Re:Pension Transfer for Flexi-Access-Drawdown Purposes

FLEXI-ACCESS-DRAWDOWN TEMPLATE

Name

Address

Address

Address

Address

Date

Dear Name

Re:Pension Transfer for Flexi-Access-Drawdown Purposes

With reference to our recent meetings in which we discussed the various options available to you when considering 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 in making my recommendations.Your attitude to risk in respect of your pension planning iscautious/balanced/speculative.

In transferring your pension funds your views and requirements are(list as appropriate) – e.g. flexibility of income(explain briefly what/why flexibility is required) – averse to annuity purchase (if open minded, explain briefly if other requirements are more important) – keen to preserve funds for dependents – keep options open – require all tax free cash – etc. etc.

Income Levels Required

With regard to income levels particularly, you wish to be able to take income from the pension schemes in question without restriction on the level of income you are allowed to take. You understand that in doing so your funds could well be exhausted very quickly during this process but indeed this is in part your intention and you are not concerned by this.

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.
• You have additional sources of income such as property / investment.

• You are currently in receipt of £X,XXX per annum of Pension Income from other pension schemes.

Include a list of relevant incomes, start dates and current amounts in payment. Comment on tax position, imposition of higher tax rates and when this would take place.

With regard to future pension planningyou do / do not intend to make further contributions to any pension scheme or accrue further benefits under a defined benefit plan. You appreciate that any such contributions would be treated as acceptable unless you exceed the annual money purchase annual allowance (MPAA).Include list of pension contributions to DC schemes and accrual in DB schemes

Options Considered

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, income 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 you wish to incorporate as much income flexibility as possible and maximum death benefits for your beneficiaries into any retirement solution.

Having analysed your requirements I recommend that you implement aFlexi-Access-Drawdown (FAD) facility. Although all of the options we discussed will allow you to take the same amount of tax free cash, the FAD route more appropriately meets your objectives, particularlyin view of your wish to withdraw high levels of income. You intend to use the tax-free cash more or less immediately for state purpose.

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.

Also note that if you decide to take the full amount of tax free cash at the outset of your policy you will not be able to take any further tax free cash in the future even if the value of your funds increase.

Having commenced a flexible 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 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 of 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 Phased drawdown plan. As you require all the tax free cash to be released this option was not considered suitable.

Under the Flexi-Access-Drawdown route, you will be able to plan in advance the level of income that you wish to take each year. This will enable you to take into account any other income you may receive from other sources. This is ideal given that/ you intend to continue working on a full time/part time basis over the next few years. You will be able to adjust your income levels currently between a minimum of £Nilwithout any maximum (subject of course of course to the full total value of your invested fund).

We discussed that where high levels of income withdrawals are made, this will not be sustainable throughout the proposed drawdown period, as a result of the fund reducing and / or any unforeseen changes in the income limits which could be imposed by the Revenuearising from any future legislative changes. Ultimately the withdrawal of capital from your Flexi-Access-Drawdown plan may result in the plan having a zero value and being closed.

Taxation

You are aware that any payments to you are classed as income (excluding the initial tax free cash sum) and will be taxed as income at your highest marginal rate. When deciding on the amount of income to withdraw each year we have discussed the merits of keeping this within tax efficient limits.You understand the implications of this strategy and are able to take your own decisions from year to year as you feel best suits your circumstances and requirements.

Your Flexible Drawdown policy will not be reviewed as previous maximum limits have now been withdrawn. There is a risk that your preferred level of income might need to be reduced in order to protect the value of your investments. Alternatively you may continue to take income at the same level but this will have a detrimental effect on the funds held.

The pension fund value (less the tax-free cash and any income withdrawn) will continue to be invested. 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 any time should you decide to purchase an annuity. 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.

Death Benefits

We have compared the potential death benefits, including income and return of funds less tax. If you continue to hold funds in the Drawdown plan and you die before age 75 than benefits paid to your surviving spouse / civil partner or other nominated beneficiaries will normally be free from tax. If death occurs after age 75 then tax will become due at the beneficiary’s marginal rate of tax.

If some form of Lifetime Annuity is set up then the same rules apply as long as suitable survivor benefits have been included at the outset. If you do not include survivor benefits then the annuity would cease to be paid on your death.

A spouse's annuity has also been discussed whereby a percentage of your annuity would continue to be paid to your wife/husband,(insert spouse’ name), after your death, whenever that occurs. However, you would prefer a situation where, in the event of your death, he/shecould receive a return of fundtax free prior to age 75 or most likely taxed at their highest marginal rate of tax if death occurs after age 75.You appreciate that as an alternative to taking the fund in cash(insert spouse name)could continue to use the fund to provide an income (either by way ofFlexi-Access-Drawdownor annuity purchase) in which case the tax charge would not be imposed.

Whilst you like the concept of deferring the purchase of an 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 and when you decide to purchase an 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 if you were to die after age 75).

Drawdown offers the possibility of passing your pension fund on your death to your selected beneficiaries. If you were to die before age 75 then death benefits arising from both crystallised and uncrystallised funds can be paid to beneficiaries without a tax charge. If you die after age 75 you are aware that death benefits arising from both crystallised and uncrystallised funds will incur a tax charge at marginal tax rates.

We have discussed the need to ensure that any Expression of Wish form is both current and comprehensive. The new death benefit rules will allow pension funds to be transferred down through the generations. You have confirmed that you would like any residual pension funds to be utilised in the following way;

Add confirmation of client’s intentions

A further tax consideration in stripping out high levels of income withdrawals from Flexi-Access-Drawdown is that if large income withdrawals during your lifetime have augmented the value of your estate at death, in addition to potentially suffering income tax at the time of withdrawal, they will also have the effect of increasing your estate for Inheritance Tax purposes and thus suffering an additional tax charge in the form of IHT.

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 being drawn down prior to purchasing an annuity.

You should understand that taking withdrawals may erode the capital value of the fund, particularly 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,

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 were it not for your desire to strip out a very high / the maximum possible income regardless of how quickly the fund is depleted, and the fact that you already have adequate pension (and other) income for your needs. You understand that in doing so your long term income may potentially be considerably less than could have been the case through annuity purchase or a sustainable Flexi-Access-Drawdown account.

We have discussed in some detail the rate of return 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.

Recommended Provider

In connection with a suitable provider, I recommend Product Provider. They are a company who are specialists in the Flexi-Access-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 comparative income levels assuming low, medium and high growth rates.

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. 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.

The second critical yield shows the investment return required to maintain the income being taken from the drawdown plan. The yield of x% per year is low/highIf your investments do not increase at this level then your pension fund will go down in value. If your investments increase over and above this critical yield then your pension fund will improve in value and could provide you with more income in the future.

It is important that the investment portfolio selected should aim to support the likely returnsrequired, 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. The ability to withdraw significant amounts of capital each year (possibly all of the capital) has been considered in the portfolio of investments. The need to ensure that there is sufficient liquidity in the portfolio to meet your requirements is important.

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.

Our Fees

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 by Product 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.