Divorce – Mrs S

Mrs S was referred to us by her solicitor as she had recently gone through a divorce and had been awarded part of her ex-husband’s pension fund as part of her settlement.

Use this Case Study as a guide for how we can help you after a Divorce

Her Situation

• The client was 42 years old.
• Recently divorced.
• She was awarded a large pension fund settlement under a pension sharing order.

Her Financial Situation

• The pension share was paid to her in the form of a Section 32 Buy Out Plan with Provider One that was worth £568,836.
• Mrs S had not set a specific age for retirement, although indicated that it may be somewhere between age 60 and 65.
• Self-Employed.
• Due to her employment, this could be in the form of a gradual, phased retirement.
• She wanted a minimum pension income of £25,000pa to be available to her but did not wish to add to her retirement provision at this stage.
• The client also had an existing Personal Pension plan with Provider Two.
• Mrs S was not currently a member of, or eligible to join any company pension scheme.
• We established she was prepared to take a Moderate degree of risk with her financial decisions.
• We discussed how she felt about falls in the market, and how this might impact on her lifestyle, with reference to specific examples linked to the portfolio we have recommended.

The Next Step

• We discussed her pension provision as a whole to see if they were suitable for her needs.
• Agreed to review the Provide One 32 Buy Out Plan.
• Agreed to review her existing pension arrangement with Provider Two.
• As part of our review, she asked us to consider the merits amalgamating her existing pension benefits and restructuring the investment strategies so that they were in line with her current objectives and attitude to risk.

In particular, we agreed to consider if a transfer would provide:

• A reduction in charges.

• Greater flexibility and options.

• Fund/investment choices which now meet your current circumstances.

• Improved fund management and performance.

Provider One Section 32 Buy Out Plan

• This had a current value of £568,836 and the transfer value was the same amount.
• The plan was invested in Provider One’s external passive portfolio.
• The total Annual Management Charge (AMC) for this plan was 0.55%.
• Flexi Access Drawdown was not available under this contract.
• The risk profile for the current fund was assessed to be ‘Moderate to Adventurous’.Over the last 12 months the fund had not outperformed the ‘Mixed Investment 40-85% Shares’ benchmark. This benchmark was an average of all funds in its sector and had a ‘Moderate’ risk profile. Whilst past performance was no guarantee to future returns, the existing fund had a higher risk strategy than her current risk profile and was currently under-performing when compared to a benchmark that had a lower risk profile.

Provider Two Pension Plan

• This had a current value of £25,374 and the transfer value was the same.
• There were no penalties applicable for transferring the plan that was invested in the Pension Managed Series 2 fund.
• The total Annual Management Charge (AMC) for the plan was 1%.
• Flexi Access Drawdown was not available under the contract.
• The risk profile for the fund was assessed to be ‘Moderate’.Over the last 12 months the fund had not outperformed the ‘Mixed Investment 40-85% Shares’ benchmark. The existing fund had a slightly higher risk strategy than the benchmark and yet had underperformed in recent months.

Combined Pension Portfolio Was ‘Moderate to Adventurous’

• Over the last 12 months the combined funds had not out-performed the designated benchmark.
• We looked at how Mrs S could achieve her objectives, taking into consideration her current expenditure and net worth.
• We also considered how much risk she was prepared to accept in an investment product and how much of a drop in its value she could withstand.
• This allowed us to produce a target asset allocation for her investments (to spread where her money was invested), and a portfolio of funds aimed at achieving her objectives.
• We discussed how the portfolio might reasonably be expected to behave and the impact a drop in value could have on your circumstances.
• The client was investing for the long term, and we assumed a life expectancy to age 85 based on current actuarial statistics.
• We also selected retirement products based on her tax position and objectives including timescales.

Outcome

Self-Invested Personal Pension (SIPP) With A New Provider

Having reviewed both the Legal & General and Royal London pension contracts, our recommendation was to transfer them to a new provider where the potential investment performance could be improved and the range of options at retirement could also be extended.

We recommended that both plans be transferred to a Self-Invested Personal Pension (SIPP) with a new provider, providing a combined pension fund of £594,210.

The recommended new portfolio was:

• £500,000 in our in house model portfolio.

• £94,188 in the external passive portfolio.

What We Established

If the transferred funds were to achieve an average rate of return of 3% (net of all charges), the projected fund value would be £1,009,412 at age 60. The client would then have a number of ways to use the projected fund value to provide her with a retirement income:

• She could purchase an Annuity, which is a guaranteed income for life.
• This therefore ceases on death, but she could factor in an element of Spouse’s pension (if applicable at that time) that would commence on her death.
• The annuity could include an element of guarantee.
• It also could be set up on a fixed monthly or annual basis, or can escalate in line with a measure of inflation.

• Whilst not available in her current Pension Contracts, an alternative to purchasing an Annuity is to use Flexi-Access Drawdown.
• This would allow her to withdraw some of her pension benefits without buying an annuity.
• It also may be more suitable for the phased retirement that she wanted to consider. For the purpose of projections:

1.  We assumed a maximum income rate of 4.50%
2.  Using the projected fund value of £1,009,412, the 4.50% rate could provide the client with a maximum income of £45,423pa.
3.  If she withdrew the £252,353 Pension Commencement Lump Sum, the reduced income using this rate would be £34,067pa.
4.  Any income drawn is subject to income tax.

Our assumptions that we shared with the client, showed this course of action could achieve her objectives. In addition, we recommended keeping this under regular review to ensure she remained on track.