Retirement planning

Our client, a self-employed professional aged 60, married with no dependants, runs a successful small business making consistent profits, with earnings exceeding £100,000.

He owned the business premises, worth approximately £190,000, on which there was a small commercial mortgage. He had three personal pensions dating back some years and a retirement annuity contract with a combined value of approximately £270,000.

Objective

Client is keen to maximise his pensions and, with retirement approaching, provide the liquidity to make the most of tax relief offered by pensions. It was likely that the business would be sold in the coming years, with the property retained to provide an income for himself and his wife in retirement.

Solution

The client consolidates two of the personal pensions into a SIPP, giving a value of £140,000.

The retirement annuity contract, worth approximately £60,000, remained outside the SIPP so the client could take advantage of the valuable guaranteed annuity rate (GAR) in retirement. We also kept the third personal pension outside the SIPP for the time being as it was invested in with-profits and had a large market value reducer (MVA).

The client paid a net pension contribution of £78,000 into the scheme which was then grossed up to £100,000 with higher tax rate relief, obtained via his tax return, significantly reducing tax for the year.

The SIPP was then in a position to purchase the property from the client, who benefited from business taper relief on the sale. He repaid the outstanding mortgage and used some of the excess for his pension contribution the following year to reduce tax further.

The MVA was removed on the third pension at a later date and the pension was then transferred into the SIPP.

Using a SIPP provided the following benefits:

• Future growth free from Capital Gains Tax.

• Part of the purchase funded by tax relief from HMRC.

• Future rental income free of income tax.

• Attractive rental income to fund future retirement income when appropriate.

• Property detached from the business.

The client now has a sizeable retirement fund worth approximately £400,000 providing an attractive return. The balance of the fund was invested for diversification with enough liquidity left within the scheme to provide a tax-free lump sum of circa £100,000 when required, which the client could use to redeem his personal mortgage if he does not sell his business.