Written by Kriss Elsdon, Chartered Financial Planner.
This case study is based on a real client situation that has been anonymised for privacy. It is provided for illustrative purposes only and does not constitute personal financial advice or a recommendation. Individual circumstances and outcomes will vary.
The challenge
A couple approaching the next stage of retirement had accumulated significant pension and investment assets but had not yet established a structured strategy for drawing an income from them. Until this point, they had been meeting the shortfall between their income and expenditure from accessible cash and capital. With annual expenditure expected to be significant in the early years of retirement, they were concerned that continuing this approach would unnecessarily deplete their readily available assets.
Their future expenditure was also expected to vary considerably. They wanted to provide for their children through university and potentially assist them with significant costs such as cars and future property deposits. The couple also anticipated several changes to their financial position. One spouse expected to stop working in the coming years, while they planned to sell a rental property, sacrificing the rental income but releasing further capital to invest.
Alongside meeting their lifestyle requirements, they wanted their strategy to be tax-efficient, taking account not only of the tax they would pay during their lifetime but also the longer-term position for their beneficiaries.
Investment risk was another important consideration. A significant proportion of their pension wealth was already tied up in an illiquid property, meaning they wanted the liquid element of their wealth managed relatively cautiously.
Our approach
The starting point was detailed cashflow modelling. Rather than focusing solely on their immediate income requirement, we modelled their expected expenditure throughout retirement, allowing for inflation and anticipated one-off costs. This helped establish how much income needed to be generated from their portfolio and, importantly, which assets should be used and when.
We recommended crystallising the pension, releasing the tax-free lump sum and designating the remainder into flexi-access drawdown. A regular pension income was then established, reducing the couple’s reliance on their accessible capital to fund day-to-day expenditure.
Rather than immediately investing all of the tax-free cash, a sum was retained in cash to meet their anticipated income requirements over the following six months. This provided a short-term liquidity reserve and avoided the need to make unnecessary investment withdrawals.
Importantly, the Gilt portfolio was structured with different maturity dates. Where the Gilts are held to maturity, the redemption proceeds can provide planned amounts of capital at different points in the future. This reduced the likelihood of needing to sell longer-term growth assets at potentially unfavourable times simply to meet expenditure. The value of Gilts can, however, fluctuate if they need to be sold before maturity.
This approach also provided an important tax-planning benefit. For this client, holding suitable UK Government Gilts directly was particularly tax-efficient. Interest received from the Gilts is subject to Income Tax, but gains on qualifying UK Government Gilts are generally exempt from Capital Gains Tax.
The remainder was allocated to a diversified multi-asset portfolio to provide the potential for longer-term capital growth, creating a balance between known future liquidity, tax efficiency and long-term investment returns.
The outcome
The result was a more coherent retirement strategy, moving the clients away from simply drawing on accessible savings whenever additional income was required. Their pension now provides a structured regular income, while sufficient cash has been retained to meet immediate spending requirements. The Gilt portfolio provides an additional source of planned future liquidity, helping to reduce the need to sell longer-term investments at potentially unfavourable times.
Most importantly, the recommendations were not made in isolation. Cashflow modelling allowed us to bring together their pensions, investments, future property sale and changing expenditure requirements to create a strategy capable of adapting throughout retirement.
Estate planning will also remain an important part of future reviews, including consideration of whether trusts could provide greater control over how wealth ultimately passes to future generations.
The result is a strategy designed not simply to generate returns, but to provide the right money, at the right time, from the right assets – while balancing security, growth and tax efficiency.
Please note that tax treatment depends on individual circumstances and current legislation, which may change in the future. Pension withdrawals can affect your tax position, future income and eligibility for certain benefits. Taking income or lump sums from a pension will reduce the amount remaining available to provide benefits in the future.
Investments carry risk and their value can fall as well as rise, meaning you may get back less than you invest. Where investments are used to provide retirement income, withdrawals and investment performance can affect how long your funds will last. Past performance is not a reliable indicator of future returns.
The approach described in this case study was based on the individual clients’ circumstances, objectives and financial position and will not be suitable for everyone. Financial decisions should be based on regulated personal advice tailored to your individual circumstances.