saved for her pension.

“I was amazed that Creative was able to get me such an improved pension,” said the pleased recipient, “if they hadn’t taken the time to speak to me when I was coming up to retirement, I would never have known it was possible.”

Contact

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