When should I retire?

Stuart Chapman, 64, lives with his wife Elizabeth, 63, in Chepstow, Monmouthshire. Since June 2006 he has been a self-employed management and accounting consultant, and earns between £30,000 and £40,000 a year after tax.

Elizabeth works part-time, taking home £330 a month. She also receives a state pension of £95 a week. Stuart holds directorships with a housing association and a charity; for these positions he receives £5,000 and £12,000 a year respectively.

The Chapmans' home is worth approximately £450,000; they have an outstanding mortgage of £85,000, which is interest-only.

The couple have £14,800 in instant access cash accounts, £7,400 in cash individual savings accounts, and £24,000 in a stocks and shares ISA.

Stuart has a self-invested personal pension with Standard Life worth £140,000 and a Transact personal pension plan worth £248,000.

Stuart's main aim is to achieve a pension income of £25,000 a year. "I plan to continue working until at least August 2011, at which point I will review my financial position," he says.

Plan of action

Marlene Shalton is a chartered financial planner with Bluefin Wealth Management in Cardiff. During her meeting with the Chapmans, Shalton focused on the couple's pension arrangements.

Stuart's main objective is to maintain the same standard of living for himself and Elizabeth into retirement, with both of them covered financially in the event of the other dying.

In terms of pension planning, Shalton says Stuart has a number of options. "If he were to take benefits now from the Transact pension fund, based on the current value he could take a tax-free lump sum of £62,000 [25% of the fund's value]," she says.

With the remaining £186,000 Stuart could either proceed with income drawdown (which is a way of taking an income from his pension while leaving the remainder invested) or he could purchase an annuity.

Shalton says: "Stuart is not currently taking income from the Standard Life plan either. If he opted for income drawdown on both plans, then he could expect to take an income of up to a maximum of £28,948.80 gross a year.

"This income would be taxable and would be reviewed every five years by the Government Actuary's Department."

Under current legislation, Stuart will have to purchase an annuity by the time he is 75. Prior to this, should he die, Elizabeth would have a number of options regarding his pensions.

She could continue to draw down the income up to the maximum allowable until she reached 75, when she could either purchase an annuity in her name or withdraw the entire fund minus a 35% tax charge.

Based on current annuity rates, if Stuart decided to purchase now he could expect a rate of £19,332 gross a year (non-smoker rate) – if he bought a level annuity with no future increases.

If he bought an increasing annuity, which would grow along with inflation, he could expect £11,376 gross a year. Both of these options assume Stuart opts for a 50% spouse's income with a 10-year guarantee.

"This would mean that if he died within this timeframe the full income would be paid to his wife," says Shalton.

"Thereafter, Elizabeth would be paid half of the pension." If Stuart opts for a spouse's pension of more than 50% it would reduce the amount of the starting annuity.

Safeguarding the future

Stuart would also like to repay his mortgage and achieve financial independence by the time he retires. Shalton notes that he can do this using the £62,000 lump sum from his Transact pension in combination with £24,000 from his stocks and shares ISA.

However, if he does this, he will only just have a sufficient emergency fund for the future. So Shalton thinks it's essential for Stuart to carry out a cashflow exercise with a financial planner.

"Stuart has a feeling that his income will cover his expenditure, based on their current lifestyle. He believes if he's able to obtain an income from his pension plans of £25,000 gross, along with his additional income, then he could manage," she says.

The problem with this plan, according to Shalton, is it assumes his additional income will continue for the foreseeable future.

"It doesn't take into account the effects of inflation over time and how much growth Stuart needs on his pension plans to achieve his objectives."

She recommends that the couple completes a detailed expenditure questionnaire to determine the real cost of their standard of living.

An alternative to purchasing an annuity at 75 would be an alternatively secured pension (ASP). This is similar to income drawdown but the level of income is lower, which may not seem as attractive.

Also, if Stuart died while using this option and there were funds left in his pension pot, there could be tax to pay of up to 85% on it. This is a choice Shalton thinks he can leave until later.

"The choice of income drawdown, ASP or annuity will be very much linked to Stuart's attitude to risk and health," she says. "He says he's in good health, with no medical conditions, as is Elizabeth – and neither of them smoke.

On that basis, there would be no reason to opt for maximum income unless his tolerance to risk is low." This is because taking the maximum income would mean his pension fund is depleted quicker and this would lead to a lower income in the future.

Shalton says: "If Stuart chooses the option of income drawdown, then he'll need a coherent investment strategy to ensure income payments can be made from cash in the early years, with a portfolio that has the correct asset allocation to meet his objectives and risk profile."

Finally, Shalton notes the couple have made wills, and carried out nil-rate band planning with an adviser, prior to the changes in inheritance tax rules, to mitigate any potential IHT on death.

However, she recommends they review their wills and consider putting in place lasting powers of attorney as well.

Stuart found the makeover experience a useful one: "Having a discussion with a new face and getting some new ideas were the real benefits. It was a worthwhile exercise and I'm sure if I do a cashflow exercise it will also help to plan my future."

Marlene Shalton is a chartered financial planner with Bluefin Wealth Management in Cardiff.

Your Comments

And if one dies early they would not have had a good retirement together. My advice is retire as soon as possible never mind about the finance. You can't take it with you. Enjoy your retirement now.