A filmmaker, 1982, and Stephen Fry: A real pensions freedom case study

How one advisory firm handled a client's request to use pensions freedom to release cash to help fund a personal project...

(Photo by Scott Barbour/Getty Images)

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When RP’s sister title Professional Adviser invited advisory business Portal Financial to share a real life case study linked to pensions freedom it didn’t anticipate a sprinkle of celebrity…

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Many clients approaching us are looking to access their pension to better manage their debts, whether these are long-term mortgages or secured loans to shorter term finance.

Even in today’s current low-interest rate environment, many people are financially better off reducing or eliminating interest payments compared to the increase in the value of their pension.

From an adviser’s perspective, the key issue is, where possible, understanding the client’s current debts and attitude to borrowing.

Accepting that, in the new pension environment, clients have the freedom to do with their pension as they will, we should also be mindful of the fact that a pension has been built up for long-term financial security and not a means to plug a cyclical pattern of borrowing.

One of our clients – a Mr Keeble – fell into the smaller group of customers who was looking to access their pension for a specific lifestyle reason.

At this juncture, it is worth stressing that we have yet to come across any client who is looking to ‘blow’ their pension on what could be argued frivolous reasons – the infamous Lamborghini.

Mr Keeble wanted to access his pension for a very interesting purpose and one where the reason could be argued on both a personal and, hopefully, professional level.

Filmmaker

Mr Keeble is a filmmaker and wanted to release some money to fund the completion of his documentary After ‘82, which explores the AIDS crisis from 1982 to the present day. He already had the support of Stephen Fry, who was narrating the film along with a number of other influential figures from that era.

When he first approached us in 2014, Mr Keeble had a good understanding of his financial options with regards to how best to finance his film. He had considered and made it clear that he did not want to take out a loan and specifically stated he wanted to access his pension.

The pension itself had a value of around £18,000, which at that time would have qualified for triviality had Mr Keeble been at least 60 years of age. At 56, however, he was not yet able to do so and wanted to access the 25% tax-free cash.

In order to take that sum, a pension scheme needs to allow drawdown. Mr Keeble was in a with-profits scheme, which did not offer drawdown as an option, so the client was unable to remove any funds and stay in the scheme.

The process was then to find a cost-effective scheme that would meet Mr Keeble’s desire to access his tax-free cash while also allowing the remainder to stay invested.

The client also stated at the time that he wanted to use the remainder of the fund, assuming the much talked about pension freedoms were introduced. He contacted us again in April of this year, and was aware of the tax implications having already spoken with HMRC directly.

After ascertaining his situation again, including assets and income, we explained in writing the list of available options, how flexi-access drawdown would reduce his annual allowance to £10,000 and the total tax payable he would pay for removing the entire sum, and how this would be reduced if the withdrawals were spread out across different tax years.

Mr Keeble’s reason for taking the money had not changed and he was happy to proceed with taking the remainder of his fund as a lump sum. Mr Keeble’s reason for using his pension is likely to be unique, however it is broadly representative of many clients.

From an advice perspective, the new flexibilities create an issue, but one that is clearly dealt with by thorough, professional and detailed management of the case and is no different from many other financial scenarios.

The vast majority of clients are looking at the new pension freedoms as a way of better managing their finances, and most have already loosely worked out the numbers.

The issues come where a client’s reasons are questionable, and this is no different to a client who wanted to liquidate an investment portfolio and take a ‘punt’ on an obscure Bolivian mining company.

If the decision is rational, albeit questionable, one just needs to make sure that every aspect has been covered and fully documented. If, however, the decision is irrational, then it may be better to decline to advise the client.

In reality, nothing has changed. We continue to have a responsibility and duty of care to provide our clients with advice that enhances their future financial wellbeing or is the most appropriate way of financing their current lifestyle, accepting the fact that this might be slightly detrimental to their in-retirement finances.