The importance of advice with complex scenarios

Peter sat back in his office – he had just celebrated 30 years in the industry as a financial adviser. A lot of his clients had been with him for many years and Peter had benefited from taking on several of their family members in their own right.

Quite often these relationships started with one of Peter’s clients suggesting to their offspring that they really ought to have a chat with a financial adviser, resulting in Peter sitting in his office opposite a somewhat reluctant son/daughter who expected to be told something useful!

Today is one of those situations. Peter expected Sheldon in a few minutes. Sheldon was the eldest son of Andrew, a long-standing client.

Sheldon was in his mid-40s and had been a real academic at university. He had moved to a pharmaceutical company after his study years had finished and had been there since as their head scientist.

Andrew always described Sheldon as being a real ‘boffin’ when it came to scientific matters, but as somebody who knew very little about the ‘real world’.A character who would never seek professional advice if it had a cost attached.

Andrew had told Sheldon to pop in and see Peter to talk about his pension and had provided details of his son’s pension scheme in advance of the meeting.

Sheldon’s pension scheme consisted of:

  • 1/60th final salary scheme, no employee contribution
  • 20 years’ service
  • £80,000 pensionable salary

Sheldon also received a £20,000 dividend from Andrew’s Company; something all Andrew’s children received, but that was currently under review pending the new dividend tax rules. Finally, a further £15,000 was received for academic contributions to scientific journals.

The pension calculations that Peter had were as follows:

Opening amount:

  • 20/60 x £80,000 = £26,667
  • £26,667 x 16 = £426,667
  • Could be an allowance for CPI applied to the opening amount – say 2%
  • Opening value £426,667 x 1.02 = £435,200
  • Following year pay rises to £90,000

Closing amount:

  • 21/60 x £90,000 = £31,500
  • £31,500 x 16 = £504,000

Pension input amount = £504,000 – £435,200 = £68,800

Peter was aware of the rules around the new Tapered Annual Allowance and therefore added in Sheldon’s extra remuneration figures to produce the following.

Adjusted income = (£90,000 + £68,800) = £158,800 + £20,000 + £15,000 = £193,800

Threshold income = £90,000 + £20,000 + £15,000 = £125,000

If this was the case Peter calculated that Sheldon would have a Tapered Annual Allowance of £18,100 and therefore would be subject to an Annual Allowance tax charge on the excess.

This would obviously not have been the case without the additional income alongside his salary (his threshold income would have been below £110,000).

He jotted down a couple of things:

  • Tax bill – scheme pays?
  • Carry forward of unused relief – any scope?
  • Restructuring of earnings for future years?
  • Opting out of the pension scheme?
  • Comparison between benefits given up and tax bill?

These were just the first subjects that came into Peter’s mind to discuss with Sheldon and he would try his best to make his new client understand his options and appreciate the value of financial advice.

Peter also had a second thought, how many people in DB schemes with no advice would understand this and possibly the LTA tax charge? Is this a scandal waiting to happen?

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.