Re:Pension Transfer for Phased Flexible Drawdown Purposes

PHASED DRAWDOWN TEMPLATE

Name

Address

Address

Address

Address

Date

Dear Name

Re:Pension Transfer for Phased Flexible Drawdown Purposes

With reference to our recent meetings in which we discussed the various options available to you when looking at taking your retirement benefits, I now wish to clarify the reasons why I believe that my recommendations are appropriate to you.

My recommendation takes into account that you are single / married / divorced / separated, with no / one / two / three / four dependent children. It also takes into account your current employment status and that you are a lower / basic / higher rate taxpayer. Based on your income and expenditure you anticipate that your net disposable income is approximately £Amount per month. You and your wife/husband/partner are in good health (if not you will need to reflect impaired life annuity rates in the suitability letter).

My recommendations are also based on the information provided by you, which was collated in your Personal Financial Planning Profile on Date. We have also discussed and noted your specific requirements in connection with retirement planning and these have assisted me when making my recommendations.Your attitude to risk in respect of your pension planning is cautious / balanced / speculative.

You do not needto withdraw any of your tax free cash from your pension for any particular purpose, nor do you need to maximise the level of income from your pension plans from the outset, as you intend to wind down your employment gradually / have other sources of income. Your other thoughts are(list as appropriate) –– you are averse to annuity purchase (if open minded, explain briefly if other requirements are more important) – keen to preserve funds for dependents – keep future options open –tax planning issues etc.

The relative importance of the funds for which you are considering implementing a drawdown plan, in relation to your overall financial circumstances is as follows;

• Although important, only one part of your overall retirement strategy.
• Not especially important as you have substantial alternative provisions.
• You have other funds / investments which will provide alternative income.
• These funds are only part of your overall pension funds.
• You have additional sources of income.
• Very important as you have no other resources to provide for your retirement.

We discussed the various options available to you in terms of drawing pension income, both in terms of the income levels, risks and flexibility. This included conventional annuities, with profit annuities, pension drawdown and phased retirement. (Include here any information on clients existing schemes which might be advantageous such as guaranteed annuity rates, escalation etc). We also discussed the possibility of splitting your capital between two or more options to provide a balance between security and flexibility. However, after discussion you feel that you would like to build in as much flexibility as possible and maximum death benefits for your beneficiaries into any retirement solution.

Having analysed your requirements I would recommend that you implement a PhasedFlexible Access Drawdown facility. Although all of the options we discussed will allow you to take the same amount of tax free cash, the Phased Drawdown route more appropriately meets your objectives.

When taking drawdown benefits (or any other form of benefit) a Benefit Crystallisation Event will take place which will use up some or all of the Lifetime Allowance available. Any benefits taken over and above the Lifetime Allowance will be subject to a tax charge.

The other options available and reasons why they were not recommended are as follows: -

1. Purchase an annuity. This was not deemed the most appropriate option as – e.g.you are averse to purchasing an annuity at this time(outline reasons) –an annuity would not provide the flexibility in income that you require – you wish to keep your options as flexible as possible in respect of death benefits
2. Defer vesting your pension schemes and rely on other sources of income from your investments. You feel the funds saved in your pension are those designated for the purpose, and prefer to use this source in the first instance to provide your retirement income.
3. Transfer to a full Drawdown retirement plan. Although a potential option even though you do not require all the tax free cash to be releasedat the outset, this routewould not necessarily be as tax efficient as Phased Drawdown. Under full drawdown all your tax free cash would be withdrawn from what is currently a very tax effective environment

Using the phased Drawdown route gives you the flexibility you require with regards to taking your income as a combination of part tax-free cash and drawdown income. This means that you are deferring most of the fund and the balance of the potential tax-free cash is available for payment in the future. As your initial requirements of income is only £1234 per annum, phased Drawdown allows you to leave most of the fund, including potential tax-free cash, invested in a tax-efficient environment until required. A further benefit of phased Drawdown is that the portion of “income”represented by tax-free cash is not liable to income tax, thus making the income stream more tax efficient.

You will be able to plan in advance the level of income that you wish to take each year, by taking another tranche of tax free cash, plus further income from that tranche (together with income from previously opened tranche/s). Alternatively you could select to take no further income for the time being from the tranche/s already open. This will enable you to take into account any other income you may receive from other sources. You will be able to adjust your income levels using phased Flexible Drawdown where there is no maximum income set and no periodic reviews are required.

By opening segments of the drawdown policy and withdrawing monies this way, your tax free cash is used as income which is not taxed, and only that part of your annual withdrawal from the drawdown plan which is actually income, is subject to tax at your normal rate of income tax. It also leaves the remaining “unopened” segments subject to the normal pension tax treatment – i.e. all the funds are invested under the very tax efficient pensions regime, and in the event of your death these segments could be passed to your beneficiaries without suffering any tax charge if death occurred prior to age 75..

We discussed that where high income withdrawals are made, this may not be sustainable throughout the drawdown periodas a result of the fund reducing.

Having commenced a phased drawdown plan and drawing an amount deemed as income you WILL be limited when making further contributions to any money purchase pension plan. This allowance is known as the Money Purchase Annual Allowance (MPAA) and will be limited to a maximum of £4,000 per year and is irrevocable. Your contribution to a Defined Benefit scheme may continue and be eligible for the normal Annual Allowance (currently a maximum of £40,000 per year).

The pension fund value (less the tax-free cash and any income withdrawn) will continue to be invested on your behalf. Whilst the value of investment units purchased can go down as well as up, you may have the opportunity to achieve sufficient growth so as to improve your ultimate benefits at the time you decide to perhaps purchase an annuity. This position is further enhanced given your low-income requirements in the early years.I would suggest that your investments in the drawdown contract be reviewed each year, and I would be very pleased to assist you with this at your request. We discussed the fact that under the current legislation you are under no obligation to purchase any form of annuity at any time if you chose not to do so.

