In essence, the same thought process applies where defined benefits are involved, as outlined in case study 2.
There is, however, a twist – the added consideration of the inherent value in a defined benefit pension arrangement and the likelihood of being able to replace any reduction in benefit.
B is higher than A even though it is post-tax – can £21,020 invested, with or without a remodelled employment package, produce something more valued than £4,000 a year guaranteed for life?
Whether it is DC, DB or a mixture of both, the thought process is the same.
Alternative strategies that may be suitable could involve transfers to Qrops, vesting to drawdown and recycling income efficiently – or perhaps less appropriately, leaving the excess for pension death benefits (assuming they expect to die before 75).
A close eye will need to be kept on the impending consultation on a new form of protection, individual protection 2014, as that will be a consideration in any advice.
One size does not fit all for a client’s LTA planning, but what all clients have in common is the need for sound financial advice.
Does it really all come down to the principle that tax is only bad if the net benefit is not deemed ‘worth it’?
Les Cameron is technical manager of Prudential
CASE STUDY ONE
Let’s compare A, C and E above:
C is higher than A at apparently no cost to the individual, a no-brainer perhaps, but this is only half the process. Step five is key as, if the employer is willing to provide an alternate benefit – for example, a higher salary now – the client may value that more than the difference between A and C, for example a higher salary, so the decision may change.
E is higher than C and the same thought process applies but there is a member cost involved now. Are the higher benefits worth the cost? Could an alternative strategy return something more valuable with the same outlay?
The exact same principle applies at higher starting points.
Comparing B, D and F
There is no clear winner between B and D. Would the client value a lump sum and lower fund over a higher fund? Could alternative remuneration arrangements do better?
F trumps B, as F is equivalent to D in fund size but the lump sum after tax is higher – could the client do something better with an alternative non-pension approach?
CASE STUDY TWO
In essence, the exact same thought process applies where defined benefits are involved.
There is, however, a twist – the added consideration of the inherent value in a defined benefit pension arrangement and the likelihood of being able to replace any reduction in benefit.
