Background

We recently started working with a couple in their early 60s. After a successful career in banking, the husband has recently retired and his wife stopped working as a GP 15 years ago. Our client is now looking for advice on how best to use their pension and savings to generate income in retirement. They live near London and have three adult children, two in the UK and one in the US. The husband has a SIPP worth £1.4m that he has not accessed since retirement. His wife has a defined benefit pension that will pay her £20,000 per annum when she reaches 65 in three years time. We also manage their ISAs valued at £800,000 and taxable investments of a similar value. They have £250,000 of cash and own their property mortgage free.

Key need

The couple told us that they envisage requiring income of £100,000 per annum (net of tax) for the rest of their lives to preserve their standard of living. They plan to travel extensively over the next few years, in particular to the US where their oldest son lives with his family. The couple are also keen to explore the impact of making gifts to their children.

Our solution

We used cash flow modelling to calculate how much the couple could safely draw down while still leaving a buffer to help with unforeseen circumstances. We concluded that they could safely draw down enough to reach their £100,000 per annum objective on an after-tax basis, after taking into account the NHS pension.

We also assessed the impact of gifting £100,000 to each of their children and concluded it would be possible although we advised the couple to assess their actual expenditure over the next year before proceeding with the gifts.

Income will primarily be drawn from the ISAs and taxable accounts as the couple were keen to keep assets within the SIPP as part of their estate planning strategy, given pension assets are not normally subject to inheritance tax and can therefore be inherited by the children tax efficiently.

We manage the couple’s assets in accordance with a “balanced-risk” mandate, designed to generate returns modestly ahead of inflation over the long term. We invest using a global, total return approach, with distributions made from a combination of naturally occurring income and capital. This approach has served our clients well in recent years where traditional income approaches are often weighted in favour of higher-yielding stocks and markets (e.g. the UK) which have underperformed global markets. Our preferred approach provides us with the flexibility to pursue our highest conviction investment ideas without having to target higher-yielding investments at the possible expense of capital appreciation.

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This strategy was based on our understanding of prevailing tax legislation at the time and should be reviewed on a regular basis in light of changes in legislation and personal circumstances. You should obtain professional advice on taxation where appropriate before proceeding with any investment.

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