We have compared the potential death benefits, including income and return of funds (less tax if applicable).

A spouse's annuity has also been discussed whereby a percentage of your annuity would continue to be paid to your wife / husband, spouse’s Name, after your death, whenever that occurs. However, you would prefer a situation where, in the event of your death, your wife / husband could receive a return of fund free from tax if under the age of 75 at date of death.

You appreciate that as an alternative to taking the opened segments of the fund in cash(insert spouse name)could continue to use the fund to provide an income in which case atax charge would not be imposed if aged 75 or less at date of death.

Whilst you like the concept of deferring the purchase of your annuity in favour of a more flexible approach to achieving income, you are aware that due to market conditions there is no guarantee that annuity rates will improve in the future. They could be lower if you decide to purchase some form of annuity than they are currently.

I have explained to you the effect of "Mortality Drag", this being the “subsidy” provided to support annuity rates by those annuitants who unfortunately die early. This “subsidy” is not available to drawdown clients, although of course the alternative benefit is that the drawdown fund remains available to your family (less appropriate tax).

You appreciate it may be possible to leave the residual fund from your drawdown scheme to a charity which will avoid a tax charge, but only providing there are no surviving dependants and that you have nominated a recipient charity to the scheme administrator prior to your death.

You are also aware that if and when you purchase an annuity, the income will be subject to income tax at your highest marginal rate, as is the income from the “opened” segments being drawn down. Please note that there is now no obligation to purchase any form of annuity irrespective of age.

You should understand that taking withdrawals may erode the capital value of the fund, especially if a high level of income is being taken, compounded if investment returns are poor. This could result in a lower annuity income if and when purchased in due course.

You must be aware that it is unusual to transact Income Drawdown where the fund size is only £Amount and it is unlikely that this method would be suitable for you if you required the maximum level of income in the early years. This is because there may be a greater chance that the income taken may exceed the growth rates achieved within the funds. However you have stated that you are particularly averse to purchasing an annuity at this stage and you accept the higher risks associated with drawdown in that your income may not be sustainable and may potentially be considerably less than could have been the case through annuity purchase.

We have discussed in some detail the rate of return (known as the critical yield) necessary in order to match the income which could be provided through purchasing an annuity. You are satisfied that you have understood the principle of this aspect, including the effect of the potential availability of an impaired life annuity.

In connection with a suitable provider, I would recommend Product Provider. They are a company who are specialists in the Pension Drawdown market place. They are happy to assist with a fund value of £Amount and they are well respected in this arena.

They also have a good selection of funds for you to invest in and you are allowed to switch between their investment funds at any time. Their contract is also competitively charged with a reduction in yield of only Percentage% per annum. Both of these areas are important to you.

Furthermore, Product Provider has achieved a good performance record over the past Number months, although you are aware that past performance should not be treated as a guide to future returns. You are also aware that investment returns may be less than those shown in the illustrations, and that the value of your funds can go down as well as up.

We have discussed fund selection and you have initially decided to invest in the Name of Fund and the Name of Fund. The spread of funds and type of funds selected are suitable for you given that you have a cautious / balanced / speculative approach to investment risk.

We have discussed the key features document that outlines the nature of the contract and also how and when benefits may be taken. We have also discussed the illustration, which confirm the tax-free cash, which may be taken, and also the minimum and maximum income levels assuming standard low/medium/high growth rates set out by the Financial Conduct Authority. Note that these rates are only examples, actual rates achieved could be more or less than these.

The illustration also shows the Critical Yield required in order for the final fund to be able purchase an annuity giving the same level of income. The yield of x% per year is low/high OR The critical yield required to support the level of income obtainable from a Lifetime Annuity now is X.X%. If your investment returns do not meet this figure then there is a likelihood that the fund available when you purchase your annuity may not be sufficient to match the income that you could have purchased at the outset.

It is important that the investment portfolio selected should aim to support the likely returns required, and that this portfolio reflects your attitude to risk. Of course growth rates cannot be guaranteed and it is always possible that actual investment returns may not be able to support income withdrawn.

Please note that Product Provider will provide final figures once the monies are received from the ceding scheme/s on completion of the funds transfer. The amount of tax free cash you receive (if applicable) will also be based on the final fund value.

For our advice and setting up your Drawdown arrangement we have agreed a fee amounting to £Amount /as shown on your personalised illustration as we have already discussed. This sum will be deducted from your fund byProduct Provider and paid to us/ You are paying our fee directly to us. Please note that no fee has been taken for the element of the transfer, which relates to the tax-free cash.

Finally I confirm we have also discussed the points itemised in our Drawdown “Best advice checklist”, and you are satisfied that you have fully understood the issues it covers.

Information regarding pension taxation is based upon current UK tax legislation and HM Revenue & Customs practices. Future changes in legislation, and in particular any changes to the tax and how pension benefits are taken, could be made by future Governments and such changes could be retrospective.

Total Charges

The table below shows the charges for your plans over the next 12 months. Where relevant, we have used weighted averages for some of the charges and also, where regular contributions are made:-

Plan Details / Charges
Platform charges
Product Charges
Fund/Investment Charges
DFM Charges
Adviser Initial Charge
Ongoing Annual Service Charge / %
X
X
X
X
X
X / £
X
X
X
X
X
X
Total / % / £

Please note, for certain investments, there may be the possibility that other costs may arise, including taxes.

I hope that the above information and my recommendation accurately reflects the details of our conversation and on the basis that you understand and agree with my recommendations I would be grateful if you could sign below.

Yours sincerely

Adviser’s Name

Title

Signed:Dated:

Client’s Name