International Pension Annuity Case Study:

Scenario:

Mr L is 74 and semi-retired but continues to oversee the running of the multi-national engineering company he has built up from scratch over the last 45 years. He has accumulated significant personal assets from the fruits of his labour. One of these is a pension valued at £3.7 m (post crystallization of Tax-Free Cash) in a Self-invested Personal Pension (SIPP) which benefits from Enhanced Protection. Mr L is a risk averse investor who wishes to benefit from continued investment returns for his pension funds until death.

Mr L was particularly concerned about receiving a flexible income once he started to receive benefits and the change of death benefits within his SIPP once he attained age 75. Under current pension legislation, in the event of his death post age 75, whilst the fund will retain its Inheritance Tax (IHT) exempt status, any money paid to his beneficiaries will be deemed as income and taxed at marginal income tax rates of up to 45%.

Mr L’s main financial objectives are:

• to ensure that he has access to flexible income from his pension fund as and when needed.
  
• to preserve the favourable IHT and income tax position his beneficiaries currently benefit from after he attains age 75.
  
• continue to invest in a low risk profiled investment portfolio.

Recommended Solution:

We recommended that Mr L’s pension fund purchase an International Pension annuity which would benefit from Business Relief (BR) after two years. The BR the annuity benefits from is not reliant on investing in High Risk AIM listed investments required of traditional BR investments. This means that Mr L’s investments within the annuity matched his risk averse profile and provided the Inheritance tax efficiency he required.

Benefits:

• Income deferred but available as and when required.
  
• The deferred income is rolled up on a year on year basis when not taken and available as a lump sum in future years.
  
• After holding the annuity for two years the full value of the annuity can be passed on to Mr L’s beneficiaries’ tax free.
  
• Assuming death occurs after two years of holding the annuity the income tax savings the beneficiaries will benefit from will be in excess of £1,250,000 based on current value.
  
• Mr L retains complete control of the funds and can invest in a risk averse portfolio of his choosing.