Mr K was referred to us by his accountant, who had recommended that he consider pensions as a means of reducing his income tax liability and also to build up funds for retirement. Due to improved profit within his business, Mr K had become a higher rate taxpayer and his accountant had explained how the various allowances for making contributions to pensions and the tax relief available would benefit him. As Mr K had only invested in pensions many years ago so he wasn’t clear how pensions could help him.
Client’s Objectives and Needs:
We arranged an initial meeting with Mr K to discuss his objectives and needs, which were to understand more about pensions, how tax relief and allowances achieve tax efficient savings and also how funds are invested in order to build up funds for retirement. He wanted to understand how contributions could be made in the current tax year in order to save tax and also how they can be used in future years for the same purpose. Building up funds for producing income was an important objective because to date he had made little provision for his retirement and was concerned about the level of income he will require in retirement and also income for his wife, who is significantly younger than him.
During our meeting, we gave Mr K illustrations on how lump sum pension contributions could be used to place money within a pension and also the effect of these in reducing his liability to income tax. This involved explaining how the various allowances under the UK pension’s tax regime worked, including the annual allowance and how this can be carried forward from previous years. During the meeting, we also discussed Mr K’s attitude to investment risk and how funds are invested in order to provide diversification and to manage the risk. We also discussed the options for potentially producing income in retirement so he could decide whether he felt that pensions could meet his needs and, particularly, whether he would be comfortable with the fact that the funds within his pension would be invested.
As a result of our meeting, Mr K confirmed he had sufficient information to decide whether or not he wished to make lump sum pension contributions. We also discussed alternatives for other investments using various tax allowances to build up additional wealth for retirement.
As a result of our discussions, Mr K decided to make an immediate gross lump sum contribution of £75,000, which would immediately reduce his tax liability for the current tax year by £34,600. Mr K agreed to invest the funds into a pension plan at a level of risk in line with his attitude to risk. Given he had concerns that markets were currently high, we agreed to phase the contribution in over a twelve-month period to mitigate the risk of a fall in the markets in the short term. We also agreed to provide our ongoing service to Mr K, with regular annual reviews scheduled in for future years to discuss further contributions and further options for him to save for the future.
As a result of the actions taken in setting up the new pension for Mr K, he was extremely pleased with the reduction in his tax bill for the current year and also for the peace of mind provided by now having in place a clear plan for building up funds for his retirement as well as providing for his family in the longer term.