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DB Doctor: Early transfer breathes new life into family business

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DB Doctor: Early transfer breathes new life into family business

Steve Danson’s client expanded his business by taking an early lump sum to build a new premises. He protected his son’s inheritance and had income left over for retirement.

THE CASE

A client, ‘Edward’, 58, was winding down from running the family business – a company that makes memorial headstones for funerals – and was handing it over to his son. But he still expected to be working in some capacity and drawing an income at some level for many years to come.

There was an opportunity to build a new premises, including a shop and workshop, at the site of a cemetery in the company’s catchment area.

Edward recently discovered a pension fund with a cash equivalent transfer value (CETV) of £452,643.

The normal retirement date of the scheme was 65 but Edward extracted his tax-free cash from his total pension to fund the building of these premises. The company would rent the building from Edward. He had a post-completion rental valuation of 10% based on the value of that property (rather than the build cost). Therefore the yield on this investment would likely exceed 10% per year. Therefore Edward is convinced building the new premises would be good for him and the long-term stability of the company.

Edward needed £24,000 a year to live off but ideally wanted an income of £40,000 per year taken from the business and the rent from the new premises.

As a divorcee, he also wanted to ensure his son inherits what he does not spend from his pension funds without it disappearing into the coffers of his defined benefit (DB) scheme.

THE PRESCRIPTION

Where the clients have a CETV already, as Edward did, we use a first meeting to conduct an initial feasibility conversation. We do not charge for this meeting. The critical yield was 6.84% on this transfer.

The critical yield is an important factor because it is a relative indicator of whether or not the transfer value offers value for money.

Edward already had a Sipp containing £416,000. Of this, £275,000 was in commercial property and the balance, £141,000, was invested in a medium risk model portfolio with Old Mutual Wealth. We recommended a transfer from his defined benefit (DB) scheme to his Sipp.

We recommended a transfer from his defined benefit (DB) scheme to his Sipp.

The transfer value was £452,643 and it went to the Sipp as cash. From the enlarged Sipp value he took his maximum pension commencement lump sum (PCLS) of 25%, which was £217,160. £275,000 remained in property and the remaining DB transfer cash was invested in the model portfolio, bringing its value to £324,000, with the balance in cash.

Room for growth

Edward had enough funds to build the premises and the rent from the company will enhance his income beyond what he needs for his essential and long-term desirable spending needs.

He is giving up a guaranteed income at 65 that would be subject to 40% tax in exchange for a pension ‘fund’ that can be passed on to his son in a tax-efficient way. In the meantime Edward can, if he wants, decide at some point to draw down on this pot to supplement his income when he fully retires, allowing more for his son and the growth of the business.

Steve Danson is a chartered financial planner at Banks Wealth

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