Flexible Annuity Case Study 1

Scenario:

Paul is 75 years old and divorced with two non-financially dependant children. Paul’s assets are his main residence valued at £500,000 and a further £500,000 invested in stocks and shares through ISAs, a general investment account, and an investment bond. Paul has a £70,000 per annum guaranteed pension which more than adequately covers his £30,000 annual expenditure requirements.

Paul’s main objective is that whilst he did not currently require income from his investments, he wanted to ensure that should his circumstances change, any income received from his investments would be received tax-efficiently. Paul’s secondary objective was to ensure that on death he could pass the investments on to his children tax efficiently.

Paul has investigated gifting the investments to his children, but he was concerned about losing control of the funds and the seven-year wait before the investments fell completely outside of his estate for inheritance tax purposes. He also investigated investing in Business Relief (BR) assets to obtain Inheritance Tax (IHT) relief after the two-year waiting period however, as a risk averse investor, Paul could not accept the high risk inherent in these types of investments.

Recommended Solution:

We advised that Paul should encash his existing investments. The ISAs were encashed in full without any tax liability. The investment accounts and the bond were encashed over a period of time which straddled two tax years so as to make full use of Paul’s annual Capital Gains Tax (CGT) allowance for both years and the Top slicing facility to reduce the Income tax liability within the bond investment.

We advised that the encashed funds be used to purchase a Flexible Annuity which provides tax efficient income and is IHT free through obtaining BR after holding the annuity for 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 meant that Paul invested the funds in the annuity into a portfolio that matched his risk averse profile and provided the tax efficiency he required.

Benefits:

• Income available from Annuity was £32,500 pa of which £29,055 was income tax free. An annual tax saving of £11,622 at Paul’s marginal income tax rate of 40%.
  
• Income was deferred and can be drawn when required.
  
• The deferred tax-free income is rolled up on a year on year basis when not drawn which can be then be drawn tax free in later years.
  
• The value of the annuity can be passed on to Paul’s children free of IHT.
  
• If Paul survives the two-year wating period, the Inheritance tax savings are £200,000 at current values.
  
• Paul retained complete control of the funds and invested then into a risk averse portfolio of his choosing.