Good financial advice can be worth a small fortune

Peter was sitting in his office. Client meetings had finished for the day, but his paraplanners had left a stack of papers on the desk for him to review. He picked up the first one and was pleasantly surprised to find that it was quite an interesting case.

It was an enquiry from one of the senior partners of the accountancy firm across the road. For a while now Peter had been trying to develop a relationship with them to show how much value they as financial planners could add to the accountancy clients.

There was still some cynicism but the relationship with the accountants was getting better, resulting in the senior partner occasionally sending across a client file for comment. This was one of those enquiries. The details were as follows:

  • Mr Johnson, an active 74-year-old, looking now to enjoy the fruits of his labours.
  • Sold his successful company on to his family a couple of years ago and continued to work as and when he wanted for a comfortable income.
  • His wife had already retired a few years ago from her job as a headteacher.
  • His children were doing very well in their respective careers.
  • The family business and other investments had all been done as efficiently as possible.
  • Mr Johnson has one pension plan – a SIPP worth around £750,000 from which it had been suggested he did not really need any income and that it would just continue untouched until death when it could be passed on. (Peter rolled his eyes – oh to have clients who had so much income they could leave a pension plan of that value untouched!)

Since the pension freedoms Peter had used the need to get a nomination or expression of wish form updated as a way to talk to the accountancy firm, so he was unsurprised to see that Mr Johnson had nominated his eldest daughter (in his words “the sensible one”) to receive death benefits from the SIPP, his wife being well looked after from her final salary pension scheme.

The request at the end asked him to cast his eye over the case just to confirm all was correct from a financial planning perspective. It was a touch sarcastic, with the presumption that Peter could add nothing!

Peter grinned to himself and wrote a few notes under the file note. (He could be suitably sarcastic in return and he usually started with the caveat that what he was saying should not be construed as ‘advice’ and that he assumed that all the other financial planning that he was not a party to and that he was not aware of had been done to the client’s best advantage.) He then went on make a couple of observations.

Firstly, he appreciated the good advice given and the idea of leaving the SIPP for death benefit provision. However, he assumed that the advice had also been to take the 25% PCLS before the age of 75. Okay, you could leave it until after 75 but with death benefits after that age subject to the recipient’s marginal rate of Income Tax, it would be sad if an unexpected death meant that it could not be taken tax-free. Even basic rate tax on 25% of such a large fund would be £37,500. Despite the money not being immediately needed, taking it out, gifting some of it and funding investments for grandchildren and other family members in a tax-efficient manner could add real value.

Admittedly the PCLS would form part of Mr Johnson’s estate from an Inheritance Tax perspective if he died, but with the spousal exemption, the ability to make gifts from excess income, Mr Johnson’s good health and the fact that Mrs Johnson had few assets in her own name, Peter calculated that the risk was minimal of incurring an Inheritance Tax charge on whatever would be left of the funds.

Peter’s second comment was about the death benefit nomination for Mr Johnson’s eldest daughter. It is not clear whether this was the pre 75 or the post 75 nomination – was the eldest daughter a higher rate tax payer and, if so, would it not be better to change the nomination post 75 to the grandchildren who could take out up to their personal allowance tax-free each year?

Peter signed the note and left it for his PA. He smiled to himself. A good financial planner can always add some value!

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.