Julia Jones (47) has recently dissolved her civil partnership with her ex-partner Sara (56). A pension sharing order formed part of the split, giving Julia a pension credit of £250,000 to add to her existing £600,000 pension.
Sara took all of her PCLS (tax-free cash) shortly after turning 55, so the pension credit Julia receives will be from crystallised funds.
Julia has always been a diligent saver but is not too clear on some of the more complex pension rules. She feels a little out of her depth having received the pension credit. Julia knows that at 47 she is not old enough to access her own pension, but she isn’t sure how the pension credit will be treated considering that Sara had already crystallised the funds.
Julia is also a little concerned about the lifetime allowance. She has been contributing generously over the past few years with a view to maximising her pension before retiring at 55. Julia’s osteoarthritis is gradually worsening, making it difficult for her to continue running her boutique clothing store.
Julia knows she will be among the last group of people able to access their pensions at 55 (under normal circumstances) before the normal minimum pension age increases to 57 in 2028.
Additionally, Julia currently jointly owns a commercial property with her brother, Dan, and father, Fred, which they are thinking of moving into their SIPPs. The property will likely undergo significant development over the next few years, which in turn is likely to increase its value.
Julia is also aware that she has not changed the other investments within her pension since deciding that she will most likely retire at 55, and they may no longer be appropriate.
Julia decides to contact a financial adviser, Debbie, for help. Firstly Debbie talks to Julia about the pension credit. She explains that when pension credits are from crystallised funds, they are known as ‘disqualifying pension credits’. In Julia’s pension, the funds will be treated as uncrystallised again, but when she decides to access the pension she will not be entitled to any PCLS from those funds.
The news that the pension credit will be treated as uncrystallised again makes Julia even more concerned about the lifetime allowance, as this seems to confirm that the money will need to be tested when she retires. However, Debbie explains that as Sara had already crystallised the funds, Julia will be eligible to apply for a ‘lifetime allowance enhancement factor’ – a form of lifetime allowance protection which is designed to increase Julia’s lifetime allowance by the value of the pension credit. In effect, this means that her lifetime allowance position shouldn’t be significantly affected by the pension credit.
Debbie then turns to the question of Julia’s investments. Julia’s share of the property purchase, including fees and a float of cash, will account for approximately £200,000.
She then requires some funds to be readily accessible ready for the possible development works for the property. It’s unclear at this stage exactly how much this will cost, but as Julia is still also making large contributions and there’s no firm development plans in place yet, Debbie isn’t too concerned. While Julia plans to retire early, her outgoings are relatively low. Debbie will be planning for Julia’s pension to last her for a long time, and it will still be appropriate to invest much of the money for the long term.
As Julia needs a mix of accessible funds and long term growth, Debbie recommends putting £85,000 in a fixed-term bank account (FTBA), with the remainder (approximately £565,000) being invested with a discretionary fund manager (DFM).
The FTBA will have a three-month term, leaving the funds relatively accessible for the property development while achieving a better rate of return than they would sitting in a standard bank account. If the property development is delayed, Julia can choose to roll the funds over for another fixed term until they are needed.
The chosen DFM will risk-profile Julia and invest her money according to her risk rating. Julia will continue to contribute to her pension, and she can arrange for her SIPP provider to automatically send the contributions to the DFM. This means neither Julia nor Debbie will have to manually request that new monies are invested, and the DFM will be able to invest without delay. Once the property development has been completed, any surplus funds can also be sent to the DFM for investment.
Julia is much more comfortable about the pension credit following her conversation with Debbie. She uses HMRC’s APSS 201 form to apply for her lifetime allowance enhancement factor. Once she receives her certificate from HMRC, Julia sends a copy to her SIPP provider so that they have a record of her enhanced lifetime allowance.
Julia appoints Debbie as the financial adviser for her SIPP, and they work together to implement Debbie’s investment strategy to help Julia prepare for her retirement.
This case study is part of Curtis Banks’s ‘Meet the Joneses’ series of intergenerational case studies.
Jessica List is pension technical manager at Curtis Banks